Editor’s note: This article is the first in a two-part series.

Effective December 24, 2012, HB 2369 amended the Department of Banking and Securities (DOBS) Code to expand the regulatory and enforcement tools available to the Pennsylvania Department of Banking and Securities over the institutions, credit unions and licensees it regulates. It also brings Pennsylvania law into compliance with the Dodd-Frank Act. The first significant amendment is the establishment of the Pennsylvania department’s authority to impose a civil money penalty of up to $25,000 per violation against an institution, or any of its officers, employees, directors or trustees for: (1) violations of any law or department order; (2) engaging in any unsafe or unsound practice; or (3) breaches of a fiduciary duty. This is a significant enforcement tool to be used against individuals and institutions that violate Pennsylvania law.

Second, the DOBS Code amendments expand state "visitorial powers" over national banks due to Dodd-Frank’s codification of the U.S. Supreme Court’s opinion in Cuomo v. Clearing House Association, 129 S.Ct. 2710 (2009). The Supreme Court held that the New York attorney general’s law enforcement power, such as the power to enforce non-pre-empted laws such as New York’s fair lending law, is distinguishable from the supervisory power over national banks, which is a power exclusive to the Office of the Comptroller of the Currency (OCC).

Dodd-Frank codified the Cuomo opinion by providing that state attorneys general may initiate civil actions against national banks and federal savings associations in order to enforce regulations of the Consumer Financial Protection Bureau (CFPB), certain other applicable federal laws, and state laws not pre-empted by federal law. However, such power does not extend to enforcing Dodd-Frank itself.

Accordingly, Pennsylvania’s attorney general can initiate civil actions against national banks, federal savings banks and state-chartered institutions with respect to Pennsylvania’s non-pre-empted laws, as well as to enforce Title X of Dodd-Frank and any regulation promulgated by the CFPB. It will be interesting to see if the AG attempts to initiate such actions against national banks, especially now that Pennsylvania’s first Democratic AG was sworn into office in January.

The AG’s ability to initiate civil actions will be subject to approval of, or brought at the request of, the department. If the AG refuses to initiate an action at the request of the department, the amendments provide that the Office of General Counsel (OGC) may initiate an action on behalf of the state. However, Dodd-Frank only authorizes an AG or the AG’s equivalent to initiate actions against national banks or federal savings associations. It is questionable whether the OGC, which represents the governor and agencies under the governor’s jurisdiction, is the equivalent of the Office of Attorney General in Pennsylvania.

Third, the DOBS Code was amended to permit the release of certain information to the public regarding institutions and credit unions in the same manner as the department would share information regarding licensees. This amendment also permits institutions to disclose formal enforcement actions as it would share orders issued by the Federal Deposit Insurance Corp. or the Federal Reserve Board without making a prior written request to the department.

Fourth, another very significant amendment to the DOBS Code is the repeal of the requirement that the department issue prior warning to an institution, or its officers, employees, directors or trustees before initiating an enforcement action. Thus, the department can issue an order against those individuals for a violation of law, engaging in an unsafe or unsound practice, or breaching a fiduciary duty. The department can also immediately suspend those individuals if the department believes that the institution, its shareholders, or depositors has suffered or may suffer significant financial harm or other prejudice from continued involvement with the institution. A post-removal due process hearing shall be held after the individual’s removal. While the initial order will remain confidential, it is likely that any final order issued will be published on the department’s website. The challenged individual could be disqualified from working not only for the institution he or she was removed from, but working for any Pennsylvania institution, credit union or licensee, for a period of time to be determined by the department.

In addition, in light of Dodd-Frank, the department can now examine subsidiaries of national banks and their employees in order to enforce state consumer financial laws to the extent not otherwise pre-empted by federal law. Subsidiaries of national banks and federal savings associations doing business in Pennsylvania should anticipate examinations by the department for compliance with state and local laws and regulations as if such laws and regulations apply to Pennsylvania state-chartered institutions and their subsidiaries.

New Section 506.I of the DOBS Code provides that Pennsylvania’s consumer financial laws not otherwise pre-empted by federal law apply to national banks and federal savings associations and their subsidiaries as though they are state-chartered institutions. Section 1044 of Dodd-Frank provides that state consumer financial laws are pre-empted only if: (1) the state consumer financial law would have a "discriminatory effect" on national banks; (2) the state consumer financial law interferes with a national bank’s ability to exercise its powers in accordance with the Supreme Court decision in Barnett Bank of Marion County v. Nelson (517 U.S. 25 (1996)); or (3) the "state consumer financial law is pre-empted by a provision of federal law other than [Title X of Dodd-Frank]." In addition, a reviewing court shall assess the reasoning and consistency of OCC determinations and any other factors deemed relevant to determining whether a law is pre-empted. Also, the amendments clarify that state consumer financial laws also apply to foreign financial institutions, which include institutions regulated by other states and other countries (although an international enforcement action is difficult to imagine).

Finally, the DOBS Code amendments make clear that no other Pennsylvania agency or political subdivision may exercise the department’s powers and responsibilities without express authorization by the department. Such agencies would be permitted to utilize any other civil enforcement power so long as it is not related to or incidental to banking or financial activities of such entities. This restriction in no way impacts the ability of the AG or municipal and law enforcement agencies to commence criminal proceedings against financial institutions. As can be seen, this one bill significantly increased the department’s enforcement power over financial institutions (both state and federal) and its ability to regulate all civil banking actions against institutions in the state. •

Michael E. Bleier is a partner and a member of the financial services regulatory group of Reed Smith. He joined the firm after serving as general counsel for Mellon Financial Corp. and Mellon Bank N.A.

Leonard A. Bernstein founded and chairs the financial services regulatory group of the firm and concentrates his practice in the representation of banks, thrifts, mortgage bankers and finance companies in providing consumer credit compliance advice.

Lauren A. Abbott joined the firm in February 2012 as a member of the financial services regulatory group.