Legislative Session ACTIVE ON BANK-RELATED ISSUES

by Justin Allen and Susannah Marshall

The 94th General Assembly kicked things off on January 9th and, 1,149 bills, 889 Acts and 89 days later, it concluded. There were lots of new faces, including 25 new members in the House and 13 in the Senate. The new Governor, Sarah Huckabee Sanders, was quite active during the session and successfully ushered through major reforms to our public education and criminal justice systems, as well as additional cuts to the state income tax.

While these headline-grabbing efforts were ongoing, there was other meaningful work being done in the background. This included issues impacting the banking and financial industries that kept the ABA government relations team quite busy during the session. This article will summarize some of the most notable pieces of legislation impacting banks.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)

ESG generally refers to corporate consideration of environmental and social factors in making business decisions. As ESG has found its way into the financial industry, many are concerned that such considerations run contrary to pecuniary goals and could constitute a breach of an investor’s fiduciary duty. That has led to legislation in many states that prohibits government from utilizing financial institutions and investors that consider ESG in setting business and investment strategies. Generally, much of this legislation precludes financial institutions that discriminate against certain industries, such as firearms and fossil fuels, from doing business with the state and local governments.

During 2022, ABA watched as this type of legislation was considered across the country. It was expected that similar legislation would be introduced in the 2023 session in Arkansas. As a result, discussions were held between stakeholders and elected officials before and during the recent session. While many of those interests, on both sides of the issue, weren’t totally happy with the resulting legislation, I think most would agree that the collaborative approach resulted in a better product than not.

In sum, Act 411 creates an “ESG Oversight Committee” that will be comprised of one appointment each from the Governor, President Pro Tempore of the Senate, Speaker of the House of Representatives and the Attorney General. The State Treasurer, or his representative, will also serve on the committee.

Act 596 of 2023 prohibits the use of a digital currency tracker to track an individual's purchases or location based on the use of digital currency unless a warrant has been issued expressly authorizing such tracking or a person consents.

The primary legislation on the topic was HB1307, which became Act 411 of 2023. In sum, Act 411 creates an “ESG Oversight Committee” that will be comprised of one appointment each from the Governor, President Pro Tempore of the Senate, Speaker of the House of Representatives and the Attorney General. The State Treasurer, or his representative, will also serve on the committee.

Once appointed, the committee will determine whether there are financial services providers that discriminate against energy, fossil fuel, firearms, or ammunition companies. Upon an initial determination by the committee of discrimination, the committee will notify the financial services provider of that decision so that the financial services provider can attempt to convince the committee otherwise. If it fails, that financial services provider will be placed on a list that is circulated to all government entities and maintained by the Treasurer. With some limited exceptions, government entities are not to place funds with any of the listed entities and are to divest any investments previously made with those entities.

This is a very general overview of Act 411. I encourage all financial institutions seeking to do business with state and local government in Arkansas to review Act 411 with legal counsel to determine the extent of its impact on the institution’s policies, procedures and practices.

The other ESG legislation of note was SB62, which is now Act 611 of 2023. Act 611 requires any business that enters into a contract with a government entity to certify that the business is NOT engaged in a boycott of the energy, fossil fuel, firearms, and/ or ammunition industries. If the business refuses to make that certification, it will not be allowed to contract with the government entity. Act 611 is modeled after a 2017 Arkansas law that requires a contracting entity to make such a certification with regard to any boycotts of Israel.

It is important to note that banks are exempt from Act 611. Act 411 is the ESG law applicable to banks and other financial services providers.

Rule Against Perpetuities And Decanting Of Trusts

HB 1339, now Act 719 of 2023, amends the “rule against perpetuities.” Under current Arkansas law, a person can restrict the transfer of real estate assets in a trust for no longer than 90 years. Act 719 extends that period to 365 years. Other states have made similar extensions in recent time, and some states have eliminated the rule altogether. Such legislation is designed to promote investment as it provides certain advantages with regard to taxes and estate planning.

Complimentary to Act 719 was HB1431, now Act 293 of 2023. Act 293 allows a trustee to transfer assets of an existing trust to another trust under certain conditions. Many states that have extended the time period for the rule against perpetuities have likewise adopted laws allowing such a transfer of trust assets. Again, these changes are intended to provide tax and estate planning benefits to the individuals involved.

Commissioner Emergency Powers And Branch Closures

Act 298 amends the law concerning the operation of bank facilities. A.C.A. § 23-46-212 grants the Bank Commissioner emergency powers to respond to various events or conditions resulting in a state of emergency and actions the Bank Commissioner may take to assist banks impacted by a state of emergency. Act 298 further clarifies the procedure for evoking emergency powers for an Arkansas state bank’s branch office in another state which is affected by an emergency condition. Additionally, Act 298 amends A.C.A. § 23-48-103 to identify circumstances in which a state bank may close a branch office on a temporary basis due to an interruption of service. Lastly, Act 298 more specifically defines the term “business day”.

Sale Of Tax Delinquent Land By The Commissioner Of State Lands

SB 418, now Act 241 of 2023, modifies the process for the sale of tax delinquent land. Most significantly, there is no longer a post-sale opportunity for a debtor, or its lender, to redeem the property.

Under Act 241, at least 30 days prior to the sale, the Land Commissioner is to notify the owner and interested parties of the date of sale and the right to redeem no later than 4:00 p.m. the last business day before the sale. The same 30-day notice is required in the event of an on-line sale.

INFO BITE

Act 241 of 2023, modifies the process for the sale of tax delinquent land. Most significantly, there is no longer a post-sale opportunity for a debtor, or its lender, to redeem the property.

Again, property can no longer be redeemed the day of the sale or any time after the sale. To the extent banks have utilized a practice of redeeming after a sale, that is no longer an option. Act 241 contains an emergency clause and therefore became effective on March 10, 2023.

Securities Commission

Act 475 transfers the administrative functions of the State Securities Department to the State Bank Department and further amends the organization of the State Securities Department. The legislation was enacted to enhance efficiencies within the agencies and within state government. The State Securities Department oversees and regulates non-depository mortgage activities, money services businesses and the securities industry. The integration of the State Securities Department with the State Bank Department is consistent with the regulatory structure in most states. Act 475 provides that the Bank Commissioner may act as the Securities Commissioner and the State Securities Department will be housed within the State Bank Department upon implementation of the legislation. Act 475 does not have an emergency clause and will become effective July 31, 2023.

Digital Currency

Act 596 of 2023 prohibits the use of a digital currency tracker to track an individual's purchases or location based on the use of digital currency unless a warrant has been issued expressly authorizing such tracking or a person consents.

The original bill contained no exceptions for, or references to, relevant federal law. ABA reached out to the sponsor during the session to raise the banking concerns in that regard and the bill was amended accordingly. In short, Act 596, as amended, makes clear that it does not excuse a financial institution, or an officer, employee, or agent of a financial institution, from compliance with the Right to Financial Privacy Act of 1978, Bank Secrecy Act and the Federal Financial Institutions Examination Council regulations. Finally, it states that a financial institution, or officer, employee, or agent thereof, refusing a request for disclosure of protected nonpublic information under the Act in good faith shall not be liable to any government authority.

Healthcare Decisions Law

Under current law, an incapacitated person with no family or guardian may be appointed a surrogate by a treating physician. That surrogate is then empowered to make decisions and take certain actions on behalf of the incapacitated person.

Act 49 of 2023 expands the surrogate’s authority to obtain financial information on behalf of the incapacitated person so as to allow application for Medicare and/or Medicaid benefits. Since the surrogate is not a legal guardian and does not have a power of attorney, this could create an uneasy situation for a bank that receives a request for financial information by a surrogate. ABA has initiated a discussion with the Bank Commission and the Department of Health about appropriate forms and necessary documentation for a surrogate’s request to a bank. Updates will be provided as that process proceeds and additional legislation is likely at the appropriate time. Banks should consult with counsel in responding to any such requests.

Opposed Bills That Did Not Pass

AR - HB1049 - To establish the Fair Access to Financial Services Act; and to protect the financial freedom of Arkansas citizens and businesses.

AR - HB1588 - To amend the uniform commercial code.

AR - HB1620 - To create the Second Amendment Financial Privacy Act; to prohibit financial institutions from using certain discriminatory practices; and to provide for enforcement of violations.

AR - HB1628 - To prohibit covenant not to compete agreements; and to amend the law concerning a covenant not to compete agreement.

AR - SB41 - To regulate environmental, social justice, or governance scores or metrics; and to allow the Treasurer of State to divest the state of stocks, securities, or other obligations.

AR - SB56 - To regulate the use of social credit scores based on environmental, social justice, or governance scores or metrics; and to prohibit a state agency from engaging in discrimination based on the use of a social credit system.

Criminal Background Checks

Act 297 amends the law concerning retention of criminal background checks for the State Bank Department. A.C.A § 2346-205(f) permits the Bank Commissioner to perform criminal background checks in certain circumstances. Currently, state law requires the Bank Commissioner to destroy criminal background check documentation within six (6) months of receipt of such records. During the annual State Bank Department’s audit, the Arkansas Crime Information Center recommended an extension of the record retention period for background checks. Act 297 provides that a criminal background check obtained under this section shall be retained by the Bank Commissioner for at least three (3) years from the Bank Commissioner's receipt of the background check. Act 297 does not have an emergency clause and will become effective July 31, 2023.