officers and directors – Compliance Guru

UPDATE 2: We in fact did see a significant decrease in O&D lawsuits in the past few years:

[pullquote]“The FDIC will not bring civil suits against directors and officers who fulfill their responsibilities, including the duties of loyalty and care, and who make reasonable business judgments on a fully informed basis and after proper deliberation.”[/pullquote]

UPDATE: Apparently one of the most common requests of the FDIC from bankers is for more technical assistance and training. The FDIC has responded, and I do not believe it is coincidental that the first set of new videos released is a new series titled “New Director Education Series” aimed at bank Directors.

The numbers are in for 2012, and for the fourth year in a row the FDIC has filed a record number of officer and director lawsuits. According to the Statement Concerning the Responsibilities of Bank Directors and Officers adopted in 1992, the FDIC may sue professionals who they believe played a role in the failure of the institution. These individuals can include officers and directors, attorneys, accountants, appraisers, brokers, or others.

The FDIC regulations defining officer and director obligations are explained here, and the key concept to understand is something called the “duties of loyalty and care.”

“The duty of loyalty requires directors and officers to administer the affairs of the bank with candor, personal honesty and integrity. They are prohibited from advancing their own personal or business interests, or those of others, at the expense of the bank.”

So how can your officers and directors (and others) demonstrate the “duties of loyalty and care” and avoid liability claims? The FDIC spells it out, and it isn’t really that difficult:

“The FDIC will not bring civil suits against directors and officers who fulfill their responsibilities, including the duties of loyalty and care, and who make reasonable business judgments on a fully informed basis and after proper deliberation.”

Let’s break that last sentence down a bit. Officers and directors must demonstrate that they made…

…reasonable business judgments…

…on a fully informed basis, and…

…after proper deliberation.

So working backwards, the key to proper deliberation is that you be fully informed, and that requires accurate, timely and relevant information. Not just data, but actionable information.

The key then, is that financial institutions must take steps to ensure that officers and directors have the information necessary to carry out their responsibilities, and that the deliberation process is appropriately documented. I’ve written before (Using Technology to Drive Compliance) about how technology (specifically automation) can enable and/or enhance your compliance efforts. Technology can help extract useful information from mountains of data, and then present that information in a consistent, easy to understand format.

Management committees like the IT committee and the audit committee can provide both a forum for both the exchange of information, and documentation that the exchange took place. Make sure all functional units are represented in the committee, and designate someone as the Board representative if possible. Make sure the committee reports to the Board periodically (preferably quarterly, but at least annually), and don’t underestimate the value of having outside expertise on those committees. Not only can it add a different perspective, it can also help document that you are truly making an effort to be “fully informed” and that you are “properly deliberating”.

Given the right information, in the right format, and the right setting, perhaps we’ll see this trend slow or even reverse itself in 2013!

Although a quick read of this FIL makes it seem that it only addresses the proper use of confidential information after the institution is placed into receivership, it really has implications for the bank officers, directors and legal counsel of all financial institutions. I’ll explain that in a moment, but first the FIL makes the following points:

Officers and directors have a fiduciary responsibility to act in the best interests of the institution at all times.
In the pursuit of that responsibility, access to institution records is essential.
If the institution goes into receivership, the receiver (FDIC) becomes the owner of the institutions’ records.
Officers and directors of failed or failing institutions who remove FI records in anticipation of litigation or enforcement activity against them may be in breach of their fiduciary duty.

It has been my experience that the vast majority of FIL’s are issued re-actively, instead of pro-actively, so I think it’s safe to assume that the FDIC has actually seen occasions where financial institution records have been removed and used by officers and directors for reasons other than for the benefit of the institution. So if you are an officer or director, the clear message here is that using FI records to prepare for or defend against litigation is acting in your best interests, NOT the best interests of the institution*. And legal counsel representing officers and directors must not advise their clients to copy or remove institution records under penalty of civil money penalties, consent orders, or removal and prohibition from the banking industry.

In addition to the “fiduciary responsibility” argument against possessing records, the FDIC also make an argument from confidentiality (GLBA Part 364b , SAR confidentiality, and Fair Credit Reporting regulations), and this has very real implications for all officers and directors regardless of the financial condition of the FI. Here’s why…how many of your officers and directors receive confidential information? All of them probably, right? Board reports, examination reports, loan packages, audit committee minutes, etc., all are essential to performing their fiduciary duties. Now how many of those records go off-site, and how are those records being secured in transit, use, and storage? Are records stored off-site treated with the same document retention and destruction policies as those stored in-house? The FDIC may not have the same motivation to go after officers and directors of healthy institutions that they do failed ones, but it is clear they expect records to be treated the same regardless of the physical location. How are you distributing this information? We’ve seen an increased interest in institutions using technologies such as iPads and cloud-based portals to distribute director reports, but you must be careful not to let convenience trump security. Use this FIL as an excuse to review your records safekeeping practices and make sure you (and your officers and directors) are adhering to your data confidentiality, security, retention and destruction policies, wherever the data resides.

*The FDIC does recognize that officers and directors may have a legitimate need to access institution records to defend themselves from litigation, but they require that access to be arraigned formally through them, and only after signing confidentiality agreements.

Tag: officers and directors

FDIC Files Record Number of Lawsuits in 2012 – 2015 UPDATE

UPDATE 2: We in fact did see a significant decrease in O&D lawsuits in the past few years:

FDIC issues FIL addressing proper use of Bank information