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Bank directors continue to face heightened risk of personal liability and huge regulatory burdens that divert their time and attention away from the most important issues facing their institutions and interfere with the full exercise of their fiduciary duties.

The American Association of Bank Directors believes that a combination of statutory and regulatory changes and congressional oversight hearings can mitigate personal liability risks and reduce regulatory burdens.

The following is a summary of AABD’s legislative agenda for 2017.  It does not include AABD’s initiatives with the federal banking agencies to make changes in their regulations, regulatory guidance, and practices that will lower regulatory burdens and undue personal liability risks.

AABD’s legislative agenda also includes proposals that will benefit banks.

Lowering personal liability risks and treating bank directors fairly

Bank directors are at greater risk of personal liability than directors of other corporations.  There is no compelling public interest served by subjecting bank directors to this heightened risk.  In fact, many qualified persons will not serve as bank directors because of fear of personal liability.  The banking industry would likely be stronger if those persons were willing to serve.

Like all corporate directors, bank directors owe a fiduciary duty to the bank and its shareholders.  They should be judged based on that standard.  But for many years, the federal laws have added to the types and amounts of penalties or punishment that bank directors are subject to, without regard to the fundamental but limited role that bank directors play.  They cannot be overseers and management at the same time, nor should they.  Sometimes bank directors are liable for just being at the wrong place at the wrong time.   Unfair obstacles that interfere with a director’s right to defend himself or herself should also be removed.  It’s time for Congress to determine which penalties and punishments should be repealed in the public interest and help assure that directors will have due process rights and the right to fully defend themselves.

  • Civil money penalties
  1. Current statutes allow the federal banking agencies (and CFPB and FinCEN) to impose liability on directors even though they acted consistent with their fiduciary duty and in good faith.

AABD proposes that the statutes relating to civil money penalties be amended so that directors would be liable only where they violated their fiduciary duties. 

  1. FinCEN may assess civil money penalties on banks and their insiders unilaterally. The assessed banks or individuals can then appeal to a federal court.  But by then, the damage has been done, at least reputationally.  One can imagine the power that this unilateral authority has for FinCEN to pressure a bank or individual to settle.

FinCEN should be required to first prove its case either through an administrative law proceeding or in federal court. 

  1. FinCEN has authority to assess penalties for either negligent conduct or willful conduct. There is a huge difference in the amount of the penalties for each form of conduct. But its administrative interpretation is such where there is little difference.  For example, it does not recognize that good faith is a defense.  So a bank can have a willful violation without intending to violate the law or regulation.

The law should be amended to define “willful” to require intentional violations.

  • Asset freezes

The federal banking agencies may freeze the assets of a director either through the administrative or court processes, or unilaterally.  AABD’s study on asset freezes in 2003 conducted by three former general counsel of federal banking agencies (Asset Freeze Task Force Report) concluded that the Congress should repeal the “stroke of the pen” authority to freeze assets of directors and officers and, instead, pursue asset preservation orders only through a prejudgment order from a court of law, for which they have statutory authority to do.

The law should be amended to eliminate the power of a federal banking agency to unilaterally freeze assets. 

  • Removal from office without due process

Once a bank becomes significantly undercapitalized, the federal banking agencies may remove a director or officer from office without any third party adjudication, whether administrative or judicial.  See 12 USC 1831o(f)(2)(F).

Congress should require any removal to be done through standard due process protections.

  • Access to bank records to defend oneself

The FDIC and OCC have asserted that access and possession by bank directors of bank records relating to their official duties is not permitted to prepare for their defense.  The FDIC has published a financial institution letter stating that bank directors and officers who obtain bank records to defend themselves on official actions they have taken on behalf of their bank are serving a “personal interest” and violate their fiduciary duties and applicable law.  But bank directors have every right to defend themselves in civil or administrative actions.

Congress should pass a statute that will explicitly authorize bank directors and officers to obtain, possess and use bank records to perform their official duties and to defend themselves against civil and administrative actions that challenge the performance of their official duties.

  • State laws defining fiduciary duty and AABD’s Task Force

As receiver of failed banks, the FDIC frequently sues their directors.  The federal law relies mainly on standard of care for a corporate or bank director in the state in which the bank was headquartered.  While AABD believes that many states have a gross negligence standard, which AABD favors, the FDIC has asserted in complaints filed against directors in some of those states that a simple negligence standard applies or has tried to define “gross” negligence as a smidgeon more than “simple” negligence.

While federal legislation may some day be needed to address this problem, AABD has instead established a Task Force to support clarification of state statutes so that it is unambiguous that gross negligence is the appropriate standard and that a definition of gross negligence that is consistent with the intent of the state legislature is provided in the statute.  Delaware law, which applies to a large majority of the major corporations in the U.S., is a useful guide for states desiring to clarify their law.

  • Reasonable reliance

None of the banking agencies recognize that bank directors may rely reasonably on officers, employees, advisors, and board committees.  State corporate laws protect corporate directors from liability for relying reasonably on such parties.  As a result of the absence of protection (and for other reasons, such as regulatory guidance requirements), bank boards and board committees receive voluminous reports to read for every meeting  which not only are burdensome but can obfuscate the most important issues facing their institutions.

Congress should amend federal law to recognize that bank directors may rely reasonably on bank officers, employees, board committees, advisors, etc. or direct that the agencies state that in their regulations.

  • “unsafe or unsound” banking practices and deference to the agencies

In the administrative action against Patrick Adams in 2014, the Comptroller of the Currency decided that the OCC’s broad interpretation of the phrase “unsafe or unsound banking practices” should prevail even though the alleged unsafe or unsound practice might not or would not be injurious to the bank.  He also determined that examiners must be given deference in their interpretation of the facts as they apply to “unsafe or unsound” practices unless it can be proven that the examiners acted arbitrarily or capriciously.

Congress should amend the relevant banking statutes to assure that the standard of review in administrative proceedings is non-deferential as to examiner judgments. And it should define the phrase “unsafe or unsound banking practices” as conduct that, at the time it was engaged in, was contrary to generally accepted standards of prudent operations (that is, it constituted an imprudent act), the possible consequences of which, if continued, created an abnormal risk or loss or damage to the financial stability of the Bank.  This is the definition that a number of federal courts have adopted but which the OCC and perhaps other federal banking agencies do not apply.

  • Reform of the banking agency OIGs

Banking agency Inspectors General are required by law to prepare Material Loss Reviews on certain bank failures to determine their causes and how the banking agencies can improve their efforts.  AABD’s report on the Material Loss Reviews of the Inspectors General (Treasury, FDIC and Fed) identified defects in how the Inspectors General conducted such reviews which may have resulted in reports that were biased against directors and officers.  These defects included not seeking information from directors and officers that might conflict with the information derived from reports of examination or interviews with agency representatives.  AABD is concerned that the results of these reports, which invariably point the finger at the board and management, may influence the decision of the FDIC as receiver to sue individual directors of failed banks.  AABD also believes that a common theme in these MLRs that the agencies should have taken more enforcement actions incentivizes the banking agencies to take such actions unnecessarily in order to avoid criticism from the Inspectors General in case the bank fails.

Congress should amend the statutes governing bank agency OIG Material Loss Reviews to assure that the reviews will be conducted fairly and allow affected parties such as the directors and officers of the failed banks to provide information prior to the issuance of the report.

  • Unfair limits on payment or indemnification of defense costs

In 1991, Congress passed a law (FDICIA) that prohibited banks from paying defense costs of directors and other institution-affiliated parties, subject to rules adopted by the FDIC.  FDIC rules prohibit banks  indemnifying directors and officers for defense costs relating to a banking agency administrative or civil action after the proceeding is initiated by a federal banking agency unless the target won the case.  If the case is settled or if the agency is able to assess a civil money penalty or impose a consent order on the director or officer, the director or officer cannot be indemnified and would be required to repay the bank for advances on paying defense costs.

In contrast, many states authorize companies to pay for defense costs of directors and who would not be obligated to repay the company unless the director did not act in good faith or did not reasonably believe that he or she was acting in the best interests of the company.  Under those state laws, it does not matter whether the director won or lost the case.

Winning an administrative action filed by a federal banking agency is difficult for a director no matter how weak the case is against him or her.  The agency often can prove a justification for a civil money penalty or a consent order on flimsy grounds because the statutory authority for taking such actions is so broad and discretionary.

Barring a bank from indemnifying the director or paying for his or her defense costs effectively eliminates the possibility of most targets of defending themselves through the administrative and court process.  Under those circumstances, they often feel pressured to consent to a penalty or an order from the agency regardless of the merits of the case against them.

Congress should amend the FDI Act and direct the FDIC to repeal its regulation (12 CFR 359) so that a director who acted in good faith and reasonably believed that he or she was acting in the best interests of the bank can be indemnified by the bank and not be required to repay the bank for defense costs even if the director has a consent order or penalties assessed.

Reducing regulatory burdens and empowering bank directors

  • Whistleblowing process and integrity of internal compliance process

The whistleblowing provisions in Sarbanes-Oxley Act and the Dodd-Frank Act do not bar insiders from collecting bounties for reporting purported violations of securities laws, etc. without first notifying the company and providing the company the opportunity to correct the violation.  This undermines the authority of the company’s board of directors and board audit committee in overseeing the compliance process required by Sarbanes-Oxley.

Congress should amend both laws to require insiders to report any perceived improprieties to the board of directors or board audit committee and provide a reasonable opportunity to resolve the issue before they can qualify for the payment of a bounty.  The changes would not bar the whistleblower from notifying the SEC in the case of Dodd-Frank, or the Department of Labor in the case of Sarbanes-Oxley, at any time.

  • Oversight hearings on bank director regulatory burdens

AABD’s Bank Director Regulatory Burden Report details more than 800 provisions in law, regulation or federal banking regulatory guidance that impose obligations on bank directors or their boards and board committees.   Since issuance of the report in 2014, the federal banking agencies have added even more obligations.  Some bank boards are receiving board reports for their monthly or quarterly meetings with 1,000 or more pages, plus voluminous reports for board committee meetings.

The House Financial Services Committee and the Senate Banking Committee should hold hearings on this issue by inviting representatives of the federal banking agencies and other interested parties to testify.  The oversight hearings will enable the committees to decide whether legislation is needed or whether the agencies themselves agree to undertake a serious review of the obligations they have imposed on bank directors and take corrective action.

Treating banks fairly

  • Independent Ombudsman and due process

AABD President David Baris has provided testimony twice before Congressional hearings in favor of legislation that would create an Ombudsman’s office in FFIEC that would assure an independent review of disagreements that banks have with their primary federal banking regulator.  Currently, each federal banking agency has an Ombudsman, with varying degrees of authority and effectiveness.  Many banks will not challenge a supervisory determination even if they disagree, for fear of retaliation.  Whether or not that fear is justified, it is real and needs to be taken into account in evaluating the value of legislation.

Congress should pass a law creating an independent Ombudsman’s office at FFIEC with proper due process safeguards.

  • Whistleblowing

See whistleblowing materials above.

  • Civil money penalties

A recent study by Deloitte reflects the substantial increases in penalties against banks compared to several years ago.  These escalating amounts are aggravated by the fact that multiple federal agencies and state agencies having common jurisdiction over the same entity and matter are under no statutory constraints to take other penalties into account.

Many of the penalties are assessed against banks for violating a law or regulation that is susceptible to different interpretations, or where an officer acted outside the scope of his or her authority but where the agency penalizes the bank even though the bank’s compliance processes were consistent with law and regulation.  Examples include failure by a BSA Officer to file a SAR even though the officer has been delegated the responsibility to use judgment and policy to decide whether to file the SAR.  The BSA Officer is autonomous by design, yet banks are penalized when the BSA Officer, in exercising that autonomy, fails to file a SAR that examiners, after the fact, decide should have been filed.

In other examples, penalties serve no legitimate public interest – banks are examined frequently, and where the examiners criticize a bank or recommend improvements, the banks will typically take corrective action during the examination or soon thereafter, without the need for a civil money penalty or other enforcement action.

The civil money penalty statutes grant powers to the agencies that allow them too much discretion.  Reasonable limits should be set, in amount and type of offense, and due process protections such as those specified in the civil money penalty section above should be reflected in the statutes.

The amount of penalties should also take into account the penalties that are assessed by other agencies.

The enforcement powers of the banking agencies are too often exercised.  They should be used for exceptional circumstances.  Oversight hearings would be appropriate to delve into how and under what circumstances the agencies are using their enforcement powers instead of simply using “moral suasion” to effectuate corrective action.

  • PCA oversight hearings

AABD is not aware of any oversight hearings conducted by Congressional Committees since the prompt corrective action authority was established by FDICIA in 1991.  It is time to evaluate how effective this authority has been.  Have the agencies been too lax?  Too stringent?  Have they closed banks unnecessarily?  Have they made it more difficult for undercapitalized banks to recover than if they were simply left alone?  Are the agencies capable of managing banks under the PCA?  How have they done?

AABD supports oversight hearings by either or both the House Financial Services Committee and the Senate Banking Committee in order to understand whether the current authority is being used in the public interest and to prepare for the next wave of bank challenges.

  • The unfair advantage of activist shareholders

In the past seven years or more, activist shareholders have invested in hundreds of community banks.  There is evidence that some activist shareholders are acting in concert to force a premature sale of the community banks.  Most of the activist shareholders do not file change in bank control notices prior to acting in concert.  Are the banking agencies applying the law and regulations correctly?  To what extent are the forced acquisitions hurting the community that was previously served by the community bank?

The House Committee on Financial Services and/or the Senate Banking Committee should hold oversight hearings to find out.

  • The ADA gravy train

Hundreds of community banks have recently received demand letters from several law firms purportedly representing disabled persons, alleging that the websites do not provide sufficient accessibility to them.  The letters assert that the banks are required to adopt an international protocol (Web Content Accessibility Guidelines version 2.0 AA) to redesign their websites at considerable cost, but the provisions of the Americans with Disabilities Act (ADA) do not specify that this protocol is applicable.  The Department of Justice, which has jurisdiction over the administration of ADA, issued an advance notice of rule making in 2010 making reference to the protocol, but has now indicated that its plans to provide a notice of rule making and the issuance of a final rule are long-term..  In the meantime, plaintiff law firms, relying on vague and broad language in ADA, continue to demand sometimes exorbitant attorney and related fees from community banks and others, often succeeding.

Congress should amend ADA to freeze any private suits against companies, including banks, for not having proper accessibility to websites and mobile devices until DOJ adopts a rule defining what is required, and allowing companies reasonable time in which to comply with the rule.