Guidelines for Legal Advice to Financial Institution Directors
FIL-15-98 (REISSUED) March 17, 1998
CHIEF EXECUTIVE OFFICER
Guidance for Financial Institution Directors Regarding Legal Advice
The Federal Deposit Insurance Corporation (FDIC) has developed the attached guidance for financial institution Directors receiving legal advice. The guidance was attached to FIL-15-98: Financial Institution Letters: dated February 10, 1998. However, some financial institutions apparently did not receive pages 1 and 2 of the guidance. Therefore, FIL-15-98 is being reissued to ensure that all institutions receive the entire guidance.
The guidance is intended to ensure that officers and Directors of financial institutions recognize that attorneys providing advice and corporate counseling represent, and owe their duty of loyalty to, the financial institution, not officers and Directors who in some cases may also be the control owners of the institution. In order to facilitate the exercise of independent approval authority, the board of Directors, or any special committee thereof, should assure effective communication of legal advice and counsel prior to action by the board or committee.
Please ensure that all members of your board of Directors receive a copy. If you have any questions, please contact your FDIC Division of Supervision Regional Office.
Nicholas J. Ketcha Jr.
Division of Supervision
Distribution: FDIC-Supervised Banks (Commercial and Savings)
NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street, N.W., Room 100, Washington, D.C. 20434 (800-276-6003 or (703) 562-2200).
(replacement version of "Guidance" released Feb 10, 1998)
GUIDANCE FOR FINANCIAL INSTITUTION DirectorS REGARDING LEGAL ADVICE
Results of a recent inquiry by the
FDIC emphasize the need to publicize the important roles and responsibilities
of bank management and independent contractor professionals providing
services to insured depository institutions.
The FDIC recently concluded an inquiry
of a law firm respecting its representation of an insured depository institution.
As bank counsel, the law firm and its attorneys owed important fiduciary
obligations to the institution, including the duty to exercise the utmost
loyalty and fidelity to the bank's interests.
An FDIC examination disclosed that
the law firm conceived and drafted documents to implement a complex series
of transactions between the bank and an entity controlled by the bank's
Chairman and other insiders. These transactions might well have resulted
in the transfer, over time, of certain bank properties to the descendants
of the bank's Chairman. Despite the fact that the interests of the bank
and the interests of certain senior bank officers and Directors
were different and in apparent conflict regarding the creation of the
entity and its transactions with the bank, the law firm relied on the
interested insiders or their subordinates to communicate to the bank's
board of Directors. Though the bank,
at the suggestion of the law firm, had established a special committee
of disinterested outside Directors
to consider and approve the transactions, the attorneys had no direct
contact with that committee. Under the circumstances presented, the law
firm attorneys failed to fulfill their obligation to effectively communicate
all pertinent facts and legal advice to the special committee members.
Similarly, it appears that the members of the special committee failed
to fulfill their duty to ensure that they were fully informed of all pertinent
facts prior to approving the proposed transaction.
Federal banking agency examiners
are vested with the power and responsibility for making thorough examinations
of depository institutions. Examiners conduct periodic examinations of
depository institutions and rely on a sampling of books and records in
determining compliance with safe and sound banking practices as well as
applicable laws and regulations. In order to fulfill their duties, examiners
must be able to rely on the completeness and accuracy of financial institution
books and records.
The documents and bank records regarding
the creation of the entity, all of which were prepared by the law firm,
uniformly indicated that the entity had been created to benefit the bank,
and that the creation of the entity and its transactions with the bank
had been considered and approved by the special committee of disinterested
outside Directors. Routine review
of this documentation by FDIC examiners during a series of examinations
of the bank raised no red flags or areas of regulatory concern. Indeed,
it was not until a substantial period of time after the transactions that
a bank employee informed FDIC examiners about the true nature of the arrangement.
Even with the assistance provided by the employee, uncovering all of the
details took significant time, effort and analysis.
The FDIC believes that the situation
described above apparently resulted in part from the failure of the lawyers
involved to identify their client - the bank - and to keep its interests
paramount. The duties owed by lawyers in their representation of insured
depository institutions run to the institution, not to the individuals
who comprise management of the institution. These principles are of particular
concern to the FDIC as many of the institutions that we supervise are
managed by the control owners of the institution.
Banking is a heavily regulated industry,
and it has long been recognized that bank officers and Directors
have higher standards of fiduciary duty than the officers and Directors
of ordinary corporations. Likewise, the safe and sound operation of insured
depository institutions requires that lawyers provide advice and corporate
counseling that is both accurate and complete, and that financial institution
Directors fully consider such advice
and counseling prior to exercising approval authority regarding non-routine
If it appears that the managers
of an insured depository institution are breaching their fiduciary duties,
it is the responsibility of the lawyer to take appropriate steps to advise
the offending officials as to their duties. When the likely result is
substantial injury to the organization, the lawyers also have the obligation
to take steps to prevent the offending conduct, if necessary by proceeding
up the corporate ladder up to and including informing the board of Directors
of the institution. These communications must also be effective. It is
not sufficient to expect or allow the offending officials or their subordinates
to properly communicate to institution decisionmakers. This is particularly
true when insider conflicts have necessitated the creation of a special
committee of the board to act as decisionmaker.
In sum, the FDIC expects all
attorneys representing insured depository institutions to exercise the
utmost loyalty and fidelity to the institution's interests. When the
interests of the institution and any of its insiders differ and may
be adverse, attorneys representing the institution must make full disclosure
of all pertinent facts to and obtain the knowing consent and approval
of institution decisionmakers who are independent from the senior officers
with adverse interests. Moreover, when an insured depository institution
has occasion to establish a special committee to exercise independent
approval authority for the institution regarding a matter, attorneys
representing the institution have the responsibility to make sure that
effective communication of pertinent facts and legal advice is made
to such committee.