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The FDIC has been one of the more active regulatory agencies in the arena of director and officer liability. And the recent and ongoing banking crisis has given the FDIC the opportunity to not only pursue actions against directors and officers, but to also explain, fashion and educate about the FDIC's view of director and officer duties. I find regulatory agency statements about the agency's view of standards of care to be interesting and instructional, even where I disagree with the agency's view, as there is a currently existing, unmet need to educate and reach mutual acceptance about the standards that will or do apply. For example, in pertinent part the FDIC Statement Concerning the Responsibilities of Bank Directors and Officers provides:
"Directors and officers of banks have obligations to discharge duties owed to their institution and to the shareholders and creditors of their institutions, and to comply with federal and state statutes, rules and regulations. Similar to the responsibilities owed by directors and officers of all business corporations, these duties include 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.
The duty of care requires directors and officers to act as prudent and diligent business persons in conducting the affairs of the bank.
This means that directors are responsible for selecting, monitoring, and evaluating competent management; establishing business strategies and policies; monitoring and assessing the progress of business operations; establishing and monitoring adherence to policies and procedures required by statute, regulation, and principles of safety and soundness; and for making business decisions on the basis of fully informed and meaningful deliberation.
Officers are responsible for running the day to day operations of the institution in compliance with applicable laws, rules, regulations and the principles of safety and soundness. This responsibility includes implementing appropriate policies and business objectives.
Directors must require and management must provide the directors with timely and ample information to discharge board responsibilities. Directors also are responsible for requiring management to respond promptly to supervisory criticism. Open and honest communication between the board and management of the bank and the regulators is extremely important.
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."
In the arena of outside director liability the FDIC has indicated that it will pursue actions against directors who do not monitor and protect against dishonest conduct or abusive transactions with insiders. The FDIC also states that it will pursue actions where directors fail to oversee that prudent processes are in place or respond to red flags.
I do take issue with some portions of the FDIC's statement of director standard of care. For example, the FDIC in part states: "This means that directors are responsible for selecting, monitoring, and evaluating competent management; establishing business strategies and policies; monitoring and assessing the progress of business operations; establishing and monitoring adherence to policies and procedures required by statute, regulation, and principles of safety and soundness; and for making business decisions on the basis of fully informed and meaningful deliberation." Such a statement is overly broad in at least several regards. Directors, particularly outside directors can be expected to exercise active, diligent, knowledgeable and informed oversight. This would include oversight of the highest levels of executive management, but not "competent management" in general.
Similarly, the FDIC's statements that directors are responsible for " . . . establishing business strategies and policies; monitoring and assessing the progress of business operations; establishing and monitoring adherence to policies and procedures required by statute, regulation, and principles of safety and soundness;" are too broad-yes, the active, diligent, knowledgeable and informed oversight of the bank's establishment, assessment and monitoring of certain strategies, policies, operations, and procedures required by statute, regulation, and principles of safety and soundness-but the FDIC's statement exceeds or potentially exceeds that level of responsibility.
And, of course, in and by itself, the FDIC's statement that a director is responsible for " . . . making business decisions on the basis of fully informed and meaningful deliberation" is overly broad.
Interesting and worthwhile discussion however, particularly in this time as agreement on director and officer responsibilities continues to evolve and directors, regulators, the public, and the courts need to work toward a mutual understanding and agreement on these and other important issues. More discussion is needed.
Visit Tate's Blog: Law - Governance - Risk - Business for more articles about corporate governance, risk management, and other corporate law topics.
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