Source: http://www.pringleandpringle.com/ethics-and-codes-of-conduct/
Timestamp: 2019-04-22 12:02:17+00:00

Document:
In this two-hour session, we would like to lead a discussion of important current issues for lawyers representing financial institutions and/or officers and directors including both legal ethics and codes of conduct. We have recently participated in several seminars, including roundtable discussions with regulators. We also have recently presented seminars and training for board members and for lawyers representing financial institutions. In addition, this fall we have led strategic planning and educational meetings for boards of directors to prepare for changes in 2012 and beyond. Never before have we found these presentations and discussions to be so challenging. However, one of the significant benefits has been that the give and take in these sessions has proven to be very valuable in understanding how to best plan for 2012 and beyond.
While the largest financial institutions are subject to enhanced levels of stress testing and submissions of capital plans to the regulators, financial institutions of all sizes are experiencing a trickle down of these enhanced regulatory requirements. At the same time, the “unknowns” in global and U.S. economic developments make it harder to conduct risk assessments.
Also, the legislative mandates which have yet to result in regulations and guidances create uncertainties which can be disconcerting in representing financial institutions and in strategic planning. One area in which lack of clarity looms over the planning processes has created a particularly large surge of discussion between the financial institutions industry and regulators. That is, the area of fair lending and the new definitions in the Dodd-Frank Act, which have yet to be explained, and related issues to be addressed by the Consumer Financial Protection Bureau have been recognized as “unknown” causing “uncertainty” and requiring special efforts in risk management at this time.
We have also provided extensive materials in several seminars presented since the current amended Oklahoma Rules of Professional Conduct (“Oklahoma Rules”) were approved by the Oklahoma Supreme Court and became effective January 1, 2008. The amended Rules contained both changes to the substantive Oklahoma Rules themselves and extensive amendments and additions to the Comments. Several of these amended Rules are cited in these materials and will be the subject of discussions at this seminar.
We note that a number of federal regulatory enforcement actions have been issued which are directed at attorneys and law firms as “institution-affiliated” parties under federal law. These provisions of federal law have been revised and strengthened as have other enforcement powers of financial institution regulatory agencies.
Major federal legislation impacting financial institutions and their lawyers has been passed by Congress in the last decade including the Emergency Economic Stabilization Act of 2008, Financial Services Regulatory Relief Act of 2006, Gramm-Leach-Bliley Act, USA Patriot Act, and Sarbanes-Oxley Act. Most recently the current Congress passed the Dodd-Frank Regulatory Reform Act (“Dodd-Frank Act”) as discussed in this presentation.
In the previous decade, Congress passed a series of federal legislative directives ramping up the enforcement powers of federal financial institutions’ regulators, i.e., the Financial Institution Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), the FDIC Improvement Act of 1991, and the Reigle Community Development and Regulatory Improvement Act of 1994 (“Reigle Act”). In fact, the regulatory agencies’ Standards for Safety and Soundness were initially issued pursuant to Section 132(c) of the FDIC Improvement Act of 1991 as amended by the Reigle Act in 1994 and those statutory provisions which were mirrored by the regulators are codified in Section 39 of the FDIC Improvement Act at 12 U.S.C. 1831 p-1.
In this discussion, we emphasize that lawyers representing financial institutions and their officers and directors must be familiar with these statutory and regulatory provisions as well as other important federal and state laws. Meeting ethical obligations requires reference to both the Rules of Professional Conduct and these statutory and regulatory provisions.
An attorney who represents a financial institution or a related business encounters some of the most complicated and far reaching ethical issues of any practitioner. All bank regulatory agencies have authority to seek civil damages against any “institution affiliated party” which is defined to include attorneys in certain situations. Section 708 of the Financial Services Regulatory Relief Act of 2006 substantially expanded the scope of regulatory enforcement authority applicable to “institution affiliated parties” by broadening that definition, effective October 13, 2006.
Because of the complications of being an “institution affiliated party” as well as unique conflict issues involving representation of the financial institution or one of its affiliates or related entities and those individuals associated with the institution in the capacity of officers or directors, whether practicing corporate or regulatory compliance law in the sphere of financial institution representation, a lawyer faces a multitude of ethical questions. These ethical questions may also involve potential violations of Federal and state banking law. There are also other ethical issues and concerns which arise when a lawyer serves on the board of directors of a financial institution or one of its affiliates or is simply operating a law firm which has a banking relationship with a financial institution the firm represents.
The uniqueness of representing a client which is subject to high regulatory standards and examination and reporting to government entities increases the scrutiny of the ethical considerations with regard to appropriate confidentiality and conflicts issues. These issues and the accompanying potential liability have been substantially enhanced due to litigation surrounding closed bank receiverships and subsequent legislation. The Federal legislative developments have been substantive and expansive in providing additional enforcement tools and broad safety and soundness standards. Subsequently promulgated regulations to implement these new tools and standards have been effectively used to address regulatory concerns.
Thus, the purpose of this presentation will be to highlight ethical concerns in several areas of banking and consumer law and to heighten awareness of the various laws and ethical considerations. Also, we would seek to encourage the development of discussion and educational presentations concerning ethical issues in corporate and regulatory representation of financial institutions and related businesses.
State professional responsibility rules have also been readdressed in this area. For instance, Rule 1.6 of the Oklahoma Rules which provided for the “Confidentiality of Information” in the client-lawyer relationship; 1.6 has been substantially expanded.
Rule 1.6 of the ABA Model Rules of Conduct is not as permissive as the Oklahoma Rule and other state rules may vary also. Additionally, those attorneys who handle securities matters before the Securities and Exchange Commission (“SEC”) for financial institutions will have the requirements of SEC regulations implementing Part 307 of the Sarbones-Oxley Act of 2002 to meet in their communications with their client and the SEC.
Many unique areas of banking and consumer law and particularly the fair lending area of law give rise to concerns with regard to this Rule. These fair lending auditing results as well as other sorts of compliance auditing records have been addressed by a number of state legislatures including the Oklahoma Legislature. We refer you to Section 3002 of Title 6 of the Oklahoma Statutes, which was effective July 1, 1995 as an example.
The Federal banking agencies have also recognized and discussed the sensitivity and importance of preserving the confidentiality privilege during the examinations. For instance, the Office of the Comptroller of the Currency has addressed these issues in the Comptroller’s Handbook on Litigation and Other Legal Matters.
There are a substantial number of areas of the law which require in depth study and focus in order to achieve and maintain competency in representation of the financial institution client. Lawyers representing financial institutions and related businesses find the applicable law challenging and continuously changing. The need for finding a specific area in which to concentrate and continuing an attorney’s legal education to be apprised of legal requirements and revisions to represent the client is quickly apparent in reviewing enforcement matters as well as civil litigation. Reviewing the current emphasis of issues in both bank safety and soundness and compliance examinations provides guidance in identifying areas of particular importance to your client.
As an example, one area of long term and current emphasis by the regulators is the area of law generally referred to as “fair lending” including the implementing of regulations of the Equal Credit Opportunity Act, the Community Reinvestment Act, the Fair Housing Act, the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act (“RESPA”), and the Truth in Lending Act which includes Section 32, the Home Ownership and Equity Protection Act of 1994 (“HOEPA”), which have been and continue to be vigorously enforced. Of course, the various regulations, interpretations and commentaries published by the regulatory agencies on this topic are part of this expansive body of law; for instance, the Interagency Policy Statement on Discrimination in Lending as well as other interpretations available from the banking agencies must be familiar to a practitioner assisting a financial institution with compliance.
Most importantly, it is noted that certain consumer laws allow an appropriate redisclosure or reimbursement to customers to limit civil liability if properly accomplished within set time limits. For instance, the Truth-In-Lending law permits corrective action within 60 days of “discovery”. Thus, it is imperative that counsel be familiar with these provisions and timely advise the client of legal alternatives to be considered in addition to the business decisions they may be reviewing.
An area of particular importance in which unwary practitioners may find problems is the appropriate notice or prior approval of the regulations of change of control of a financial institution. This is an area which may result in enforcement actions against individuals or the financial institution. Review of the rules of notice and the definitions of what constitutes “control” is advisable. Additionally, it is noted that a change of control and other factors can trigger certain additional reporting requirements for periods established by regulatory issuances pursuant to Federal statutes. For instance, Federal law requires specified categories of national banks to furnish the OCC with at least thirty (30) days notice before adding any individual to the board of directors or employing an individual as a senior executive officer. That is, a national bank is subject to the notice requirement if the bank (i) has been chartered for fewer than two years, (ii) has undergone a change of control within the preceding two years, or (iii) is not in compliance with the minimum capital requirements applicable to it or is otherwise in a “troubled condition”, as determined on the bases of the bank’s most recent report of condition or report of examination or inspection.
We note that recent revisions to the provisions of federal law which expand enforcement authority over “institution affiliated parties” also specifically relate to change of control transactions. Additionally, enforcement actions which name attorneys have involved issues regarding insider transactions as well as issues of competency.
Areas in which these sorts of issues most quickly arise involve capital and dividend matters and holding company formations and expansion. Also, affiliate party transactions and insider borrowing transactions can involve these sorts of issues because of the complicated overlapping of affiliate and insider borrowing issues. Recently adopted Regulation W implementing provisions of the Banking Affiliates Act and subsequent issuances provide guidance and additional limitations on affiliate transactions. The violations of these provisions are more likely to involve pursuit of civil money penalties than many other sorts of violations. Familiarity with definitions of “executive officer”, “related interests”, and “affiliates” as well as familiarity with the issues of “control” are imperative. Another very difficult area that can involve civil money penalties or criminal prosecution and potential conflict of interest is the Bank Secrecy Act. Federal law disallows the disclosure to a person who is the subject of a suspicious activity report of the fact that a suspicious activity report is to be filed. Bank counsel should be familiar with that requirement and properly advise clients with regard to these issues. Because of the very fine line in handling required reporting, including suspicious activity reports, versus complying with privacy law restrictions, counsel for the financial institution must be well apprised of these areas of law and quick to recognize and disclose conflicts. A review of these pitfalls would involve a discussion of the inherent conflicts in these laws. Generally, no release of customer financial records is permitted unless the customer agrees to the release or the customer is notified and the customer does not object after notice and a reasonable time to raise an objection. However, in certain instances Federal law prohibits the disclosure to the customer of the request for information; for instance, where a Federal grand jury subpoena has been issued involving a crime against a bank. Additionally, financial institutions are obligated to file suspicious activity reports in instances where there is a “suspicion” of a crime; however, only very limited information can be released to appropriate government authorities relevant to a possible violation and, release of information beyond those limits can expose the institution and related individuals to third party liability and the person who is the subject of the filing cannot be notified.
Because of the nature of reporting currency transactions and appropriate use of suspicious activity reports in this area, a substantial degree of risk with regard to handling appropriate release of bank customer information is involved. In instances when an officer or director of an institution is the subject of the report, the attorney’s responsibility remains with the institution. While independent representation may be sorely needed, to so advise the individual would cause a violation of Federal law.
Rule 1.13 of the Oklahoma Rules and the ABA Model Rules of Professional Conduct deal with representing an organization such as a bank or other business entity as a client. This rule addresses the sorts of situations where an officer, employee or other person intends to act or refuses to act in a matter that may cause a violation of a legal obligation of the organization and the lawyer is obligated “to proceed as is reasonably necessary in the best interest of the organization”. One measure that may be taken is advising that a separate legal opinion on the matter be sought for presentation to the appropriate authority (this may be the board of directors). Separately, the rule provides that in dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer is obligated to explain the identity of the client when it is apparent that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing. This rule also separately addresses the situation where an attorney represents both the organization and the interest of any such individual constituent and must obtain the consent required by Rule 1.7 from an appropriate official(s) other than the person being represented (again, this may be the board of directors).
The ethical issues which arise in the situation where a lawyer serves on the board of directors of a financial institution or a related business are manifold. The commentary to Rule 1.7 of the Oklahoma Rules sets forth specific direction on certain of these issues, and the commentary to the amended Rule expands this analysis.
The concept with regard to a “Chinese Wall” in acquisition and merger transactions particularly as well as in regulatory representation needs to be carefully reviewed. Several provisions in the amended Rules affect commercial lawyers’ conflict of interest issues. A new Section 1.18 addresses the liklihood of a conflict being created in the first meeting with a prospective client on a new matter and, as noted above, other revisions include the use of “informed consent” requirements. Separately in amended Rule 1.0(k) the old “Chinese Wall” approach in handling conflicts within a firm is addressed within the definition for the “screened” handling of matters.
The attorney’s obligation to zealously assert the client’s position is found in the Preamble to the Oklahoma Rules and the ABA Model Rules of Conduct and Rule 1.3 of both the Oklahoma and Model Rules. After first identifying the client and resolving any conflicts, the attorney still must guard against advocating a position zealously which ultimately is not in the best interests of his/her client and its directors nor the attorney as an affiliated party.
For instance, attorneys representing financial institutions frequently find themselves in situations involving evaluations of loans for combination or otherwise structuring lending transactions involving insider transactions, affiliate transactions, or lending limit considerations with outside borrowers. Pressure to assist in allowing the loans booked at the bank rather than participated or made by another lender is not uncommon. This is an area in which counsel have been pursued as “affiliated parties” by bank regulatory agencies and further discussion and review of the responsibilities of attorneys in this area is important.
Enforcement actions can only be brought by federal regulators based on statutory authority or certain types of rules of the agencies adopted pursuant to the Federal Administrative Procedure Act. An article published in the American Bar Association’s Administrative Law Review’s Spring 2000 issue entitled Distinguishing Legislative Rules from Interpretive Rulesdescribes the confusion in the law regarding those rules which have the force and effect of law. While you may or may not agree with the position advocated by the author of that article, the review of the status of the law is helpful in reflecting on the various rulemaking endeavors of the federal banking regulatory agencies.
F.Interdisciplinary Practice and Multistate Practice and Unauthorized Practice of Law.
The amended Rules made no substantive changes to current Rule 5.4 which would address multidisciplinary practices. The amended Rules 5.5 and 8.5 did revise the multijurisdictional rules creating specific safe harbors and addressing reciprocal enforcement. Rule 1.13 as amended, addresses the Sabanes-Oxley “up the ladder” communication requirements for representing an entity. We encourage your review of the specific provisions of the Rules on the OBA website cited in these materials.
Issues regarding ethical conduct for financial institution officers, directors, employees and attorneys often arise in connection with the Federal Bank Bribery Act (the “Act”) which prohibits the payment or solicitation of bribes in connection with financial institution transactions. Regulatory pronouncements in recent years have emphasized the need for financial institutions to adopt corporate codes of conduct, codes of ethics or ethics policies (collectively hereafter “code” or “codes”) to address issues arising under the Act, as well as general corporate governance concerns arising under the Sarbanes-Oxley Act and related provisions of the Federal Deposit Insurance Act (“FDI Act”) and regulations, and those laws and regulations specifically addressing prohibitions and limitations on insider transactions, including the Federal Reserve Board’s Regulation O (“Regulation O”). The FDIC issued its “Corporate Code of Conduct Guidance on Implementing an Effective Ethics Program” in October of 2005 (“FDIC Guidance”) and the OCC addressed the need for codes in the “Insider Activities” segment of the Controller’s Handbook, issued in March of 2006 (“Comptroller’s Handbook”).
6. FDIC Guidance “Corporate Governance, Audits, and Reporting Requirements”.
Having identified attorneys as both affiliated parties of the bank and as being specifically subject to the Act, it is apparent that not only should attorneys be involved in developing and implementing a code of conduct from the standpoint of providing legal counsel but that bank counsel must also be familiar and compliant with such codes. It should also be apparent from the many regulatory pronouncements regarding codes of conduct and ethics policies that this is an area of current regulatory scrutiny. Even more importantly, the implementation of an effective code will provide the bank with an important tool to identify, and hopefully avoid, the many economic, reputation, compliance and other risks inherent in unethical and, in some cases, illegal actions on the part of officers, directors, employees and even bank counsel.
Two recent lawsuits between the Federal Deposit Insurance Corporation (“FDIC”) as receiver for failed financial institutions and law firms representing members of the failed institutions’ board of directors raise interesting ethics considerations. Federal Deposit Insurance Corporation, as Receiver for Hillcrest Bank v. Bryan Cave LLP, Civil Action No. 1:10-CV-03666-TCB, USDC ND GA and McKenna Long & Aldridge LLP v. Federal Deposit Insurance Corporation, as Receiver for Darby Bank & Trust Co., K Bank, McInstosh (sic) Commercial Bank, and NorthWest Bank & Trust, Civil Action No. 1:10-CV-03779-RWS, USDC ND GA. The Bryan Cave case was initiated by the FDIC as a result of bank documents being copied and provided to the law firm as counsel for officers and directors of the Hillcrest Bank before that bank was closed by the Kansas Office of the State Bank Commissioner and the FDIC was appointed as receiver. The McKenna case was initiated by that law firm in connection with the failures of Darby Bank & Trust Co., K Bank, McIntosh Commercial Bank and NorthWest Bank & Trust, as what appeared to be a preemptive attempt to forestall the same sort of litigation initiated by the FDIC in Bryan Cave. In its Answer and Counterclaim in the McKenna case, the FDIC asserted essentially the same causes of action against McKenna Long & Aldridge that it asserted against Bryan Cave. While both cases were settled and therefore did not give rise to established precedent and both cases involved failed institutions, the factual and legal underpinnings for the parties’ respective positions in these cases provide food for careful consideration and digestion by attorneys practicing in the financial institution arena. For these purposes, we will focus specifically on the Bryan Cave litigation.
At the outset, the FDIC relied on 12 U.S.C. §1821(d)(2) to support the proposition that, as receiver, it had “succeeded to all rights, titles, powers and privileges of” the failed institution and thus “became the owner of Hillcrest Bank’s books, records and assets, including all copies.” Consequently, for ethics consideration purposes, it may be assumed that the same arguments asserted by the FDIC as receiver could be asserted by any financial institution with respect to the circumstance of purportedly unauthorized delivery of copies of institution records to counsel representing individual officers and directors, rather than counsel representing the institution itself. Of course, the distinction between representation of a financial institution and representation of its officers and directors raises significant ethical considerations in and of itself with respect to conflicts of interest.
Among the allegations asserted by the FDIC was that the bank documents provided to counsel for officers and directors included documents relating to the bank’s business and finances, the FDIC’s examination and investigation of the bank and, importantly, confidential customer information. Due to the inclusion of such confidential customer information in the copied files, the FDIC alleged that the release of documents to the counsel “violates and/or creates a risk of violating” 15 U.S.C. § 6801 and 6905(b) of the Gramm-Leach-Bliley act, 12 U.S.C. §1831p-1 of the [Federal Deposit Insurance Act] and 12 C.F.R. Parts 332 (Privacy of Consumer Financial Information) and 364 (Standards for Safety and Soundness, including the Interagency Guidelines Establishing Information Security Standards). Presumably because the copied documents were transmitted electronically, the FDIC also alleged violations of the federal Computer Fraud and Abuse Act, 18 U.S.C. §1030(a).
The FDIC also included an allegation asserting “Unjust Enrichment/Money Had and Received”, based on the fact that the engagement letter pursuant to which the officers and directors had retained Bryan Cave apparently provided that the bank, and not the officers and directors, would be responsible for all legal fees in connection with the engagement.
 12 U.S.C. § 1813(4), as amended.
 Financial Institutions Reform. Recovery, and Enforcement Act ogf 1989, Pub. L. No. 101-73, 1036 stat. 183 (1989).
 Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. No. 102-242, 105 stat. 2236 (1991).
 Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989), amending 12 U.S.C. §§1813, 1786, (“FIRREA”).
 OK ST RPC Rule 1.6, prior to 2008 amendments.
 MODEL RULES OF PROF’L CONDUCT 1.6 (2001).
 OK ST T.6 § 3002.
 Litigation and Other Legal Matters, Comptroller’s Handbook, Office of the Comptroller of the Currency, February 2000.
 MODEL RULES OF PROF’L CONDUCT 1.1 (2001).
 15 U.S.C. § 1691 et seq.; 12 C.F.R. 202.1 et. seq.
 12 U.S.C. § 2901 et seq.
 12 U.S.C. § 1829(b) and 1951-1959; 31 U.S.C. § 5311-5330; 31 CFR 103.
 42 U.S.C. § 4012 et. seq.
 12 U.S.C. § 23A and B; 12 CFR 223; 12 C.F.R. 215.
 15 U.S.C. § 1601 et. seq.; 12 C.F.R. 226.
 12 U.S.C. § 2601 et. seq.; 12 C.F.R. 3500.
 12 U.S.C. § 4301 et. seq.; 12 C.F.R. 230.
See e.g., Regulation Y issued by the Board of Governors of the Federal Reserve System under the authority of Section 5(b) of the Bank Holding Act of 1956, as amended, 12 U.S.C. § 1844(b), as well as other authorities sets forth in Subpart E provisions dealing with the change in bank control.
 12 USC § 371c & 371c-1.
 OK ST RPC Rule 1.13 and MODEL RULES OF PROF’L CONDUCT 1.13.
 5 U.S.C. § 551, et seq.
FIL-105-2005; Comptroller’s Handbook, Corporate Governance, Insider Activities, March 2006.

References: v. 
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 §1821
 § 6801
 §1831
 §1030
 § 1813
 § 3002
 § 1691
 § 2901
 § 1829
 § 5311
 § 4012
 § 23
 § 1601
 § 2601
 § 4301
 § 1844
 § 371
 § 551