Our most recent annual survey of bank enforcement actions confirms, not surprisingly, that the number of actions reached unprecedented highs during the financial crisis. While those numbers are declining to historical norms, responding to potential enforcement actions has become even more challenging because the number of agencies with concurrent jurisdiction has increased, and the authorities of those agencies have been broadened.
The Dodd-Frank Act established the Consumer Financial Protection Bureau giving it administrative enforcement authority, as well as the right to bring civil litigation. The jurisdiction of state regulators and attorneys general has been broadened, and the Department of Justice and the Financial Fraud Enforcement Task Force are working with one dozen working groups, including three dozen federal and state agencies, vigorously pursuing cases against financial institutions.
While these are indeed challenging times, and there is a premium on maintaining good working relationships with regulators, there are a few key points to keep in mind when confronting an enforcement situation.
Customize agreements. Surprising as it may seem, even though a regulator may say that an order or agreement must be approved as drafted, they are usually surprised if a bank does not attempt to customize it to avoid unintended consequences that may flow from overly broad enforcement terms and provisions. Most agreements start from the same stock form, so it is natural that they may not reflect the specific nuances of each case. A bad enforcement agreement serves the purposes of neither party.
Don't be a guarantor. Many agreements and orders are initially drafted as if the bank, its executives or directors are providing a guarantee of the financial performance or remediation sought by the regulator. In many cases, no one can guarantee results, and trying to do so will create additional liability for the bank and its directors and officers. The best approach is one that reflects clear commitments and attainable goals requiring only the "best efforts" of directors and officers.
Understand the impact of a breach. Enforcement agreements come in many different flavors – memoranda of understanding, consent orders, cease and desist orders, civil money penalty assessments, etc. – and there are different consequences for breaches of each. A breach of a memorandum of understanding has no legal consequences, though it may have the practical impact of leading to a C&D and other regulatory pressure. But the violation of a C&D forms the basis for immediate CMPs, restitution or other affirmative actions, as the regulator in that case need only prove that the terms of the agreement have been violated. Each agency provides for an appeal of supervisory findings and permits access to an ombudsman which may be fruitful courses to pursue in certain cases. The use of such alternatives will not usually stay an enforcement proceeding, however, once it has begun.
Build in reasonable compliance and cure periods. Because of the significance of a breach that could result in removals of directors and officers, CMPs and even closure of the bank, it is important that the timing and substance of what is being required of the bank is clear and manageable. Reasonable time lines should be negotiated and standards of materiality should be built into the definition of a breach, along with cure periods. Technical violations of an order should not form the basis for more severe enforcement action, and the bank should have the right to a "do-over" for a certain range of potential breaches before the hammer falls.
Consider the impact of parallel actions. Bank enforcement these days often involves multiple agencies with overlapping jurisdiction investigating and prosecuting the same facts. That is complicated enough, but when one of the investigating agencies has criminal authority, the nature of defenses must adapt accordingly. Cooperation, testimony, documents and interviews have to be viewed through a different prism, taking into consideration the use of the Fifth Amendment, the workings of grand juries and the ability to structure a global settlement. The number of parallel proceedings involving criminal authorities has increased so significantly that it is dangerous to proceed without understanding the federal or state criminal aspects of a case.
Confront the increased power of regulators. Banks are accustomed to a pattern of examination involving negotiated enforcement agreements or administrative hearings. But they are getting more accustomed to a new enforcement landscape that includes increased civil litigation. The DOJ has always had the ability to bring a civil suit, as demonstrated by the fair lending enforcement actions that it has taken. But the CFPB was also given the authority to bring civil suits in place of an administrative process. This only ups the ante given the increased pain that accompanies the visibility of a lawsuit against a financial institution.
Thomas P. Vartanian chairs the financial institutions practice at Dechert LLP. He is a former official at the Office of the Comptroller of the Currency, the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp.