More Stringent Codes Of Conduct Are Urged As Means of Protection

As banks continue to struggle with risk management, many compliance officers say institutions need strong codes of ethics that go a step beyond law and regulations.

While codes vary from bank to bank, experts say the documents must include board-approved guidelines on lending to insiders, giving and accepting gifts, releasing confidential information, and avoiding conflicts of interest.

"It's especially important in light of the new emphasis on risk management from the regulators, which expands compliance risk to include more than just rules and regulations," said Michael D. Maher, regulatory compliance manager at First Bank System in Minneapolis. "Banks really should consider having some code of ethics to protect themselves."

About 80% of all banks have some sort of ethics code, many adopted in the last 10 years, according to Thomas P. Vartanian, a partner at Fried, Frank, Harris, Shriver & Jacobson in Washington.

Small banks, which historically haven't expended the resources to create codes, need to do so and put them in writing, he said. Regulators, in their risk-based exams, expect to find clear, succinct policies, he added.

Big banks should update their codes, he said, and this is especially true for institutions that have entered new businesses or acquired other banks.

What goes in a code of conduct?

Mr. Vartanian said any ethics code must address insider lending, to avoid credit and compliance risk. It should spell out that banks can't give preferential loan terms to their directors and executive officers or their friends and business partners. It should also explain what will happen to someone who does.

"Many banks have gotten in trouble over the years for insider lending, because there hasn't been enough emphasis on it," Mr. Vartanian said. "A very clear code of conduct can hammer home the importance of avoiding making those loans."

Banks also can use the code to do more than what's required by law, such as extending insider-lending limits to additional employees.

Still, codes of conduct don't address only regulatory issues.

To protect its image, Fleet Financial Group prohibits its employees from giving gifts to clients, including meals or tickets to sports events, according to Amy W. Bizar, a bank senior counsel.

Fleet's rules were tightened earlier this year, when a new ban on most gifts to congressional staffers took effect. "Basically, this means that our people can't take clients to the Fleet Center for Celtics or Bruins games anymore," said Ms. Bizar. Fleet's gift-giving prohibition extends to all customers.

Also, Fleet's guidelines define sexual harassment in several forms, from requests for sex to the posting of pornographic materials. The code directs employees to report violations to a supervisor or the bank's personnel department.

Other sensitive subjects must be addressed as well, Mr. Vartanian said. For example, the codes should define conflicts of interest - when an employee has personal or business ties to a client. The codes also must tackle the handling of confidential information, he said. Because bankers handle so much personal customer data, they must know what can or cannot be released. A mistake can embarrass the bank, he said, and cause customers to lose trust in it.

Mr. Maher said all bank employees should sign a form yearly saying that they have received a copy of the code and have complied with the rules. This can help demonstrate that the guidelines are known companywide, should regulators ask for proof during an exam.

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