I. INTRODUCTION
The Federal Deposit Insurance Corporation (FDIC) issued a guidance for financial institution directors receiving legal advice (FIL-15-98, Reissued March 17, 1998). The purpose of the guidance is to ensure that officers and directors of financial institutions understand that attorneys providing advice and corporate counseling represent, and owe their duty of loyalty to, the financial institution – and not to the officers and directors who in some cases may also be controlling owners of the financial institution. In an accompanying letter to CEO’s, the FDIC stated that 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. The letter also requested that CEO’s ensure that all members of the board of directors receive a copy of the guidance.
II. SUMMARY OF GUIDANCE REGARDING LEGAL ADVICE
A. The Situation
After concluding an inquiry regarding a law firm’s representation of a financial institution, the FDIC issued the guidance to emphasize the important roles and responsibilities of bank management and independent contractor professionals providing services to financial institutions. The FDIC stated that the law firm and its attorneys (as bank counsel) owed important fiduciary obligations to the financial institution, including the duty to exercise the utmost loyalty and fidelity to the bank’s interests.
B. The Facts
According to the FDIC, an examination revealed that
[T]he 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.
Evidently, during the course of an FDIC examination, documents and records pertaining to the entity’s creation, as prepared by the law firm, showed that it was created to benefit the bank, and that its transactions with the bank had been considered and approved by the special committee of disinterested outside directors. The examiners’ routine review of the documentation did not raise any red flags or regulatory concerns. At a later date, long after the transactions occurred, a bank employee informed FDIC examiners about the true nature of the arrangement. The FDIC noted that this situation resulted in part from the failure of the lawyers involved to identify their client – the bank – and to keep the bank’s interest’s paramount.
C. The Conclusion
The FDIC guidance stressed that the duties owed by lawyers in representing financial institutions run to the institution -- not to the individuals who comprise management of the institution. Safety and soundness considerations require 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 transactions.” If it appears that financial institution managers are breaching their fiduciary duties, it is an attorney’s responsibility to advise the offending officials of their duties. If the likely result is substantial injury to the financial, bank attorneys have an obligation to take those measures to prevent the offending conduct – if necessary by proceeding up the corporate ladder up to and including informing the financial institution’s board of directors. The FDIC notes that such communications must be effective and that it is not sufficient to expect or allow offending officials or subordinates to properly communicate to institution decision-makers, particularly true when insider conflicts have required the creation of a special board committee to act as decision-maker.
FDIC expectations are that all attorneys representing financial institutions must exercise the utmost loyalty and fidelity to the institution’s interests. If the institutions’ interests and any of its insiders’ interests 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 decision-makers who are independent from the senior officers with adverse interests. If a financial institution sets up a special committee to exercise independent approval authority regarding a matter, attorneys representing the financial institution are responsible to ensure that effective communication of pertinent facts and legal advice is made to the committee.