By Joseph Lynyak, Buckley Kolar LLP

Every 20 years or so, a major piece of banking legislation is adopted that addresses structural changes needed in the U.S. banking system in order to make it as competitive as possible - the most recent example was the Gramm-Leach-Bliley Act (“GLBA”) that homogenized financial services by permitting affiliations among banking, insurance and securities companies.

In between each major legislative initiative such as the GLBA, however, there inevitably arises the perceived need by the federal banking agencies and financial institutions to “tweak” the system to achieve laudable yet minor goals, such as enhanced regulatory and corporate flexibility, correction of prior statutory and regulatory requirements that are outdated and similar issues. These accumulated wish lists typically are assembled into a comprehensive bill - usually termed a “regulatory relief bill,” that proceeds to make its way through one or several sessions of Congress.

On Oct. 13, President Bush signed the latest version of regulatory relief legislation - the Financial Services Regulatory Relief Act of 2006. The Act is the product of five years of effort on the part of the various constituencies of the financial services industry to negotiate their respective remedial provisions. (The Act ultimately was finally passed by both houses of Congress because of the perceived need by the then-majority party to adopt any type of legislation to counter the accusation that it was a do-nothing Congress.)  

From the perspective of commercial banks, the Act contains several useful statutory provisions that directors should be aware of - most of which are “above-the-line” concerns that might create operational efficiencies and cost savings. (It should be noted that many of the provisions are neutral in effect for commercial banks - but were insisted upon either by the federal banking agencies or competitors of commercial banks such as savings associations or credit unions.)

A summary of the more significant changes lobbied for by banks and their possible impact are as follows:

Bank Trust Powers - The GLBA created a conundrum for banks by making many traditional banking activities, including numerous day-to-day trust department functions, subject to broker-dealer registration and supervision by the Securities and Exchange Commission. The Act corrects this potentially disastrous result by voiding proposed SEC rules and requiring that the SEC and the Federal Reserve Board must issue joint regulations addressing this issue.

This statutory change - which is a major victory for banks - should preserve the ability of banks to provide traditional trust services without expensive and duplicative registration and supervision. (Regulations are expected to be proposed in the first quarter of 2007 and should be closely monitored.)

Payment of Reserves - Responding to long-held complaints from banks that reserve requirements imposed by the Federal Reserve denied banks reasonable rates of returns, in a compromise, commencing in 2011 the Federal Reserve Board has been granted greater flexibility in the setting of reserve requirements - in exchange for which banks will be paid interest on reserves at rates equivalent to prevailing short-term interest rates.

Corporate Flexibility - Certain dividend limitations applicable to national banks and state member banks were liberalized by affording boards of directors greater flexibility when declaring dividends without the necessity of obtaining banking agency approval.

In addition, a frequent Regulation O reporting error - the obligation to report correspondent bank loans made to a bank’s executive officers - has been eliminated. (Note, however, that many reporting requirements for loans as required by Regulation O will remain in effect.)

Examination Flexibility - In a welcome extension of the 18-month examination schedule available to community Banks, the extended examination schedule is now available to community banks with assets at or below $500 million dollars in assets (previously, the examination schedule was only available for community banks at or below $250 million in assets).

Protection of Sensitive Bank Information - In a victory against the organized plaintiffs’ bar, the ability of a bank to protect attorney-client privileged information has been enhanced. Among other things, this means that a bank can protect documents that contain potentially damaging legal analyses and conclusions from third parties when those types of documents are required to be given to state or federal banking agencies. (For example, litigation reports that contain candid yet potentially damaging assessments of liability by a bank’s legal counsel can be provided to a bank regulator without losing the privileged nature of the document.)

As can be seen, these changes are incremental and helpful, but not revolutionary in content or effect - which is exactly the intent of regulatory relief bills such as the Act.

In conclusion, bank directors should ensure that their banks carefully monitor how these and other provisions of the Act are implemented, including discussing with management the recent changes will impact the day-to-day operations of the bank. Clearly, this is an area in which the admonition that the “devil is in the details” is correct, thereby demanding continuing review and inquiry.

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