When “termination” means good news

Oh, happy day! You bank’s federal regulatory enforcement action has been terminated.

Usually, “terminated” carries negative connotations. Not when it comes to freedom from a regulatory order.

But now what?

Paper for everybody!

Community banks are emerging from a gauntlet.

Enforcement actions have been part of the regulatory arsenal since I began as a lawyer at FDIC over 35 years ago. In fact, I became intimately acquainted with enforcement actions fairly early on, conducting the first hearing for FDIC before an Administrative Law Judge on an enforcement action in the late 70’s (I won, by the way).

In the recent economic disaster starting in 2008, FDIC, the Comptroller’s Office, and the Federal Reserve used their enforcement action tools quite liberally.

If you count all the enforcement actions from cease-and-desist orders, consent orders, personal sanctions, fines, restitution, formal agreements, written agreements, prompt corrective action, and the like, the enforcement actions issued, since Jan. 1, 2008, total over 5,000.

In theory, if you ignore multiple enforcement actions issued to the same institution, that means over 40% of all banks in the country were subject to some type of formal enforcement action.

During the Great Recession, many of those banks that were not subject to formal enforcement actions were subject to informal (non-public, unenforceable) enforcement actions.

This was just for good measure , and as a measure of caution on the part of the regulators.

What comes next?

Thank goodness we are out of that part of the regulatory environment. In fact, today, the growing phenomenon is the termination of enforcement actions. Since Jan. 1, 2008, there have been approximately 1,450 enforcement actions terminated, with approximately half of those terminations occurring since 2012.

As noted above, this does not include the informal actions, the termination of which is not public.

So what happens at the bank, both internally and dealing with the public, when an enforcement action is terminated? 

Let’s deal first with the public and your local media.

Banks that are not public, SEC-reporting companies have some discretion as to what information they provide the public once an enforcement action is terminated. For an SEC-reporting company, the termination of the enforcement action will be a reportable event, which requires the reporting company to file an 8(k). In other words, the company’s reporting status largely dictates their dealings with the public.

Most of the community banks that received enforcement actions were not public SEC-reporting companies, so those boards have discretion as to what, if anything, is disclosed to the public with regard to the enforcement action.

As one bank CEO told me:

“When our enforcement action was published back in 2009 and picked up by the local paper, it was not pretty. It was basically a report that the bank had the bubonic plague or something similar.”

When I told this same CEO that the termination of the enforcement action would be public as well, he commented:

“That’s great!  Now they are going to announce publicly that I have been cured of the bubonic plague.” 

He did not think that was a positive either.

In my opinion, the best practice for a nonpublic community bank upon termination of its enforcement action is simply to keep its head down.

That’s right. Keep quiet.

Getting the regulatory foot off your community bank’s neck is great.

However, the public will not interpret an announcement of that as anything other than bad news, simply associating the bank’s name with regulatory enforcement by FDIC, OCC, or the Federal Reserve.

From an external standpoint, unless your bank or holding company is required to do so by SEC rules, my recommendation with respect to the termination of the formal enforcement action is to do nothing.

Obviously, if the media picks up on the termination, then the community bank can make it a joyous occasion, spin it any way the bank wants, etc. As a general matter, however, my recommendation is not to be proactive with the fact that the order has been terminated.

How life should change inside the bank

Handling the termination of an enforcement action internally is a different situation.

Any bank that has been under a formal or informal enforcement action knows that it dominates the senior officer level and the board of directors’ discussion for the life of the action.

I have been with many boards that, when inquiring about the length of the board meetings, best practices, etc., indicate that their board meeting used to be a couple of hours, but since the bank agreed to the enforcement action, the board meeting was now a four, five, or six-hour event because the board had to ensure compliance with the enforcement action.

So, within your own walls, termination of enforcement actions is definitely a “happy day.” 

First, this is cause for celebration.

Second, it is also cause for reflection.

Everyone must ponder how they will make sure that the bank does not get into the position where it is subject to another enforcement action in the future. Who wants to get on that ride again?

I had one client call me recently about an acquisition. I asked him about his regulatory status—that’s critical if you want to get an acquisition approved:

The banker answered:

“We actually got in trouble early in 2007, so by the time everything hit the fan, we were through it. We are in great shape now. Looking back at it, having an enforcement action was the best thing that happened to us because we cleaned up our policies, procedures, and underwriting.”

No community bank likes being under an enforcement action, but it does provide an instructional tool going forward. Use your termination to rally the troops. Use it to breathe some fresh air. Use it in your long-term planning.

I was recently with a bank that anticipated to be out from under its enforcement action in the next six or eight months. The strategic plan was basically couched in terms of “Once we get out from the enforcement action, the long-term strategy is to do X.”

Go forward with experience

You may be tempted to pop open some bubbly at the first board meeting after the order is lifted.

Cheers! But remember:

• The best practice is to just keep on with your everyday business. Don’t make a public big deal about the termination of an enforcement action unless the SEC requires it or the local paper picks it up.

• And take a lesson from what you just went through.

It took work to get past this ordeal—long hours, perhaps some big changes, likely some hard choices.

The termination should be a celebration of the good things the bank has done, the restored regulatory confidence in management and the board of directors, and a learning tool to guide the bank moving forward.