The Wall Street Journal had some fun with this, asking “What is 20 times taller than the Statue of Liberty, 15 times longer than Moby Dick and would take the average reader (at 40 hours a week) more than a month to read?” Answer: the growing paper trail left by the Dodd-Frank Act, the law that Congress passed last year in an attempt to overhaul financial regulations and then punted to a dozen regulatory bodies to turn into almost 400 actual rules. (The basic text of Dodd-Frank is no lightweight itself; it runs 849 pages; the Sarbanes-Oxley Act, the now monumentally outgunned gorilla of financial reform, is just 66 pages.)
Particularly hard hit by the enormous workload that Dodd-Frank has created are the general counsel of banks, all of which fall under the law’s purview. The GC’s job is to keep tabs on what those regulatory bodies—the Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Federal Reserve, the Financial Accounting Standards Board, and others—are up to in the form of hearings, evidence gathering, reports, proposals, draft reforms, and, ultimately, the final rules. Then the GCs must make sure the bank’s executives know how to operate within their politically re-engineered confines and its directors understand how the reforms affect their governance responsibilities—and, yes, their personal liability.
Adding to the GC’s challenge is that as of June 1, only 24 rules had been finalized, according to a report by the law firm Davis Polk & Wardwell, among them raising bank deposit insurance to $250,000 per account. Another 115 were in various stages of “proposal.” Those included the rule the Commodity Futures Trading Commission wants to impose on capital and margin requirements for swap dealers and major swap participants. Twenty-eight rules, including one setting limits on interchange fees for debit card transactions, or swipe fees, had missed their deadlines. The remaining 218, one being the Volcker Rule, which would set limits on proprietary trading among other things, were still being hashed out. Meanwhile, 87 separate studies were still under way to help various rule-making bodies determine the fine and not-so-fine print of the various new regulations that fall within their particular bailiwick. One of them looks at how to rate the insurance industry appropriately. In mid-June, regulators took official notice of some of these delays and agreed to postpone a bunch of the new rules that would have affected the derivatives market, but that still leaves a lot in the pipeline.
Even when harried, GCs evoke the image of swans, making seemingly effortless if not downright lawyerly progress across a lake while their webbed feet work up the sweat, beneath the surface and well out of public view. GCs have never paddled more furiously than now, not even after the passage of Sarbanes-Oxley. No wonder many have boosted the headcount of their staffs, an increase that’s sure to continue. “They’re working 24 hours a day, coping with enormous change, integrating their regular jobs with all they have to do to stay on top of Dodd-Frank. These are difficult times for GCs,” observes Anna T. Pinedo, a partner at Morrison & Foerster in New York.
That might explain why the dozen or so GCs at some of the largest U.S. banks declined to be interviewed for this article. They already feel like they’re in Washington’s cross hairs and don’t want to make themselves any more visible.
Because they are under so much pressure, bank GCs are leaning hard on the services of their outside law firms for help. In fact, they’d be paddling even more frenetically were it not for all the data that law firms in general are churning out as they, too, scramble to stay abreast of Dodd-Frank developments. Law firms have contributed mightily to the Journal’s bigger-than-Moby Dick paper trail count by way of whale-sized schools of white papers, Q&As with their own in-house legal experts, coverage of their partners’ and associates’ appearances at conferences, newsletters and advisories. There is many a Kindle’s worth of electronic reading material as well, ranging from tweet-like tip sheets to wordy think pieces. Among the more lively of the online offerings, and certainly the most imaginatively named, is Morrison & Foerster’s “FrankNDodd Daily News Report.” In addition to various updates from the regulation front, FrankNDodd aggregates just about everything to do with Dodd-Frank, including updates on how Washington lobbyists are fighting to return some of the monster law’s body parts back to the cemetery where critics think they belong. Example: FrankNDodd alerted subscribers to the 60-day comment period when they could challenge the so-called living-wills rule approved by the FDIC and the Fed. That calls on the biggest banks, about 125 with assets of $50 billion or more, and systemically important financial institutions, to submit ways they could be dismantled with minimal collateral damage should they get into trouble. The objective is to prevent another crisis like the one that followed the Lehman collapse, where only a government bailout can save the entire financial system from crashing when one institution tanks.
Directors are obviously following the progress of various rule-making bodies with avidity and look to their GCs to explain the legal ramifications and various legal and operational risks. The latter largely depends on the size of the bank, says Margaret Tahyar, a New York-based partner in Davis Polk’s Financial Institutions Group. In fact many community banks don’t even have a full-time GC to explain things to them, she points out. It’s an expense they’ve been able to do without. But not any more. Since “Dodd-Frank isn’t only about enhanced regulation, it’s about enhanced intensity,” community banks will be facing increased demands for compliance without the qualified legal help they need, she says. To help manage this huge risk, Tahyar suggests their boards consider mutualizing the cost of qualified legal help, splitting the expense of an effective legal team among a bunch of banks, perhaps even with an eye to ultimately merging. At the regional banks, which obviously do have a GC and a compliance structure in place, “one big risk is the immediate cost impact of the proposed limits on debit card fees,” Tahyar says. This so-called Durbin disclosure would reduce a bank’s cut on card swipes at big box stores and the like, from some 44 cents to 12 cents. This enormous potential loss “is something their boards are sure to be thinking about this summer.” The biggest half-dozen banks, the “GSIFIs” (pronounced “gee-siffees” and an acronym for Global Systemically Important Financial Institutions), face all kinds of reforms, including higher capital requirements and restrictions on various trading activities that are part of the Volcker Rule. The risk the boards of Bank of America, J. P. Morgan Chase, Citigroup and the other giants contemplate, says Tahyar, “is whether Dodd-Frank will damage their ability to compete internationally.”
However well informed they may be about Dodd-Frank and its implications to their business, board members absolutely need to avoid the temptation to micromanage, however critical a particular new rule may be, says the GC of a major asset management outfit that deals regularly with top banks, private equity firms, and the U.S. government, and who did not want to be named. “Boards should stay out of the weeds,” he says, and leave running the bank to the CEO, the GC, and the management team. Besides, this GC believes, directors worth their salt were identifying the main challenges likely to be contained in Dodd-Frank long before Congress was even close to signing off on the law, let alone assigning it to various regulatory bodies to come up with the specific rules. “They were asking the right questions of their general counsel back then. We’ve had lots of lead time on what Dodd-Frank will say. We really can’t pretend that we are facing big surprises,” he says.
Other issues of great interest to boards, not necessarily new but revived by Dodd-Frank, include shareholder say-on-executive-pay, incentive compensation plans and how they accommodate for risk-taking by the CEO or other top members of his team, whistleblower provisions, derivative exposure, mortgage securitization, and a whole slew of rules about consumers, such as how much banks can charge by way of fees. Say-on-pay, already a hot shareholder issue, may put directors at added legal risk, according to Viral V. Acharya, a professor at NYU’s Leonard N. Stern School of Business and co-editor of “Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance”. “Demands for greater transparency on compensation mean the past habit of directors seeing their role as a rubber stamp is over,” he warns.
Boards also need to be asking their GCs about the impact of a slew of reforms other than Dodd-Frank, both in the U.S. and overseas. The most significant by far is the new Basel III framework, a global behemoth whose guidelines extend across Europe, Asia and other parts of the world. This includes the U.S., or at least it embraces those U.S. banks that are internationally active. Much of Basel III, such as its capital requirements, parallels Dodd–Frank. However, Basel III’s counterparty credit risk, liquidity, and leverage requirements will require careful analysis. There also are some differences between the approach taken in the Basel III framework and Dodd-Frank, says Pinedo. One is the framework’s ongoing reliance on ratings. By contrast, Dodd-Frank requires that many rules be amended to remove references to ratings in order to deter overreliance on them by investors and market participants. Overall, this may mean that boards will have to develop criteria other than (or in addition to) ratings for their modeling and various other decisions.
All in all, says Pinedo, the GC must be sure to give boards all the background information they’ll need to do their jobs, which means keeping them informed of all the changes in rules that are coming their way. If a bank is obliged to change its business model in any significant way—abandoning credit cards and issuing only debit cards, for example, or exiting home mortgages—directors will need to ask their GCs to explain how the extent of risk may have changed, too.
Pinedo, for one, expects risk to be more frequent and heightened. Directors’ personal liability also will likely be affected, and not only in the matter of say-on-pay cited by Professor Acharya. Chris Cole, senior vice president and senior regulatory counsel at Independent Community Bankers of America, a trade group in Washington, D.C., notes that premiums for director and officer insurance have already started to rise. But board members should be careful before asking for an increase in their D&O benefits, says attorney Mark Nuccio, a partner of Ropes & Gray in Boston. “Don’t stock up on insurance,” he advises. “If your bank does fail, you might make a more interesting target for the FDIC, which will run after directors with extra coverage.”
There also is extra work for the bank’s CEO. His or her extra workload includes setting up various management committees or work groups, assigning them to track the changes contained in the new rules as they take shape, identifying the lines of business that will be affected, anticipating the changes that still populate the rule makers’ drawing boards, and recommending new corporate strategies that accommodate and, ideally, make the most of the new rules when they are finalized. Boards will need what Pinedo calls “a fair bit of briefing to understand what all these working groups are up to. The GC should be closely involved in all this,” making sure bank directors are kept up to date with the big-picture conclusions and concerns of each working group. The GC may also be working with other advisors, she says, notably experts in information technology and those who assist with risk modeling or other quantitative exercises. Not surprisingly, face time among directors, GCs, and, in some instances, the bank’s outside law firms, has increased substantially.
Overall, board meetings at the biggest banks are “pretty streamlined” compared with those at their smaller peers, says the asset management firm’s GC, even though Dodd-Frank leans more heavily on the big guys. This is no reason for smaller outfits to relax, however. For one thing, different parts of the law act sometimes deliver the same message in different wrapping. Consider the push for tougher capital requirements. Dodd-Frank requires them only for banks with assets of $50 billion or more, the same cohort expected to come up with living wills. But that doesn’t mean smaller institutions, notably community banks, are off the capital requirement hook. Dodd-Frank essentially repeals other rules that had exempted smaller fry from similar demands. Regionals may be able to take this in stride, but less so the community banks. Like Tahyar, Nuccio predicts, “Some consolidation among these institutions is a given.”
In addition to the enormous amount of work Dodd-Frank has dropped into the collective lap of GCs and law firms, it also signals a change in what has perhaps too often been seen as the attorney’s role, says Viral Acharya, the Stern business school professor—namely the search for loopholes that enable a bank to conduct its business the way it wants to conduct it, just so long as it stays technically within the law. But the complexity and scope of Dodd-Frank may mean lawyers will need to put all their effort into just making sure the business doesn’t run afoul of any number of new rules, he argues. More challenging, they’ll also need to make sure the bank is seen to be keeping to the spirit of the rules. In some cases regulators have the option to tighten or change the rules annually and are likely to do so, says Acharya, if they think a bank is pushing its luck.
Like others, Acharya emphasizes how important it is for GCs to understand the various businesses a bank is in and that he or she is included in strategy sessions where executives and directors seek and value the GC’s opinion. Is promoting a GC to the CEO’s job the next logical step, given the legal complexity and range of Dodd-Frank? After all, boards have successfully drafted their CFO to the corner office when a company is in drastic need of financial expertise. Similarly, executives with strong backgrounds in operations or foreign markets have made effective CEOs when their company needed that particular experience. But a lawyer? Sorry, this idea didn’t collect any fans. “At the end of the day, a bank is about making money,” says Mark Nuccio. “A CEO needs a good lawyer stapled to his sleeve, but I’m not sure that a lawyer is the right man for the corner office.” Besides, the short and all-too-recent track record for such appointments isn’t good. Citigroup’s former GC Chuck Prince was propelled into the corner office, fell on his face, and was soon replaced. Case closed. |BD|
GENERAL COUNSELS FOR THE
LARGEST U.S. BANK HOLDING COMPANIES
BANK OF AMERICA CORP.
Ed O’Keefe joined the company in 2004 from Deutsche Bank AG, where he was responsible for the global staff support legal functions outside of Germany. O’Keefe has a bachelor’s degree in business administration from the University of Rhode Island. He received his law degree from Fordham University School of Law.
J.P. MORGAN CHASE & CO.
Stephen M. Cutler has been with JPMorgan since 2007, previously working as a partner in WilmerHale and as director of enforcement for the Securities and Exchange Commission. He was educated at Yale University and Yale Law School.
Michael Helfer joined Citigroup in 2003 after serving as president of strategic investments and chief strategic officer at Nationwide Insurance. He received his law degree from Harvard Law School and a B.A. in economics from Claremont Men’s College.
WELLS FARGO & CO.
James M. Strother joined Wells Fargo in 1998, previously serving as vice president and assistant general counsel with Norwest Corp. He is a graduate of the University of Minnesota where he received both his law and bachelor’s degrees.
Nicholas Latrenta has been with MetLife since 1969 and has served as senior vice president of institutional business and as head of international operations, overseeing the insurance business in 11 countries. He received a B.B.A. degree from the College of Insurance in 1974 and a J.D. degree from Seton Hall Law School in 1979.
Lee R. Mitau has served as executive vice president and general counsel since 1995. Mitau also serves as corporate secretary. Prior to 1995, he was a partner at the law firm of Dorsey & Whitney LLP.
PNC FINANCIAL SERVICES GROUP
Helen P. Pudlin has been with the bank since 1989 and has served as general counsel since 1994. She was appointed executive vice president in February 2009 and was previously senior vice president.
BANK OF NEW YORK MELLON CORP.
Jane Sherburne joined the company in May 2010 and was formerly general counsel for Wachovia Corporation and general counsel for Citigroup’s global consumer group, as well as a partner at Wilmer Cutler & Pickering in Washington, D.C. and special counsel to President Bill Clinton. Sherburne received a B.A. and M.A. from the University of Minnesota, and earned her J.D. from Georgetown University.
CAPITAL ONE FINANCIAL CORP
John G. Finneran joined Capital One in September 1994, and has worked for the Federal Deposit Insurance Corp. and the Washington, D.C., office of Cleary, Gottlieb, Steen & Hamilton. Finneran is a magna cum laude graduate of Georgetown University Law Center and Pennsylvania State University.
SUNTRUST BANKS INC.
Ray Fortin joined SunTrust in 1989. Prior to that, he served for eight years as staff counsel at the Citizens and Southern Georgia Corporation. He earned a bachelor’s degree in political science from the University of Florida and a J.D. from the University of Florida School of Law. He was the managing editor of the Florida Law Review.
ALLY FINANCIAL INC.
William B. Solomon, Jr. joined GMAC, Ally’s predecessor company, in 1999, to serve as general counsel. Previously, he was an attorney and practice area manager for General Motors Corp. from 1988 to 1999. Solomon received his bachelor’s degree from the University of Detroit in 1973 and his law degree from the University of Notre Dame in 1978.
STATE STREET CORP.
Jeffrey N. Carp is executive vice president, chief legal officer and secretary, joining the company in 2006. Previously, he served as general counsel at MFS Investment Management and worked in the corporate department of Hale & Dorr, LLP. He received a bachelor’s degree from Tufts University and a law degree from George Washington University National Law School.
Robert Johnson joined BB&T Corp. in 2005 and has served as general counsel since August 2010. He graduated summa cum laude with a bachelor’s degree in psychology from Miami University, Oxford, Ohio, and earned his law degree from The Ohio State University Moritz College of Law.
REGIONS FINANCIAL CORP.
Fournier J. “Boots” Gale, III joined Regions in 2011, having been founding partner of Maynard Cooper & Gale PC in Birmingham, Alabama. Gale holds both a bachelor’s degree and law degree from the University of Alabama, where he served as editor-in-chief of the Alabama Law Review.
Paul N. Harris joined KeyCorp in February 2003. He previously served as partner-in-charge of the Cleveland office of Thompson Hine LLP. He received a bachelor of arts degree from the University of Chicago in 1980 and his law degree from Stanford Law School in 1983.
FIFTH THIRD BANCORP
James Hubbard joined the bank in 1992. Prior to that, he was an attorney at Frost & Jacobs in Cincinnati; and Kaye, Scholer, Fierman, Hayes and Handler in New York City. He received his bachelor’s degree from Colgate University and his J.D. from the University of Cincinnati School of Law.
NORTHERN TRUST CORP.
Kelly R. Welsh joined Northern Trust in 2000, previously working as general counsel for Ameritech Corp. He also served as corporation counsel for the City of Chicago from 1989 to 1993. Welsh holds a bachelor’s degree and law degree from Harvard University, where he was an editor of the Law Review.
M&T BANK CORP.
Drew J. Pfirrman joined M&T Bank Corp. in October 2009, after working as senior deputy general counsel at PNC Bank. He previously was general counsel for Fleet Bank. Pfirrman has a bachelor’s degree from Boston College and a law degree from St. John’s University School of Law.
Jon W. Bilstrom joined Comerica in January 2003 from The Bar Plan Mutual Insurance Company, of St. Louis, Mo., where he was president and chief executive officer. A U.S. Army veteran, Bilstrom earned the Purple Heart for his service in Vietnam. He holds both a law degree and a bachelor of science degree from the University of Iowa.
HUNTINGTON BANCSHARES INC.
Richard A. Cheap has served as general counsel since May 1998. Prior to joining the corporation, Cheap practiced law with the law firm of Porter, Wright, Morris & Arthur LLP, Columbus, Ohio. He has a bachelor’s degree from John Carroll University and a J.D. from Northwestern University.
CHARLES SCHWAB CORP
Carrie E. Dwyer joined Schwab in 1996, previously serving as senior counselor to Arthur Levitt, chairman of the U.S. Securities and Exchange Commission. Dwyer spent 15 years on Wall Street as senior vice president and general counsel of the American Stock Exchange. Dwyer received both her bachelor’s degree and law degree from Santa Clara University.
CIT GROUP INC
Robert “Bob” Ingato joined the company in 1999. Before, he held executive positions at Newcourt Credit and AT&T Capital, where he served as general counsel. He received his J.D. degree with honors from Cornell Law School and his B.S. degree in business administration with honors from Bucknell University.
MARSHALL & ILSLEY CORP
Randall J. Erickson joined M&I in 2002, previously working as a partner with Godfrey & Kahn, S.C. and head of the firm’s securities practice group. He graduated cum laude from the University of Wisconsin – LaCrosse in 1981 and the University of Wisconsin Law School in 1984.
* Hudson City Bancorp Inc. doesn’t have an in-house general counsel and American Express Co. did not provide information about the company’s general counsel.