life-perserver.jpgMy colleagues and I frequently meet with bank boards that have received very sobering reports from their bank’s examiners.  While the directors’ responses to bad examination reports vary greatly, there is one emotion that is nearly universal: a feeling of helplessness.  As a result, directors almost always express a desire to get involved in the exam process after they receive negative feedback from the examiners, whether through requesting meetings with higher-level regulators, appealing the exam findings, or fighting a proposed enforcement action.  Unfortunately, those actions, particularly if taken after a final examination report is issued, seem to have little positive impact on the examination process and may even prove to be harmful to the bank.

The good news, however, is that there is a way for directors to get involved in the regulatory examination process that can have a meaningful positive impact.  Discussed below is our top recommendation for directors to be involved in the examination process.  We believe early, proactive involvement can positively impact the outcome of a regulatory examination and also enhance the board’s understanding of regulatory criticism.

While most directors’ first contact with examiners is at the examiners’ exit meeting with the board, we suggest director involvement earlier in the examination process.  There should be one or more outside directors present at the examiners’ preliminary exit meeting with management.  During this meeting, the examiners will present their preliminary findings from the examination.  In addition to highlighting the engagement and availability of the bank’s directors, attending this meeting allows the directors to understand the key issues in the examination.  By hearing the examiners deliver their findings first hand, the directors will have a better sense of the seriousness of the issues being identified.  Finally, directors will be able to ask questions of the examiners that might not be easily asked by members of management; e.g., asking for an interpretation of a regulation.

By attending this preliminary exit meeting, directors are also able to ensure that the bank’s board has a timely understanding of the issues presented by the examiners.  Members of the bank’s executive management team have a natural tendency to relay examination criticisms to the board through their own point of view.  Management may fear adverse action by the board as a result of regulatory criticisms or may feel so strongly about their point of view that they tend to “water down” the comments of the examiners.  By having outside directors attend the meeting, those directors can deliver an independent report of the regulatory criticisms to the board.

In addition, by identifying key regulatory issues, and particularly disagreements, bank directors have the greatest likelihood for influencing the examination process.  It is at this time, after preliminary findings are made but before a final examination report is delivered to the bank, that a bank and its directors should present additional information and viewpoints that might alter the findings in the final examination report.  We have found that examiners are willing to review additional information at this juncture and, where appropriate, the examiners will alter their conclusions in response to such information.  Ideally, such information is presented prior to the examiners’ exit meeting with the full board.  Our experience tells us that this approach is much more effective and timely than a formal appeal of final examination findings. 

By inserting themselves into the regulatory examination process, we believe directors can have a positive influence on the regulatory examination process.  While we would not recommend having the full board involved in functions that are typically left to management, having an independent point of view involved early in the examination process can be very helpful.  Not only can directors display their involvement in the oversight of the bank’s operations, they can also help with strategy for dealing with regulatory issues at a time when conclusions have not yet been formed.  Finally, directors can better understand regulatory feedback and can track management’s progress toward addressing regulatory concerns.


Jonathan Hightower


Jonathan Hightower is a partner at Fenimore Kay Harrison LLP, and focuses his practice in financial institutions law, including corporate, regulatory and securities work.  Mr. Hightower represents banks and trust companies throughout the country, with a particular focus on the Southeast.  In the course of his practice, he regularly advises banks and their boards of directors on their strategic plans, including organic and acquisition growth plans, sale transactions, strategic mergers and capital raises, as well as on complex regulatory issues.  Mr. Hightower represents investment banking firms in connection with public and private capital raises, delivery of fairness opinions and strategic transactions.