After almost two years, you might think that Wells Fargo, its senior management and Board of Directors would have gotten the message from its regulators to take its compliance obligations seriously, remediate and put ethics into the culture of the organization. Apparently not, however as last week, the Federal Reserve Bank (Fed) imposed an agreed upon of limiting the Bank’s growth over the next two years until it could not only right itself but also convince regulators it would be responsible for cleaning up its misconduct. Janet Yellen, on her final day as Chair of the Federal Reserve said, “We cannot tolerate pervasive and persistent misconduct at any bank.” One clear step would be to put a compliance professional on the bank’s Board of Directors.

The New York Times (NYT) reported a settlement with Wells Fargo led to the unique sanction, “The settlement is an attempt by the Fed to impress upon banks that their boards of directors should be vigorous, independent watchdogs — and if they fail, there will be consequences. That reflects a shift from regulators’ historically hands-off approach to corporate boards, and the boards’ role is likely to grow in importance as regulators appointed by President Trump and Republicans in Congress generally loosen the reins on big banks.”

Jerome H. Powell, Yellen’s successor, had previously said in a speech, “Across a range of responsibilities, we simply expect much more of boards of directors than ever before”, meaning “he is likely to maintain the Fed’s emphasis on holding bank boards accountable.” During the negotiation, “The top priority for Wells was that the order be lifted quickly, said participants in the talks. The bank’s negotiators wanted the Fed to commit to a speedy timetable for reviewing its progress. The Fed responded that it wanted Wells to move quickly, which Wells officials interpreted as meaning the Fed would act swiftly, too.” But the Fed also wanted specific changes to the make-up and character of the Board, announcing it would publicly criticize prior Board chairman for their poor oversight in discharging their responsibilities.

The Wall Street Journal (WSJ) was even more strident in its coverage of the Fed sanction, stating, “The Federal Reserve’s unprecedented move to handcuff growth at Wells Fargo & Co. sent a message that boards of directors, not just management, will be held accountable when big banks fail to manage risks.” The piece quoted Ian Katz, an analyst at Capital Alpha Partners, who said “The Fed just put the fear of God into bank boardrooms across the country. And that’s exactly what it wants to do.”

This action against Wells Fargo comes on the heels of Fed guidance about the roles of bank Board of Directors, which came out last summer. The goal was to get the Board to focus on enterprise wide risk management. For Wells Fargo that is clearly remediation of the culture which led to the fine and penalty over its fraudulent accounts scandal and several others which have been uncovered since that time. To say that the Wells Fargo Board of Directors was asleep at the switch is unfortunately putting it mildly. Indeed, every Board of Directors need a true compliance expert sitting on their Board. Almost every Board has a former Chief Financial Officer (CFO), former head of Internal Audit or persons with a similar background and often times these are also the Audit Committee members of the Board. Such a background brings a level of sophistication, training and subject matter expertise (SME) that can help all companies with their financial reporting and other finance based issues. So why is there not such compliance SME at the Board level?

An arm of the US government has recognized the need for such expertise at the Board level. In 2015 the Office of Inspector General (OIG) called for greater compliance expertise at the Board level. The OIG said that a Board can raise its level of substantive expertise with respect to regulatory and compliance matters by adding to the Board, a compliance member. The presence of a such a compliance professional with subject matter expertise on the Board sends a strong message about the organization’s commitment to compliance, provides a valuable resource to other Board members, and helps the Board better fulfill its oversight obligations.

Mike Volkov looked at it from both a practical and business perspective and has stated, “I have witnessed firsthand that companies that have a board member with compliance expertise usually have a more aggressive and effective compliance program. In this situation, a Chief Compliance Officer has to answer to the board for the company’s compliance program, while receiving the resources and support to accomplish compliance tasks.”

Roy Snell sees it through the prism of the compliance profession and has said, “If you ask most companies if they have compliance expertise on their Board… most would say yes. When asked who the compliance expert is they typically point to a lawyer, auditor, risk manager, or an ethicist. None of these professions are automatically compliance experts. All lawyers have different specialties.” He goes on to state that what regulators want to see is specific compliance expertise at the Board level. He noted, “the government is looking for is not generic compliance expertise. They are looking for compliance program management expertise.”

Over the past year, the Department of Justice (DOJ) has continually talked about companies operationalizing their compliance programs. Having a Board member with specific compliance expertise, heading a Board level Compliance Committee can provide a level of oversight and commitment to achieving this goal. It will not be long before the DOJ and Securities and Exchange Commission (SEC) begin to require this step in any Foreign Corrupt Practices Act (FCPA) enforcement action resolution. This means that when your company is evaluated by the DOJ under the new FCPA Corporate Enforcement Policy, to retrospectively determine if your company had a best practices compliance program in place at the time of any violation, you need to have not only the structure of the Board level Compliance Committee but also the specific subject matter expertise on the Board and on that committee.


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© Thomas R. Fox, 2018