OCC Issues Guidance and Establishes Standards Regarding Banks’ Usage of Independent Consultants in Connection with Compliance with Enforcement Actions

The OCC issued guidance (the “Guidance,” OCC Bulletin 2013-33) that establishes standards that the OCC will use when it requires national banks, federal savings associations or federal branches or agencies (collectively, “Banks”) to employ independent consultants to comply with an enforcement action involving the applicable Bank’s alleged significant violations of law, fraud, or harm to consumers.  In a statement accompanying the Guidance, Comptroller of the Currency Thomas J. Curry stressed that:

 “…while consultants can provide knowledge, expertise and additional resources, [the OCC] must take care to ensure they maintain independence and are subject to appropriate oversight.  The standards [the OCC is] publishing today help [the OCC] achieve those important objectives while ensuring that a consultant’s conclusion is never substituted for the OCC’s supervisory oversight.”

Moreover, the OCC cautioned in the Guidance that a Bank’s use of an independent consultant does not absolve the Bank’s management or board of directors of their responsibility to see that “all needed corrective actions are identified and implemented.”

OCC Assessment of Need for Bank to Retain Independent Consultant in Enforcement Action

The OCC stated in the Guidance that in assessing whether it will require a Bank to retain an independent consultant in an enforcement action, it will consider the following seven factors, among others:

  • the severity of the violations (including their impact on consumers, the Bank and others);
  • the criticality of the function requiring remediation;
  • the OCC’s confidence that Bank management has the ability to identify and correct violations in a timely manner;
  • whether the Bank has the expertise, staffing and resources necessary to take the required corrective actions;
  • the actions already taken by the Bank to correct the violations or address the problematic issues;
  • the type of services the independent consultant would provide; and
  • the available alternatives to the engagement of an independent consultant.

OCC Review of the Consultant Proposed by the Bank

If the OCC determines that it will require a Bank to hire an independent consultant in connection with an enforcement order, it will require the Bank to submit information to the OCC regarding the due diligence that the Bank has conducted regarding the independent consultant it proposes to retain.  In particular, the OCC will seek information concerning the qualifications, independence, resources, expertise, capacity, reputation, information security and document security practices, risk management and reporting, conflicts of interest and financial viability of the proposed independent consultant.  The Bank would also be expected to disclose to the OCC professional disciplinary actions, if any, taken against the proposed independent consultant.  In assessing the independence and level of objectivity of the proposed independent consultant, the OCC expects that a Bank’s submission to the OCC in support of a proposed independent consultant will address, among other things:

  • the scope and volume of other contracts or services provided (or previously provided) by the independent consultant to the Bank;
  • whether the Bank evaluated other independent consultants with the required specialized expertise and level of independence;
  • whether the Bank proposed any mitigating actions to address any potential conflict of interest (or the appearance of a conflict of interest);
  • the amount of the fees to be paid by the Bank to the independent consultant (and any other financial relationship between the Bank and the proposed independent consultant);
  • any business or personal relationship of the independent consultant (or its employees) with a board member or executive officer of the Bank;
  • whether a member of the independent consultant’s staff has previously been employed by the Bank; and
  • other relevant facts and circumstances.

The Guidance also states that, in reviewing the use of a proposed independent consultant, the OCC will evaluate the terms of the Bank’s proposed engagement contract with the independent consultant (and the work plan suggested by the independent consultant) to determine whether the contract and work plan are consistent with the requirements of the OCC’s enforcement action.  The Guidance states that a Bank should ensure that the engagement contract with the independent consultant provides that the independent consultant will:

  • comply with applicable laws and regulations (including those concerning privacy, customer information security and the confidentiality of non-public OCC correspondence and information);
  • maintain complete records;
  • make all work papers, analyses, drafts and reports available to the OCC (upon the OCC’s request);
  • bring to the OCC’s immediate attention disagreements with the Bank about material matters;
  • base its conclusions and recommendations on its own independent and expert judgment; and
  • provide a final report to the board of directors.

The Guidance also provides that the engagement contract with the independent consultant must:

  • identify ongoing requirements concerning reporting by the independent consultant and require that the independent consultant meet these requirements;
  • provide that the OCC may meet or discuss matters privately with the OCC;
  • provide that the OCC must approve in writing any material modifications to the contract, work plan or staffing;
  • provide that the proposed subcontracting of any work be subject to the OCC’s determination that it has no objection to the proposal; and
  • provide that the engagement contract shall be terminated by the Bank if so requested by the OCC “without any objection or right of appeal by the consultant.”

The OCC’s Oversight of the Consulting Engagement

In overseeing a consultancy engagement, the Guidance states that the frequency of the OCC’s interactions with the Bank and the independent consultant will depend upon the facts and circumstances of the matter, the Bank management’s expertise and resources, the nature of the independent consultant’s assignment, and the timeline for completion of the consultancy engagement.  Furthermore, the extent and frequency of the OCC’s monitoring of the consultancy will also reflect the scope and direction of the consultant’s engagement, the nature of the deficiencies or violations that the independent consultant will seek to identify (and with respect to which it will be expected to recommend appropriate remedial actions), and the potential harm (and the materiality of such harm) to consumers and the Bank.

As part of the OCC’s assessment of the Bank’s compliance with the enforcement action, the OCC will review the independent consultant’s final written report of findings and recommendations.  The OCC’s review helps it to determine whether all matters for which the independent consultant was engaged were addressed.  If the OCC is not satisfied, it may request that additional work be performed by the Bank or the consultant.  After the final written report has been reviewed by the Bank’s board of directors and the OCC, the Bank is expected to prepare a plan to address the consultant’s findings and to implement the board of directors’ responses to those findings.  The plan, states the Guidance, should be approved by the Bank’s board of directors and is “subject to OCC review and a written determination of supervisory no objection [by the OCC] before [it] can be implemented.”  As part of the OCC’s review, it will consider whether the Bank’s corrective actions will be sustainable.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Topics:  Banks, Compliance, Consultation, Enforcement Actions, Fraud, OCC

Published In: Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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