Banks in Massachusetts may be shrugging off an important “little missile” launched in a Federal Deposit Insurance Corp. (FDIC) Financial Institution Letter (FIL) late last month – at their own peril.

The FIL, entitled “Guidelines Regarding the Copying and Removal of Confidential Financial Institution Information,” didn’t worry bankers, or the Massachusetts Bankers Association (MBA) when it was issued March 19.

“I’m sure it will be absorbed but, thankfully, it’s kind of a nonissue in this part of the country when you consider our banks are in such good shape and we only had one failure in all of New England during the entire financial crisis,” Bruce Spitzer, MBA spokesman, told Banker & Tradesman by email.

Likewise, Brian Thompson, president and CEO of Worcester-based Commerce Bank & Trust Co., was unexcited by the guidelines.

“In essence, you have a duty to the bank, and all records pertaining to the bank are to stay with the bank and the FDIC is in control of all their reports,” Thompson said. “Pretty clear and maybe unfortunate if you are in an adversarial position with your regulator.”

Not Specified 

On the surface, the FDIC guidance seems simple enough. It summarizes: “The FDIC has observed a limited number of instances in which directors and officers of troubled or failing institutions have made copies of financial institution and supervisory records, and removed those copies from the institution in anticipation of litigation or enforcement activity against them personally.”

But one could argue that’s as specific as it gets, and that’s what has banking attorneys worried.

Bank failures are uncommon in the region, and perhaps a certain sense of security among its bankers and industry advocates is appropriate, but the March FIL is simply too broad for banking attorneys who have seen institutions through hard times.

“That little missile could be a real problem for [attorneys],” Stanley Ragalevsky, a partner at K&L Gates in Boston told Banker & Tradesman. “Certainly they don’t want confidential information about third parties floating around out there… but it’s not clear. Can (directors) have copies of bylaws? Copies of insurance policies to show that they have indemnification?”

Ragalevsky said bank directors “probably wouldn’t have a problem” arguing they could have such documents, but it’s easier for the FDIC “to say you can’t have records of the bank.”

“Directors need access to documents so you can defend yourself against charges of negligence,” banking attorney Kevin Handly told Banker & Tradesman.

Limited Access 

Handly said document preservation by bank directors, including “chapter and verse” of every decision made by a bank’s board should be preserved and accessible. Without access, the FDIC has a strong hand in the event of a bank failure and bank directors have nothing.

The way the March FIL is written, “You wouldn’t have access to it. Once the bank is closed… you’re an ex-director, or you’re counsel for an ex-director and you are nobody,” Handly said. “By the time the FDIC asks for information, it has already pored over the documents, assembled the documents and built a case. The director’s counsel isn’t going to have any information.”

Handly argued that there is no precedent that possession and preservation of certain bank documents by directors is a breach of fiduciary duty.

“It’s a breach of fiduciary duty because the FDIC says so,” he said.

Rich individuals who may be interested in serving on bank boards may be put off by the risk to their personal wealth by becoming directors.

“There haven’t been any failures in a long time,” Handly said. “That’s when the FDIC comes out with these. It slips through and becomes precedent. Five or seven years from now when something happens to the New England economy and banks start failing, it looks like we can’t preserve any of these critical records.”

Bank failures are a big, chaotic jumble, and the FDIC doesn’t want to be without documents bank directors may have. Exam reports are FDIC property to begin with, and removing documents from a bank in anticipation of a failure is the kind of flagrant no-no all but the most brazen would understand.

Still, many banks provide directors access to documents through intranet systems, and “if it’s not related to the condition of the bank, they should be allowed to have them,” Ragalevsky said.