DONNA FISHER
‘Good feedback’

As part of an ongoing effort to help banks understand the complexity of the language in the Sarbanes-Oxley Act of 2002, the American Bankers Association has formed a Corporate Governance Task Force to assist banks.

The ABA created a “decision tree” for community banks and institutions with assets under $500 million to help decide if Sarbanes-Oxley is applicable.

The decision tree also refers to the auditor independence rules that apply to Federal Deposit Insurance Corp.-supervised banks and insured institutions, both commercial and savings banks, with over $500 million in assets.

Earlier this year, the FDIC issued a letter concerning the effect of the act on insured banks.

The letter emphasizes that banks having registered securities, as well as bank holding companies that are public companies, must comply with the act, including the provisions governing auditor independence, corporate responsibility and enhanced financial reporting, as implemented by U.S. Securities and Exchange Commission regulations.

Although the letter assumes that banks with less than $500 million in total assets, if not public, are also not subject to the act, the FDIC letter discusses both the major provisions of Sarbanes-Oxley and how other similar bank requirements or banking practices might encourage a bank to adopt similar procedures to Sarbanes-Oxley corporate governance.

According to Donna Fisher, director of tax and accounting at the ABA in Washington, D.C., bankers needed something concrete to help them establish whether the requirements of Sarbanes-Oxley pertain to their banks and businesses.

“The [ABA] staff was forming all kinds of charts and summary of information about [Sarbanes-Oxley] but we were still getting telephone calls from non-public banks wanting to know how this [act] applies,” said Fisher. “The bankers kept saying, ‘We need something to show us what we are supposed to be doing.’ I think they felt that they were in limbo. They were unsure what was required and if it will be required in the future.”

With that in mind, the ABA’s Corporate Governance Task Force, made up of 15 banking professionals from around the nation, created the decision tree to help bankers decide if Sarbanes-Oxley is required for their institution.

“We’ve gotten really good feedback … It does help with efficiency and there is a team in place to sort out the issues for the banks. We don’t give accounting or legal advice, but we help the bankers understand the issues,” said Fisher. “Banking regulation will continue to be updated, but banks have to decide if the provisions make sense for them to implement.”

‘Big Process’

Paul A. Perrault, chairman, president and chief executive officer of Chittenden Bank in Vermont and a member of the boards of directors of Chittenden Corp. subsidiaries, The Bank of Western Massachusetts in Springfield and Flagship Bank in Worcester, said the decision tree is a necessary tool made available to help the banking industry interpret complex legislation.

“This is just one of the tools that the ABA would develop to help their members and the banking industry with legislative issues. Sarbanes-Oxley is a confusing and bewildering affair and there are facts and figures that need to be distinguished,” said Perrault. “Part of the decision [process] relates to the fact that the first pass of this bill is for publicly traded companies. What, if any, of this applies [to the banking industry] and how regulators will interpret their actions is of concern. This decision tree tries to provide guidance on how an individual bank should [interpret the legislation].”

Fisher said the ABA has fielded a number of calls from banks since Sarbanes-Oxley has been finalized, but could not comment on the number of banks that have implemented the regulations because they felt is was important, not because it was required.

“[Some banks] are saying, ‘We are going to take a look at these things because it’s good corporate governance,’ but I don’t know whether they have made determination to do this,” said Fisher. “It would be difficult for many of the smaller institutions to implement Sarbanes-Oxley because of the cost vs. the benefits and also, the act’s requirements that you have independent directors, especially in small banks. You want to make sure you have good quality directors, and for the most part community bankers try to do that and get community leaders.”

Fisher said many banks are concerned about the issue of the independent board members and the financial relationships that bankers have with their board members. Those details, among many others, are what Fisher said are “some unique issues and we will address them for bankers.”

As with any new legislation, Fisher said banks are worried about the fine print and are seeking advice from outside counsel and law experts, but warns that bankers should seek expertise from within their industry.

“Many banks are worried about overreaction by accounting firms and law firms who are using this as an opportunity to build businesses in situations where it might not be necessary,” said Fisher. “The board should look to outside advice, but we are getting questions about the accounting firm’s definitions and we are using our expertise here to explain the definitions.”

According to Perrault, the ABA’s help is essential for the bankers.

“A lot of people are issuing advice – solicited and unsolicited – and they may be qualified or unqualified,” said Perrault. “The ABA is an objective commentator and this kind of tool is perfect.”

Among the other tools available to members of the ABA, Fisher said, is a weekly e-mail sent to member banks at no charge so that banks “will not miss anything” with respect to new and updated rules and regulations.

“This is a classic example of what happens when legislation gets passed quickly – the normal course of business on the hill gets fine-tuned language on the front end,” said Fisher. “There is a general uncertainty and no one wants to be caught doing the wrong thing. It’s a big process and what we are trying to do is make sure it’s manageable for the banks.”

Melanie Nayer may be reached at mnayer@thewarrengroup.com.