Procedural protections for individuals in financial enforcement actions

June 16, 2014

5274When should a financial services regulator bring an enforcement action against an individual? When they do, what types of procedural protections should an individual have?

A recent article by Jeremiah Buckley, Robert B. Serino, and Ann D. Wiles of BuckleySandlerLLP, appearing in both Consumer Financial Services Law Report and Commercial Lending Litigation News, makes several discrete proposals that would help answer those increasingly important questions as more regulators make the promise to “name names” and hold individuals accountable.

The head of New York’s Department of Financial Services recently stated that regulators “should publicly expose — in great detail — the actual, specific misconduct that individual employees engage in,” and that “where appropriate … individuals should face real, serious penalties and sanctions when they break the rules.”

While no one would argue that individuals should be held accountable for their conduct, individuals are particularly vulnerable to irreparable reputational and other damage when facing allegations that may not ultimately result in any finding of misconduct.

A recent enforcement action by the OCC against Patrick Adams, the former president and CEO of T-Bank in Dallas, highlights these concerns.

The OCC filed a notice of charges against Adams alleging that he engaged in unsafe and unsound banking practices.  But when the charges went before an administrative law judge, the ALJ issued a scathing opinion, recommending that the notice be dismissed.

But Adams had already been forced to resign from the bank, and incurred significant costs in defending himself.

Given the unique considerations surrounding individual enforcement, authors Buckley, Serino and Wiles propose that agencies put in place procedural protections for individuals, including:

  • Adopting written procedural guidelines specific to individual investigations and actions;
  • Providing individuals who are the target of an investigation with a confidential notice detailing the allegations and providing an opportunity to respond;
  • Providing an opportunity for an independent review of proposed charges by the agency’s ombudsman before an action is filed or otherwise made public.

These procedural protections would not only benefit individuals, but also the enforcement agencies by increasing public confidence and adding credibility to the agencies’ enforcement decisions.