Dealing With Regulators: Advice For Counsel In Regulated Industries

In the past ten to 15 years, advising the financial institution has become ever-more complex, from the perspective of both corporate counsel and outside counsel. One of the reasons for this additional complexity is that the array of laws and rules applicable to financial institutions, and the regulatory jurisdictions to which they are subject, have increased dramatically.

Among other legal responsibilities, we give regulatory compliance advice to non-depository mortgage companies on a daily basis, and in this capacity, we have developed some guidelines for dealing with government regulators. Most of the comments in this article were taken from our joint presentation entitled "Regulatory Issues Facing In-House Counsel" at the 14th Annual Womens Corporate Counsel Forum, sponsored by Fulcrum Information Services in Washington, DC from April 30 – May 1, 2001. Although we represent mortgage companies primarily, the comments below are equally applicable to other types of regulated businesses.

First and foremost, we urge counsel for regulated industries to "know your regulator." This advice could be rephrased as "regulators are people, too." When you have questions about rules and regulations, or need information from a government agency, attempt to establish rapport over the phone with the person who is assisting you. If time permits (and 4PM on a Friday afternoon is generally not a good time to do this), let the regulator know something about your company and the issues that are important to you; be sure and point out the important things you are doing. At the same time, you must be respectful of the regulator’s concerns. If you have a filing or report that should have been filed on March 1 and vacation resulted in its being late, don’t ask on March 14 for the filing to be moved to the top of the stack. Keep in mind that regulators generally supervise many companies The fact that they know you and your company might help you navigate the regulatory process, but doesn’t entitle you to special favors.

Getting to know your regulators helps them get to know you. If your supervisory agency has meetings or a trade group to which the industry is invited, attend. Better yet, offer to make presentations or provide industry updates to the group. This will establish you as not only an expert who is worth consulting, but also as a cooperative person who is willing to share her knowledge. The industry we represent, the residential mortgage industry, has a trade association known as the American Association of Residential Mortgage Regulators (AARMR). Both of us have been on its advisory council which has given us the opportunity to learn about regulatory agendas (sometimes informally and in advance of rulemaking), and to interact with agency personnel on a one-to-one basis. It also offers an opportunity to advise regulators on industry concerns and unintended consequences of contemplated regulatory changes. If your industry has an association for regulators, you can also publish articles in their newsletters, offer to speak at their conferences, and so forth.

Many regulated industries are examined on a regular basis. Preparing for examinations is another area where you will have an opportunity to either impress or discourage your regulators about your compliance efforts. Of course, you should provide a reasonably comfortable work environment for the examiners. It doesn’t have to be your principal conference room, but there should be an uncluttered work space with basic office supplies and a phone. You can make the examination more efficient by gathering the records and files that the examiner requests in advance; sometimes, a call to the examiner, or a question or two when the examination is being scheduled, will elicit information on what the examiners want to see.

On the other hand, don’t make the mistake of simply handing over whatever an examiner asks for, particularly if you are not sure whether the examiner has the authority to examine specific records. In the consumer financial services field, with the increasing emphasis on confidentiality of non-public personal information, a financial institution should consider the privacy rights of individuals when their personal financial files are reviewed, even during the course of a government examination. Review in advance the underlying laws establishing the examiner’s authority, and attempt to limit your submissions to those that are required by law to be subject to inspection.

During an examination, it’s often wise to meet with the examiners on a daily basis, to talk about their findings; sometimes, a discussion of issues as they arise can lead to a resolution that will prevent the finding from being written up as an exception in the examiner’s final report. Even if the examiner is close-mouthed about his findings, daily meetings often reveal the temperament of the examiner and a reading of body language or other indirect signals can be a tip-off to how the examination is going.

Not all examinations are announced in advance, unfortunately. When unannounced examinations occur, corporate counsel is faced with the decision of whether to cooperate or resist. Generally, we recommend a cooperative demeanor, even if the surprise visit is untimely or difficult for other reasons. One approach would be to use the first visit of an unannounced examination to negotiate for more time to complete the exam, or to prepare for it. Examiners on unannounced visits may be making rounds and have other companies they can visit after having negotiated a preparation period for your company. Again, as indicated above, you will be well served to know whether the law authorizing examinations permits unannounced examinations. If not, a cordial discussion of the examiner’s authority is in order.

When, during the course of an examination, an examiner asks for copies of papers or other business records, consider carefully whether these are records your company would like shielded from further disclosure. Negotiating non-disclosure of corporate records when they are provided is the best course, and obtaining these agreements in writing is preferred. At a minimum, your office might have a stamp with the words "Strictly Confidential; Provided In Response To Government Agency Request; Not To Be Photocopied Or Further Disclosed" or similar words, and use this stamp on documents that contain financial or proprietary information.

Perhaps the best way to minimize the effect of government agency supervision and examination for a regulated company is to be scrupulously careful to comply with the applicable regulations and to keep detailed records of all compliance activities. Most agencies have websites where the latest information is posted, including regulatory interpretations, proposed and final rules and the like. It is incumbent on corporate counsel to be familiar with these sources. There are also a variety of commercial services available to track developments in virtually every industry, including information through trade associations. Likewise, law firms provide client newsletters that analyze virtually every regulatory development applicable to industry. Goodwin Procter LLP’s newsletters include both the monthly Financial Services Alert and the weekly electronic-edition Infobytes, both of which are free. Corporate counsel should get on as many mailing lists for law firm newsletters as they find helpful; these newsletters are also a great source of referrals for outside counsel.

In dealing with regulators, there should be a central point of communication in every company. It is difficult to maintain the personal communication between the supervised and the supervisors if the regulators are forced to deal with a different person in the company with every communication. A central point of contact also ensures that uninformed personnel won’t be answering regulatory questions inaccurately or providing data that should be kept confidential. We recommend that logs of communications between regulators and the company be kept, with dates, summaries of the issues discussed, and other pertinent details. Procedures for dealing with calls from regulatory agencies should include same-day call return.

Occasionally, there will be times when government agency advice is unclear, ambiguous, or just plain wrong. Or advice from an agency might be delayed so long that it is unhelpful to the company. The best defense in these situations is a dedicated approach to the law and regulations and a thorough knowledge of both, so that if ambiguous advice is given, your company is in a position to take action on the basis of what you, its corporate counsel, know. To consult an agency about important issues anonymously, consider asking your outside counsel to make the calls and report the answers. Get favorable advice in writing. If the agency is unwilling to put advice in writing, you can draft and send a "confirming" letter to the agency requesting acknowledgment of your position. Failing that, you should write up an internal memo and keep it in your corporate files.

Not all companies in regulated industries are large enough to have in-house compliance staffs and regulatory liaisons. For smaller or start up companies, it is even more important to create an impression of regulatory cooperation and compliance, and to keep open lines of communication between your company and its regulatory agencies. Some regulators may assume a higher level of compliance by brand-name larger companies and be more inclined to scrutinize smaller companies or newcomers. In this event, engagement of select regulatory counsel with a complete understanding of your industry can end up saving both time and money. Often outside counsel can run interference with agencies on your behalf because they too, follow the recommendations above and have their own well-honed relationships with regulators, and detailed knowledge of the underlying rules.