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Banking Interpretations

NYSBL 7001(4)
Superintendents Regulations Part 305

Memorandum


TO: Deputy Superintendent Abballe, Foreign Financial Services Division

FROM: Assistant Counsel Kane, Legal Division

RE: [ } - Independent Directors

DATE: October 21, 2002


Background.

[ ] is the wholly-owned subsidiary of [ ], which is chartered under the laws of [ ]. As we understand it, the Bank currently has no outside "independent" directors. The Bank contemplates nominating two individuals, [ ] and [ ], who currently serve as members of the Bank's Advisory Board, to its Board of Directors.

In their current capacity as members of the Bank's Advisory Board [ ] and [ ] are not involved in the day-to-day operations of the Bank, nor are they compensated for their service. The Bank has asked the Banking Department to determine whether these two individuals would qualify as "independent" directors on its Board of Directors.

[ ], in addition to serving on the Bank's Advisory Board, is also a consultant to the Bank. He is compensated $6,000 per month for referrals of new business and activities related to the development of new client relationships.

[ ], in addition to serving on the Bank's Advisory Board, is a partner in a law firm which represents the Bank in certain loan transaction closings. However, it is not contemplated that [ ] would be personally involved in any potential Bank/borrower relationship.

Applicable Banking Laws and Regulations.

By way of opening, we point out that there is little in the way of guidance issued by the Banking Department as to what constitutes an "independent" director. Accordingly, the sole legal determination which can be made under the existing Banking Law and regulations enacted pursuant thereto is whether these individuals qualify as outside directors under Part 305 of the Superintendent's Regulations. Part 305 which was enacted pursuant to Banking Law Section 7001(4), sets forth the requirements regarding the composition of boards of directors of banks and trust companies, and provides that:

(a) No more than one third of the entire board of directors of any bank or trust company with capital stock, surplus fund and undivided profits … [i]n excess of $50,000,000 shall be active officers or employees of such institution.

(b) No more than one half of the entire board of directors of any bank or trust company with capital stock, surplus fund and undivided profits in excess of $7,500,000, but less than $50,000,000 shall be active officers or employees of such institution.

With respect to [ ] nomination, the Bank argues that he is "independent" since his only previous roles in the Bank were as an Advisory Board member and a consultant. In one prior instance the Banking Department has examined whether a director who is a paid consultant is considered an outside director under Banking Law Section 7001(4) (see attached Exhibit 1). In brief, that case involved an individual who was paid $146,000 per year in compensation as well as various benefits (health insurance, a leased automobile, and reimbursement for life insurance, disability insurance, and virtually all the expenses associated with providing his consulting services).

In determining whether the individual in question was an employee of the bank or a consultant, the Banking Department's analysis was predicated on the legal principle that if the right to control the manner or means of performing the work is in the person for whom the service is performed (the bank), the relationship is that of an employer and employee, but if the control of the manner or means of performing the work is delegated to the person performing the service (the individual), the relationship is that of an independent contractor. In that instance, the Banking Department, based on the limited facts, concluded that the individual was a consultant.

However, even if the individual in question were an officer/employee of the bank rather than a consultant, he would have to be an "active" officer/employee to be counted toward the one-third statutory maximum number of directors that can be active employees under Banking Law Section 7001(4) and Part 305. An "active" employee is one who is responsible for implementing policy.

As in the case discussed above, [ ] duties involve marketing on behalf of the Bank. If [ ] marketing activities involve his implementing Bank policy, it would be difficult to conceive, from a safety and soundness perspective, that the Bank would engage [ ] to perform the necessary tasks without subjecting his performance to the Bank's direction and control.

In telephone conversations with [ ] Senior Vice President of the Bank, and [ ] President and CEO of the Bank, on October 18, 2002, we have learned that while the Bank does not have a written consulting contract with [ ] and as further clarified in a letter dated October 18, 2002 (see attached Exhibit 2), [ ] role is essentially that of an "introducer" who recommends the Bank to potential clients. Further, except for the $6,000 per month he receives from the Bank, he receives no other benefits or reimbursements from the Bank. Thus, based on the foregoing, we conclude that [ ] is in all probability an independent consultant and not an employee of the Bank, and thus would qualify as an outside director.

With respect to [ ] nomination, the Bank argues that [ ] is considered "independent" since he currently serves as an uncompensated Advisory Board member. A review of the opinions and memoranda construing Banking Law Section 7001(4) and Part 305 finds none regarding a lawyer who is a partner in a law firm who also serves as a member of a bank's board of directors and the possible conflicts of interest which could arise should the director be in a position to steer bank business to his law firm.

There is no reference in the Banking Law to conflicts of interest between a director and his bank. The only provision relating to a director's duty to his bank is Banking Law Section 7015, which imposes upon directors and officers the obligation to discharge "the duties of their representative positions in good faith" and to exercise the same degree of care as would an ordinarily prudent man.

During the course of the aforementioned telephone conversations with [ ] and as further set forth in Exhibit 2, we have learned that the Bank does not have [ ] firm on retainer at this time, but rather, [ ] firm is one of eight which represents the Bank in loan transactions, and whose fees are paid by the borrowers. Moreover, [ ] does not himself represent the Bank in such transactions. Based on the foregoing facts, we conclude that [ ] would qualify as an outside director.

With respect to [ ] nomination to the Bank's Board of Directors, we note that it is common for bank board's to have a member who is a member of a law firm which represents a bank. Both Banking Law Section 7015 and sound banking practice in such cases would militate that the Bank's Board of Directors, as the Bank represents in its letter to the Banking Department it will, require that a nominee to its Board, such as [ ], not participate in any transaction in which both the Bank, as lender, and the law firm, as counsel to the Bank, participate. Further, if the Bank does in the future, enter into a retainer agreement with [ ] firm, it should ensure that such agreement be at arm's length, on terms which are not disadvantageous to the Bank, and that [ ] should recuse himself from any matters relating to the Bank and his law firm.

Conclusion.

The Legal Division concludes, based on the facts presented, that [ ] and [ ] qualify as outside "independent" directors.

Noted: ______
           S.A.K.

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