[author: Walter Donaldson, II CFE]

As explained in our January 24, 2014 Client Alert, “‘Heightened Standards’ for Large Banks: OCC Proposed Guidelines,” the Office of the Comptroller of the Currency (OCC) has released a proposal seeking comment on guidelines establishing minimum standards of governance, risk management and board independence for insured national banks, Federal savings associations, and Federal branches with assets of at least $50 billion (Guidelines). What is significant for many banks is the flexibility that the OCC preserves for itself with regard to whom it would subject to the heightened standards. Not only will the Guidelines apply to large banks, but they also could be imposed on smaller banks – including community banks – where the OCC determines that their operations are highly complex or otherwise present a heightened risk. In making that determination, the OCC must consider the complexity of the bank’s products and services, its risk profile, and the scope of its operations.

The decision to issue these heightened standards in the form of guidelines rather than regulations is deliberate. The OCC explains that guidelines provide it with “the flexibility to pursue the course of action that is most appropriate given the specific circumstances of a bank’s noncompliance with one or more standards, and the bank’s self-corrective and remedial responses.”

Notably, the Guidelines do not offer any further explanation of the three factors, thus also giving the OCC total flexibility in making its determination. What the limited OCC commentary does make clear is that the size of an individual bank will not necessarily be the measure of coverage. For example, although a bank may be small, if it is related to other banks, the OCC will base its determination on the collective complexity of the banks’ products and services, risk profile, and scope of operations.

Pepper Point: Just as our Observation 1.1.1 covering the Volcker Rule regulations cautions that so much is left to the interpretations yet to come from the banking agencies in determining how and when ordinarily exempted community banks would be found to engage in prohibited trading and investment activities, it is equally unclear what level of complexity or risk will ensnare community banks in the Guidelines.

Pepper Point: While we recognize that the Guidelines are contained in a proposed rule that technically has no current legal effect, experience teaches us that the vast majority of proposed rules readily evolve into final rules with little change. Consequently, it is important for community banks to consider the potential impact of the Guidelines in their compliance planning.