As financial firms gain experience with the Dodd-Frank Act, the 2,319-page comprehensive financial regulatory reform legislation signed by the president last July, not only are unheralded provisions coming to light, but also subtle indirect consequences of known provisions are also coming to light.

Those who have followed the legislation closely know that one of many unheralded provisions, Section 164, prohibits certain management interlocks between certain financial companies.  

Specifically, Section 164 of the act generally provides that a nonbank financial company supervised by the Federal Reserve Board, i.e. a financial company that the newly created Financial Stability Oversight Council (“FSOC”) determines is systemically significant, shall be treated as a bank holding company for purposes of the Depository Institutions Management Interlocks Act (12 U.S.C. 3201 et seq.).  

That statute, among other things, generally prohibits a management official of a depository institution or depository institution holding company with assets of more than $2.5 billion from serving as a management official of any other non-affiliated depository institution or holding company with assets of more than $1.5 billion or affiliate thereof1 (12 U.S.C. 3203).  

An initial reading of that provision would simply suggest that a client that is not a systemically significant firm need not worry about the provision. However, on reflection, one realizes that interlock provisions cut two ways and can affect the board composition of banks and bank holding companies that today may have interlocks with financial firms that could be deemed systemically significant by the FSOC or with affiliates of such firms.  

Practical Tips for In-House Counsel

We recommend two things to bank and bank holding company in-house counsel.  

First, in-house counsel of banks and bank holding companies should brief their board nominating and governance committees of the potential problem that could arise if the FSOC designates as systemically significant any company (or affiliate of any company) of which a sitting director is an officer or director. Such designation could lead to a resignation of the affected director and a resultant vacancy or force a director to have to choose between service on either the board of the bank or bank holding company, on the one hand, and the board of the systemically significant nonbank financial firm or its affiliate, on the other.

Second, banks and bank holding companies will also want to add a question to their annual director questionnaires, now that the FSOC is up and running (its first meeting was Oct. 1), asking whether the director is a director or officer of any systemically significant “nonbank financial company supervised by the Federal Reserve Board” as a consequence of an FSOC determination and whether the director is a director or officer of an affiliate of any such company.