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Shearman & Sterling LLP SVB Fallout: Banks Face Heightened Corporate Governance and Risk Management Scrutiny | 48 Assess the Impacts of Recent Regulatory Rulemakings and Proposals There have been a number of proposals in recent months targeted at regional and mid-sized banking organizations, from long-term debt and "clean holding company" requirements 8 to resolution planning requirements and related guidance. 9 On the governance front, the FDIC released an ambitious proposal in October 2023 that would establish "enforceable guidelines" for all state non-member banks with $10 billion or more in assets. 10 These guidelines are highly prescriptive in nature and differ in several important respects from the Office of the Comptroller of the Currency's 2014 "heightened standards" guidelines 11 and the Federal Reserve's 2021 governance guidance. 12 Notable features of the FDIC's proposal include the following: • General Obligations – Each director "has a duty to safeguard, through the lawful, informed, efficient, and able administration of the [bank], the interests of the [bank] and to oversee and confirm that the [bank] operates in a safe and sound manner, in compliance with all laws and regulations." In potential tension with the typical corporate fiduciary duty focus on maximizing shareholder value, the FDIC would require a board to "consider the interests of all its stakeholders, including shareholders, depositors, creditors, customers, regulators, and the public." • Director Independence – A bank's board should comprise a majority of outside and independent directors. For this purpose, an independent director is generally one that is (a) not a principal, member, officer or employee of the institution, and (b) not a principal, member, director, officer or employee of any affiliate or principal shareholder of the institution. An independent director of the bank's holding company, often a public listed company, may qualify as an independent director of the bank as long as the holding company conducts limited or no additional business operations outside the bank and such individual is not a principal, member, director, officer, or employee of any other institution or holding company affiliate. • Board Duties – The duties of a bank's board include: (i) setting an appropriate tone, (ii) approving strategic plan for the bank, (iii) approving policies, (iv) establishing a code of ethics, (v) providing active oversight of management, (vi) exercising independent judgment, (vii) selecting and appointing qualified executive officers, (viii) providing ongoing training to directors, (ix) conducting annual self- assessments and (x) establishing and annually reviewing compensation and performance management programs. • Board Committees – At a minimum, a bank would need to have an audit committee, compensation committee, trust committee (if it has fiduciary powers) and risk committee. A bank should establish other committees, as necessary, in accordance with its risk profile such as compliance, lending, information technology, cybersecurity and investments. • Board Diversity – A bank's board would be required to consider how the selection of and diversity among board members collectively and individually may best promote effective, independent oversight of bank management and satisfy all legal requirements for outside and independent directors. Important aspects of diversity may include: social, racial, ethnic, gender, and age differences; skills, differences in experience, perspective, and opinion (including professional, educational, and community or charitable service experience); and differences in the extent of directors' ownership interest in the bank. • Risk Management Program – A board should establish, and management should implement and manage, a comprehensive and independent risk management function and effective programs for internal controls, risk management and audit. 8 See OCC, "Federal Reserve and FDIC Proposal on Long-Term Debt Requirements, Etc.," 88 Fed. Reg. 64524, https://www.govinfo. gov/content/pkg/FR-2023-09-19/pdf/2023-19265.pdf (September 19, 2023). 9 See FDIC, "Resolution Plans Required for Insured Depository Institutions With $100 Billion or More in Total Assets; Informational Filings Required for Insured Depository Institutions With at Least $50 Billion But Less Than $100 Billion in Total Assets," 88 Fed. Reg. 64579, https://www.fdic.gov/news/board-matters/2023/2023-08-29- notice-dis-b-fr.pdf (September 19, 2023); see also FDIC, "Guidance for Resolution Plan Submissions of Domestic Triennial Full Filers," 88 Fed. Reg. 64626, https://www.govinfo.gov/content/pkg/FR-2023-09- 19/pdf/2023-19267.pdf (September 19, 2023). 10 See FDIC, "Guidelines Establishing Standards for Corporate Governance and Risk Management for Covered Institutions with Total Consolidated Assets of $10 Billion or More," 88 Fed. Reg. 70391, https://www.govinfo.gov/content/pkg/FR-2023-10-11/ pdf/2023-22421.pdf (October 11, 2023). 11 See OCC, "Guidelines Establishing Heightened Standards for Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches," 79 Fed. Reg. 54517, https://www.occ.gov/news-issuances/federal- register/2014/79fr54518.pdf (September 11, 2014). 12 See Federal Reserve, "Supervisory Guidelines on Board of Directors' Effectiveness," SR 21-3 / CA 21-1, https://www. federalreserve.gov/supervisionreg/srletters/SR2103a1.pdf (February 26, 2021).