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2 min read

Federal Banking Agencies Maintain Ethics & Integrity in Industry

banking agency regulations

The 10th Circuit Court of Appeals recently reviewed the actions taken by the Federal Reserve System's Board of Governors (Board) against Frank Smith and Mark Kiolbasa, former employees of Farmers State Bank. The misconduct that occurred at their previous workplace led to severe consequences. Both individuals were stripped of their positions as officers and directors at Farmers Bank. These actions were not taken lightly and resulted from a thorough investigation and due process. This case is a powerful reminder of the importance of maintaining integrity and ethical conduct in the banking industry.

The Petitioners contested the authority of the Board to act against them. They argued that the Board had no power to start enforcement proceedings and that the FDIC, the proper federal banking agency for Central Bank & Trust, held jurisdiction. However, the court ruled for the Board, affirming its status as a legitimate federal banking agency with the authority to start such proceedings. In addition, the court chose not to review the Petitioners' Appointments Clause challenge, further solidifying the Board's authority in this matter.

The Federal Deposit Insurance Act (FDIA) grants federal banking agencies the responsibility of defining and enforcing standards within the banking industry. These agencies include the Board, the Office of the Comptroller of the Currency (OCC), and the FDIC. The agencies have the authority to remove officers, directors, and executives in cases of misconduct, as well as prohibit their future participation in the industry. These standards are in place to protect the integrity and stability of the banking sector, ensuring those who engage in misconduct are held accountable.

Originally, the Petitioners were executives at Central Bank & Trust, a state bank supervised by the FDIC. As Institution-Affiliated Parties (IAP), they were subject to potential removal by the "appropriate Federal banking agency" for any misconduct. However, they left Central Bank & Trust and joined Farmers State Bank, a state bank and member of the Federal Reserve System (FRS). This transition led to a lawsuit filed against them by Central Bank & Trust, alleging breaches of fiduciary duties.

During the legal proceedings, the Petitioners argued that the Board lacked the authority to start an enforcement action against them, as they believed that the FDIC held jurisdiction. However, the Board asserted its authority as the proper federal banking agency for IAPs associated with a Board-supervised bank, even if the misconduct occurred at a bank supervised by a different federal banking agency. The court agreed with the Board's interpretation, as it aligned with the plain language of the FDIA.

In their appeal, the Petitioners also raised an Appointments Clause challenge. However, the court did not address the substance of their claim, as they did not raise this issue before the Board. The court emphasized that the Petitioners had the opportunity to raise the issue during the appeal process but neglected to do so. They also argued that it would have been futile to raise the issue. The court dismissed this argument, stating that the agency regulations required them to raise the issue before the Board. Their Appointments Clause challenge was effectively surrendered and was given no further consideration.

The actions taken by the Board of Governors of the Federal Reserve System against Frank Smith and Mark Kiolbasa serve as a powerful testament to the unwavering commitment of federal banking agencies to uphold the integrity and ethical standards within the banking industry. The recent court ruling affirming the Board's authority reinforces these agencies' legitimacy and effectiveness in initiating enforcement proceedings. It is crucial for individuals working in the banking sector to comprehend the severe consequences of misconduct and the formidable power of federal banking agencies in ensuring accountability.