Bankers Looking to Make a Move Should be on Alert Following Recent Federal Reserve Ban

July 20, 2021
(Originally published in Arkansas Business July 19, 2021)

Bankers changing positions from one bank to another is nothing new in the industry. The volume of moves may ebb and flow over time, but we have witnessed this play out in the Arkansas market for years. While there is risk inherent in any move, bankers and their new employers are well advised to consider a few steps to mitigate legal risks accompanying the change. A recent Federal Reserve action imposing a lifetime ban on two Wyoming bankers is an alarming reminder of the severity of these risks.    
Banks routinely impose some level of restrictions on employees, typically taking the form of a confidentiality or nondisclosure agreement intended to protect the bank’s trade secrets, proprietary and customer information. It is somewhat rare in the Arkansas market to find a restriction that completely prohibits a former employee from engaging in the banking business. Most common are restrictions on management level employees impacting their ability to solicit customers and other employees.  

It is fairly well established that an employee may prepare to compete prior to actually leaving employment. This could include, for example, negotiations with a prospective employer, securing office space and similar activities. At the top of the list of impermissible activities before leaving employment would be contacting current customers to recruit them to follow. This can expose the employee to various legal claims, potentially including breach of fiduciary duty and improper use of the employer’s proprietary information and trade secrets.  

Looking beyond the potential for claims by a former employer, the Federal Reserve action referenced above takes the issue to a much more concerning level. In 2018, the Federal Reserve named two Wyoming bank executives in a “Notice of Intent to Prohibit” – effectively proposing to bar their further participation in the banking industry. The Federal Reserve announced it was considering this lifetime ban for the bankers for taking trade secrets and recruiting clients from a former employer. The Fed alleged that they engaged in unsafe and unsound practices and breached their fiduciary duties to their employer.
In late March of this year, the Fed issued its final decision in the case upholding a ruling to impose a lifetime ban. The agency determined that the bankers conspired while they were working for Central Bank & Trust to misappropriate Central’s proprietary business information in a plan to take jobs at Farmers State Bank. The order indicates that the bankers obtained commitments from customers to move loans and accounts while they were still employed by Central. The order effectively prohibits the individuals from working at a bank.

Any banker considering leaving one job for another should first consider what duties they owe to their current employer. All prior employment agreements, letters and other documents should be reviewed to assess whether any contractual restrictions exist. Some restrictions are structured such that they are intended to become enforceable upon the employee’s receipt of an equity award without him or her having actually signed any document consenting to the restriction. Caution should be taken to make sure that all previous documents and agreements are identified and reviewed.  

Beyond any contract responsibility, the law separately imposes fiduciary duties on any employee serving as a corporate officer. Officers owe a duty of loyalty to their current employer meaning that any competition prior to resigning is a breach of this duty. This would include discussions with key customers and co-workers occurring prior to termination of employment. In practice, these conversations occur frequently, but bankers should understand that they may serve as the basis for a lawsuit.

Given this action by the Federal Reserve, and the risk of litigation by a former employer, bankers and their new employers should tread carefully through the recruitment and transition process. The risk of a lifetime ban may better protect banks, but creates heightened risks at the same time.  If not careful, the same bank that threatens to report a former employee to the Federal Reserve may also be hiring a new employee that has engaged in the same conduct.

For the banker, the best advice is that he or she not take anything with them to their new job other than their own personal knowledge (or often referred to as what is “in between the ears”). In particular, note that the Fed’s order indicates that the individuals took proprietary information including forms and customer information.   

For the new employer, discussions should begin early with the prospective employee to confirm legal restrictions and outline a plan for the transition. The Employer should make clear to the new employee what conduct is and is not acceptable.  

Robert T. Smith heads the Finance and Commercial Transactions Practice Group and serves on the firm’s Management Committee. In the banking area, Robert advises clients on merger and acquisition transactions, lending, regulatory compliance and capital raising activities. He assists clients in private equity and corporate finance matters, the offering of debt and equity securities, and counseling directors and executive officers regarding fiduciary duties and corporate governance issues. Robert also regularly represents professionals and professional firms in the formation, expansion, merger, and division of professional practices.

Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.