There is a famous quote from Shakespeare’s play Henry VI where Dick the Butcher says: “The first thing we do is kill all the lawyers.” People like to cite that quote when making a general attack against the legal profession, perhaps thinking that Shakespeare was lending support to their anti-lawyer position. Interestingly, the quote in question was made by Dick the Butcher speaking about what would occur once Jack Cade, the head of an anarchist rabble overthrew the government. The lawyers, you see, would be the ones pointing out the fact that the seizure of power by the government was unlawful and the acts of such a government unenforceable. Today, lawyers grapple with similar issues on behalf of individuals and corporate clients that find themselves confronted with the power of state and federal governments whether that involves the creation of legal entities, such as banks, or the ongoing regulatory strictures such entities operate under. A bank that has had to deal with a Consent Order or a director that is being sued by the FDIC will understand exactly what I mean.
When a group of people decide to form a bank they generally retain a lawyer to create the legal entity that raises the capital and facilitate the various applications that must be shepherded through state and federal banking regulators. That lawyer is generally from an outside law firm that specializes in handling such matters. Bank boards may oftentimes have a lawyer but who may be involved in closings real estate transactions for the bank but is generally not the person to whom the bank is seeking bank regulatory advice. The reason for that is that the broad area of banking law and regulation is an amazingly complex series of laws and regulations promulgated by state and federal governments and regulator bodies. A local general practitioner will not generally have the type of training and background to provide advice on matters that may threaten the future of the bank or subject the directors to civil money penalties.
Legal advice, like every other product and service a bank spends money on, is an expense. Lawyers generally charge by the hour or by the matter, and expenses can be fairly substantial when the bank is involved in complex regulatory matters. When the aggregate amount of that expense grows to the point that it is having a material impact of the bank’s annual budget, banks should begin to consider alternatives for managing that expense. Some banks will hire an their own internal legal counsel. Generally speaking, any bank approaching $1 billion in assets will find that hiring an internal general counsel makes financial sense. The internal lawyer is able to field many of the day to day questions that might have gone to outside counsel and they can play a valuable role in overall enterprise risk management. They will also see to it that legal matters that need to be referred to outside counsel are sent to the lawyers most capable of handling the matter in a cost efficient manner.
When hiring an internal general counsel it is important to understand what they will and won’t be doing. They cannot handle every legal issue that comes up. The size and complexity of banks today, particularly a growing institution that may be involved in many different business lines, will make that impossible. The internal general counsel will manage the overall legal affairs but there will still be some matters that need to be referred to outside counsel. The bank will reap additional benefits from just a certain amount of cost savings. Internal legal counsel will build a close working relationship with the business people in the bank, they learn about the lines of business and they participate in strategic planning. They are able to provide value added advice at the earliest stages of a project and are able to spot issues before a project gets too far down the road.
Banks that are not quite ready to take the plunge and hire an internal general counsel should consider approaching talking with their outside counsel about their current legal spending and seeing whether there are ways to manage the legal spend to make it more predictable. Law firms can put in place creative billing arrangements where a bank will pay a regular retainer for the firm providing ongoing legal advice. Likewise, firms can provide certain services on a fixed fee arrangement.
(A version of this post was also used in BankDirector.com’s story, When Should you Hire a General Counsel?)