As a parting shot as Federal Reserve chair, Janet Yellen and the board of governors slapped Wells Fargo & Co. with an asset freeze limiting the bank's growth and imposed other unprecedented enforcement actions for what the agency called “widespread consumer abuses.”

Wells Fargo said it would replace three members of the bank's board of directors by April and a fourth board member by the end of the year. The Fed released supervisory letters censuring the bank's board of directors, former chairman and CEO John Stumpf and a former lead independent director.

“We cannot tolerate pervasive and persistent misconduct,” Yellen said in a statement on her last day on the job on Feb. 2nd. “The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.”

The Fed's action was certainly a wake-up call, and white-collar lawyers this week were weighing what the reprimand might mean for other financial services companies. A team from Wachtell, Lipton, Rosen & Katz—Edward Herlihy, the executive committee co-chair, and corporate partners Richard Kim and Sabastian Niles put together their observations in an advisory posted on compliance blogs at Harvard Law School and New York University School of Law.

Here's a snapshot of some of what Herlihy and the Wachtell team had to say:

The Fed's action was a “more piercing political statement” than a regulatory direction change. “As a matter of regulatory policy, we believe that these actions are [a] more piercing political statement than a change in direction from the deregulatory posture of the Trump administration or the recent Federal Reserve pronouncements about reducing the regulatory demands on bank boards of directors. It is telling that the Federal Reserve took action on chair Janet Yellen's last day in office and that its press release features a quote from her—she rarely commented on enforcement actions during her tenure.”

Still, the statement from the Fed was an admonition to boards of directors to investigate. The Wachtell lawyers pointed out that supervisory letters are usually kept confidential by the regulators. The letters from the Fed pointed to “a lack of oversight and control of compliance and operational risks,” the lawyers wrote. The Fed suggested that the board members should have pressed for more information from firm management to understand and assess the problems and the company. The lawyers pointed out that once problems are known, a failure of board leaders and independent directors to seriously investigate “will expose directors to criticism and potential reputational damage.”

Former Wells Fargo CEO John Stumpf testifies in September 2016. Photo: Diego M. Radzinschi/ALM

Further enforcement actions by the Federal Reserve against Wells Fargo and individuals associated with the bank are possible. “Given the highly public nature of the Federal Reserve's actions, the congressional hearings that will likely follow, and the continuing outcries for holding individuals accountable in cases of corporate misconduct, it may be politically difficult for the Federal Reserve to refrain from taking further action against individuals previously or currently associated with Wells,” the Wachtell lawyers wrote.

There are higher expectations for general counsel and compliance officers everywhere. “While financial institutions operate within their own unique regulatory framework, all companies should reflect on the increased expectations on board leaders and the board as a whole with respect to assuring that appropriate risk management and escalation systems are in place. This includes setting high expectations for general counsels and compliance departments and following up assertively with robust and prompt inquiry and tracking when evidence emerges of serious compliance breakdowns,” the Wachtell lawyers wrote.

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