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 Few people had a more important role than Scott Jarvis in overseeing how Washington’s financial institutions weathered the twists and turns of the disruptions the Great Recession brought to the economy and the financial industry.

As director of the state Department of Financial Institutions (DFI) from 2005 until his retirement this week, it was the role of Jarvis and his team to closely monitor the financial health of the state’s banks and thrifts during that economic crisis. And on 20 or more occasions, they had to pull the plug when critically inadequate capital or severe loan losses threatened continued solvency.

Jarvis, appointed by Gov. Christine Gregoire to the DFI director role in 2005 and reappointed in 2013 by Gov. Jay Inslee, reflected on that crisis during an interview that amounted to a revisiting of the bumpy ride on which the financial downturn took financial institutions in this state, and the role his agency had in each of the “bumps.”

But the most high-visibility failure, the seizure of Washington Mutual in September of 2008 by the Federal Deposit Insurance Corp. and the sale of the assets of what was by then one of the nation’s largest banks to J.P. Morgan Chase, was without consultation with the state regulators.

And the closure that was perhaps the most painful for Jarvis and his staff, that of Frontier Financial Corp. in April of 2010, was unavoidable after the feds turned down what both the bank board and state regulators viewed as a satisfactory buyout plan.

“If I had to name a ‘down’ moment, it was the circumstances associated with the closing of Frontier Bank,” Jarvis said. “Willing and adequate capital was available for infusion but the Fed was unwilling to sanction the transaction.”

A key bright spot for the regulators was the successful emergence of Sterling Savings Bank from under threat of closure. The once high-flying Spokane-based institution had been placed under a cease and desist order in early October of 2009 and its chairman-founder and the CEO ousted.

Agreements Sterling secured to raise $730 million in new capital under new CEO Greg Seibly and a reconstituted board allowed both DFI and the FDIC to terminate the order and allow Sterling to proceed back on the road to healthy operation and growth, and eventual acquisition by Umpqua Bank.

In fact, Jarvis said of Sterling’s re-emergence: “Sterling’s success is proof that a cease and desist order is not a death-knell for Washington’s banks, but rather a call to action. When a financial institution’s leaders take aggressive, well-planned, corrective action, success can be found at the end in safe and sound business practices – and in strong community and employee support.”

The financial crisis had actually paved the way for Oregon-based Umpqua to move into Washington since the Bank of Clark County, closed by DFI in January of 2009 as the first closure in this state, reopened under Umpqua ownership. And a year later, when DFI took action against Seattle-based Evergreen Bank and Rainier Pacific Savings Bank, they wound under the Umpqua banner.

And Jarvis may well have had Umpqua, among others, in mind when he said: “No matter how dark the financial or investment environment might seem at any given moment, there are always individuals and organizations who see opportunities for success that benefit our economy and move us forward.”  

Of the circumstances that forced DFI to close the 18 banks and at least two thrifts that the department had to act on, Jarvis observed: “as a pituitary giant will tell you, sometimes there is a problem with too much growth.”

Jarvis, a New York native who graduated from Allegheny College and got his law degree from University of Puget Sound (now Seattle University), first joined DFI in 1997 after serving as an insurance regulator for the state Insurance Commissioner and General Counsel to the State Treasurer.  

In discussing the relations between state financial regulators and their big-brother counterparts at the federal level, Jarvis admitted that “overall, state regulators are concerned with the feds pre-empting powers of state regulators,” evidencing an unsaid sense that in some areas, the local regulators have a better sense of market needs.

A key area where that is important, he feels, is in failure of the feds to understand the need to right-size regulations for small institutions, where “the risk and exposure are dramatically different for small banks.”

“I think the number of small commercial banks will shrink further and small towns need these kinds of institutions,” Jarvis said.

Of the WAMU takeover by the Fed, Jarvis’ banking chief, Rick Riccobono, has been outspoken in his view that the Fed’s action and its sale of assets to J.P. Morgan Chase for what many viewed as a bargain-basement price didn’t need to have happened. Jarvis has routinely scolded Riccobono for making those statements to various groups, but intriguingly, hasn’t said he disagreed with the comments.

Under his leadership, DFI became a nationally-recognized leader in state financial regulation, which helped move the state from 17th in the nation to 10th on Washington's Corporation for Enterprise Development Scorecard Ranking in "Financial Assets & Income.” In 2012-13 he chaired the legislative committee for the Conference of State Bank Supervisors.

An area where Jarvis was obviously pleased to see the states step in when a void was being left at the federal level was in creation of local legislation to make it easier for start-up entrepreneurs to raise capital from local investors, basically a state version of the JOBS Act passed by Congress in April of 2012.

It was clear after Congress passed the legislation and told the Securities & Exchange Commission to enact rules to put the law into effect, that the SEC’s then chair, Mary Shapiro, didn’t think easing investor protections to enhance entrepreneurial opportunities was a good idea, so she foot dragged for several years.

Eventually a number of states, including Washington, decided they could do it better locally anyway, so they enacted JOBS Act-like crowd-funding legislation, strongly supported by Jarvis and his agency. He told me once that his role was to balance protection for investors with opportunity for entrepreneurial startups and that the balance wasn’t that difficult a challenge.

He was careful how the process of putting the crowd-funding into effect was carried out, with hearings, testimony and staff evalutions, though there have only been four companies that have filed to raise money under the state legislation.

In thanking Jarvis for his years of contribution, the governor named Gloria Papiez, who had served as Jarvis’ deputy for more than a decade, to replace him.

Washington State securities regulators intend to make sure that entrepreneurs anxiously awaiting adoption of the rules that will permit them to begin raising capital under new state crowd-funding law won't face any of the frustrations and disappointments that have followed passage of similar legislation at the federal level.

The bill under which entrepreneurs can raise funds up to $1 million a year in small amounts from in-state investors passed the Legislature, was signed by the governor last month and goes into effect June 12. But officials of the State Department of Financial Institutions have until October 1 to put in place the rules and the process under which the fund-raising can get under way.

Joe Wallin

In an effort to ensure that everything is done on schedule, Scott Jarvis, director of the Department of Financial Institutions, says even before the legislation goes into effect, his agency has begun the planning process for how the rulemaking will unfold between now and October.

Washington is now one of a handful of states where lawmakers have decided the promise of a new source of fundraising for entrepreneurs won't likely come about in any meaningful way at the federal level and thus have decided to act locally.

It's becoming increasingly likely that what Congress, with an election-year flourish two years ago, passed as the JOBS Act to open the door for entrepreneurs to fund their start-up businesses by attracting average investors on the internet will remain a promise unfilled.

It's now been almost two years since Congress passed the bill and gave the Securities and Exchange Commission 180 days to put together the rules for how entrepreneurs could fund their start-up companies via the internet to allow selling equity to large numbersof average investors.

Well, entrepreneurs around the country are still waiting for those rules to emerge from the SEC, which must pass rules to implement the legislation officially titled Jumpstart Our Business Startups.

And there is a growing sense that the details of compliance, once the SEC finally acts, will be so onerous on entrepreneurs that the costs of starting to raise capital on the Internet will deter many if not most would-be entrepreneurs.

One of those cost factors imposed under the federal act involves a requirement that entrepreneurs must use what are called "portals" basically a new kind of SEC-regulated website with unique responsibilities to oversee the entrepreneurial fund-raising activities, investor risk and monitor money raised.

Under the state legislation, economic development organizations and ports will serve as portals for the entrepreneurs at the outset, with the legislation's second deadline being methods of qualifying other portals by next April 1.

But unlike with the federal legislation, Washington state entrepreneurs raising funds won't be required to use a portal.

The bill allows eligible businesses to raise up to $1 million during any 12-month period and repeat the process in subsequent 12-month periods with accredited and non-accredited investors allowed to participate, up to the investment caps imposed by the federal legislation.

Joe Wallin, the Davis Wright law firm attorney who had the leading-edge role in bringing about the state crowd-funding statute, sees it as "potentially a good avenue for companies to raise capital."

Wallin, who wrote the first draft suggestion the legislation and included it in a blog post later testified on its importance in making the state more business friendly.

He suggests, as others have, that having a crowd-funding law in place to allow entrepreneurs who are residents of this state to sell small amount of equity to investors who must also be Washington residents could attract entrepreneurs from other states to move to Washington.

"States are vying to get businesses to move to their states to bring jobs and entrepreneurs who build businesses through crowd-funding will eventually also create jobs," he adds.

Rep. Cyrus Habib, the King County lawmaker who sponsored the bill, said "we're putting our state in a place to attract entrepreneurs, and to capitalize on their energy and brainpower. And ordinary people get to buy a piece of the action."

Since the Internet has been viewed as the vehicle of choice by entrepreneurs and crowd-funding advocates to reach large numbers of average investors most effectively, the fact that only Washington residents are eligible to invest in the Washington state-based companies creates an outreach challenge for the startups.

Wallin says "companies will have to be very careful" how they conduct their equity offerings, using either portals that only allow investors of a particular state to view offerings, or "work connection to connection in a manner that doesn't involve generalsolicitation to non-residents."

Part of the role of portals will be to ensure that a firm's annual fundraising via crowd funding doesn't exceed the legal $1million restriction.

If there's any doubt that optimism is the byproduct of entrepreneurism, witness the fact that venture capitalists and other investors are rushing into the creation and development of the companies whose business is serving as portals and helping provide services to those who will be hoping to raise equity under the eventually implemented federal act.

The VC's have poured millions of dollars this year into companies like Indigogo, Crowdbit and Teespring and other such crowd-funding support companies.

Wallin, the Davis Wright attorney, think portals will attract funding from experienced investors. "They are Potential great investments," he said. 

Unlike most rule-making hearings by state agencies, the crowd-funding hearings may draw substantial and boisterous gatherings.

As DFI Director Jarvis put it, "this is a crowd of young and enthusiastic supporters who have little knowledge of the process of rulemaking."

Part of the challenge for the agency as the rulemaking moves ahead is that some entrepreneurs may fail to understand that, as Securities Administrator Bill Beatty emphasized, "our mission is a dual mission: to protect investors and promote small business capital formation."

There's a growing conviction among economic-development groups in the Seattle area and Washington State that targeting the financial-services sector could bring dramatic and relatively quick returns for the local and state economy.

With the third annual Financial Services Summit taking shape for this summer, California's finance industry is clearly in the sights of many of those who are leading the charge and touting the fact that Washington State has neither a corporate nor a personal income tax.

and is attracting perhaps the most interest.

Jeff Marcell

The fact that California didn't just shoot itself in the foot, but in the head, when it imposed a surcharge on the wealthy has raised the benefits bar on a concerted marketing effort aimed at financial firms. Several hedge funds have already moved from the Bay Area to Seattle and that surcharge is seen as the "moving" force.

The EDC, which has returned to the name it had for more than 30 years prior to being rebranded as EnterpriseSeattle early last decade, held the first summit on that industry sector in May 2011. That gathering dealt with the value of targeting financial firms and showed that Washington State ranks fifth in the nation as a hub for the financial-services industry. The six subsectors the study identified within the financial services cluster include things like banking, accounting, credit and lending.

Scott Jarvis

But the excitement about potential rapid growth is focused on the financial-services subsector. And California's finance industry is the most prominent target for many, though there's a bit of "in-bad-taste" reluctance to talk about specifically targeting California's businesses.

David Allen, McKinstry Co. executive vice president and chair of the EDC, agrees the financial-services sector could well provide the quickest and most lucrative returns, if the state's benefits are marketed well.

Karl Ege, a Seattle attorney at Perkins Coie who served for a time as vice chair of Russell Investments and is heading the Regulatory Task Force, is unabashed about touting the state's tax benefits.

"Why shouldn't we go after 21st Century high-paying jobs for educated people?' Ege asked in an e-mail exchange with me. "Financial services encourages a bigger business base, creates good jobs and their money comes from assets they manage around the world. And really this state's advantage, for high-margin businesses, is that we have no income tax."

Washington is one of only seven states without a business or corporate income tax and the only others in the West are Nevada and Alaska.

In addition, the service sector (law, accounting and financial activity) is exempted from the state sales tax, though the 1995 Legislature punished the service-sector businesses for battling against imposition of the sales tax by hammering those businesses with the highest business & occupation tax rate. The B&O tax rate for service firms is 1.8 percent of gross revenue, three times higher than the next highest industry and almost seven times higher than the lowest B&O rate.

Jeff Marcell, president and CEO of the EDC, says "one reason we feel it's so important to target this industry is that it yields unbelievable results for the community in terms of fantastic wages and international connections."

"Thanks to technology, more and more financial services companies are enjoying the freedom to base operations where it best suits their needs," Marcell added. "And Seattle/King County is increasingly becoming a hub of major financial players who want their headquarters far from the negativity conjured up by Wall Street."

"I don't know how to define 'the biggest reward,' but I certainly agree that the logistics of a move by one of those firms are relatively simple and the ability to be up and running, literally over a weekend, takes much uncertainly and 'down time' out of the decision to relocate," he replied.

And Jarvis is significantly involved in shaping the strategy for financial-services firms, including working with Ege's group to modernize Washington's trust laws, an effort which he explains is "to make them more relevant, modern and attractive to business."

"Currently, our trust laws are in the same chapter as our banking laws and have not been significantly amended in many years, Jarvis added. "We plan to work during the

interim with interested parties to separate out the trust law elements while at the same time ensuring that the elements needed for effective consumer protection remain and are modernized to address current and even future improper practices."

"Scott Jarvis been amazing," Marcell replied when I asked about the involvement of the state agency involved with overseeing financial institutions. "It's striking to see a regulator work so collaboratively about growing the industry cluster. He's an ace up our sleeves when we are competing for business."

"DFI has worked hard to foster a regulatory environment that is attractive and responsive to, and supportive of, financial entities while aggressively protecting consumers from improper or illegal behaviors," Jarvis replied when I asked about his department's involvement. "Those two activities are not mutually exclusive. Reduced to its essentials, we assist the good guys who want to play by the rules and go after the bad guys."

As Governor-elect Jay Inslee puts his administration's leadership team in place over the coming weeks, the state's community bankers hope to persuade him to retain the man who oversaw the state's regulation of financial institutions during their unprecedented turmoil.

If Inslee asks outgoing Gov. Chris Gregoire about Scott Jarvis, whom she appointed director of the State Department of Financial Institutions (DFI) at the outset of her tenure in March of 1985, she'd undoubtedly give an unqualified endorsement.

Scott Jarvis

Brad Tower, president and executive director of the Community Bankers of Washington (CBW) will be suggesting to his members that they urge Jarvis' reappointment. The state-chartered community banks around the state may represent the most economically important sector of industries that fall under Jarvis' oversight.

Part of what Inslee must weigh is the fact that Jarvis, during an almost unprecedentedly challenging time for banks, credit unions and other financial companies, created a firm but caring state regulatory environment. What he created was important not just to the industry he oversaw but also to the economy of the state.

The state's banks and savings and loans were awash in profits when Gregoire plucked James (Scott) Jarvis from the office of the state insurance commissioner, where he was Deputy Commissioner for Consumer Protection, to head the agency that oversees all financial-transaction businesses.

It wasn't long into his tenure that Jarvis, an attorney, came to realize that what he recalls as "extremely high concentrations of lending in land acquisition and real estate development was going to be a problem for community banks if the economy took a turn for the worse."

But he was frustrated by the fact that, as he puts it, "there were no tools in the regulator's tool box to impose enforceable concentration limits nor to compel a profitable and healthy institution to reduce its exposure to a line of lending."

Thus as Jarvis came to know personally many of the bankers who ran institutions he regulated, "I knew who among them was struggling and whose banks, absent infusions of hard-to-come-by capital or an acquisition, would not survive."

"To watch these decent individuals keep a stiff upper lip and act as if all was well when they were among their peers and competitors was difficult," he said, in a comment bespeaking a regulator with a human side. "And it became all the more difficult as time for failure drew near." In the end, 17 state-chartered banks failed.

"I believe that over the last seven years, the environment he has created and people he has surrounded himself with has been one of the greatest assets for community banking in our state, and actually nationally," said CBW executive Tower in a telephone interview.

"While he has been a tough regulator, he's been fair and supportive and has been willing to push back on federal regulators when they were failing to be sensitive to local conditions," noted Tower, whose CBW is viewed as the pre-eminent voice of the state's 60 independent community banks. "Scott has been directly involved in slowing the knee-jerk reaction of the feds to close first and ask questions later."

That ability to work with federal regulators stems in part, likely, from Jarvis' role as legislative committee chair for the national organization of state regulators, where one of his duties is to coordinate the legislative positions of the organization at the federal level.

Pat Fahey, one of the state's most respected bank CEOs, recalls that as he sought to turn around failing Frontier Bank, "Scott was very supportive, even meeting with the governor to see how she might get involved, in seeking to convince the feds to accept a deal we had put together to save the bank."

In the end, fed ineptitude caused investors who sought to put together a deal with Fahey that would have saved Frontier Bank and its parent Frontier Financial Corp. to back away and the bank was shuttered and its assets sold to California's Union Bank.

Fahey is now at the helm of First Sound Bank as chairman, president and CEO seeking to turn it around. 

Patrick Patrick, like Fahey, a turnaround banker now involved in bringing back Seattle Bank, where he is CEO, says Jarvis "was the man the state needed in a very difficult time for Washington. He represented the interests of the regulatory system as well as the communities whose banks he oversaw."

Patrick credits Jarvis with "making certain, where possible, that people who had given back to their communities had a chance to continue to do so with their banks."

It's interesting, as well as telling, that Jarvis views his role as DFI director to be fostering policies that not only provide a healthy and predictable regulatory environment, but also promote economic vitality. It's clear he understands that what his agency website describes as "a fair and dynamic lending environment that results from viable state-chartered banks and credit unions" is important to capital formation for small business.

Jarvis' agency, in addition to regulating state chartered banks and credit unions, also regulates a variety of non-bank financial services providers, including mortgage lenders and payday lenders, as well as our state's securities industry.

Tellingly, CBW's Tower notes that "The FDIC has ramped up hiring and paid outrageous amounts to get good people. Scott can't pay market rates for his people so the only way he can keep good people is to create a good working, even a mentorship, environment."

Looking down the road for the industry he's come to understand as well as anyone, Jarvis thinks that as the economy improves "we can expect to see entrepreneurs looking to the state bank charter as the vehicle to create and grow new local community banks."

But he adds that for now, "and perhaps a bit beyond, consolidation remains the more likely path as the economic environment strives to sort itself out and attractive returns on investment remain challenging."

"Though not in the numbers seen in the past, well capitalized proposals, with strong management and sound business plans, will have a place in the Washington community banking environment in the years ahead and should receive federal approval," Jarvis said.

In addition, Jarvis notes, "a number of Washington institutions have recently switched from a federal to a state charter and several more are giving serious consideration to doing so."

"I would like to think that our efforts to be perceived as a fair, competent and knowledgeable regulator and our performance during these almost unprecedented times has something to do with that," he added.