Clarification of Statement of Policy

AGENCY:

Federal Deposit Insurance Corporation (FDIC).

ACTION:

Clarification of Statement of Policy for Section 19 of the Federal Deposit Insurance Act.

SUMMARY:

The FDIC originally promulgated the Statement of Policy for Section 19 of the Federal Deposit Insurance Act (SOP) in December 1998. The FDIC, in 2007, issued a clarification to the SOP based on the 2006 amendment to Section 19 of the Federal Deposit Insurance Act which addressed institution-affiliated parties (IAPs) participating in the affairs of Bank Holding Companies, or Savings and Loan Holding Companies. The FDIC is restating that previous change to the SOP in a slightly modified form, and addressing certain other issues that have arisen in the FDIC's interpretation of the policy since its original publication. The FDIC is clarifying what the FDIC views as a complete expungement of a conviction, and the definition of de minimis offenses.

DATES:

The change to the policy statement is effective May 13, 2011.

FOR FURTHER INFORMATION CONTACT:

Martin P. Thompson, Review Examiner (202) 898-6767, in the Division of Risk Management Supervision; or Michael P. Condon, Counsel, (202) 898-6536, in the Legal Division.

SUPPLEMENTARY INFORMATION:

I. Background

Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829, (FDI Act) prohibits, without the prior written consent of the FDIC, a person convicted of any criminal offense involving dishonesty or breach of trust or money laundering (covered offenses), or who has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense, from becoming or continuing as an institution-affiliated party (IAP), owning or controlling, directly or indirectly an insured depository institution (insured institution), or otherwise participating, directly or indirectly, in the conduct of the affairs of the insured institution. In addition, the law forbids an insured institution from permitting such a person to engage in any conduct or to continue any relationship prohibited by Section 19. The FDIC's SOP was published in December 1998 (63 FR 66177) to provide the public with guidance relating to Section 19, and the application thereof.

The Financial Services Regulatory Relief Act of 2006, Public Law 109-351, § 710, modified Section 19 to include coverage of IAPs of Bank Holding Companies, and Savings and Loan Holding Companies. In response to this amendment of the statute, the FDIC amended the SOP by including a footnote which noted the authority of the Board of Governors of the Federal Reserve System (FRS) and the Office of Thrift Supervision (OTS) in regard to bank and savings and loan holding companies under Section 19. (72 FR 73823, December 28, 2007 with correction issued at 73 FR 5270, January 29, 2008). The FDIC is now eliminating the previous footnote, incorporating the change directly into the text of the SOP, and noting the coming transfer of authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-202, § 312 (2010) (Dodd-Frank) of savings and loan holding company jurisdiction to the Board of Governors of the Federal Reserve System. In addition, the FDIC is making certain clarifying changes regarding when an application for the FDIC's consent must be filed.

The SOP, as revised herein, will be on the FDIC's Web site at http://www.fdic.gov.

II. Clarifying Changes to the Statement of Policy

The SOP will be clarified in the following areas:

A. Scope of Section 19

Section 19 covers IAPs, as defined by 12 U.S.C. 1813(u), and others who are participants in the conduct of the affairs of an insured institution. However, because of changes to Section 19, the FDIC has identified the possibility that any persons covered by Section 19, because they are participating in the affairs of an insured depository institution, may also be participating in the affairs of a bank or savings and loan holding company and, therefore, fall within the scope of the changes to Section 19 related to the supervision of individuals participating in bank and savings and loan holding companies. This potential requirement was noted in the previous amendment to the SOP. This change eliminates the previous footnote and places the discussion in the text of the SOP. Although jurisdiction under Section 19 for the purpose of granting consent for an individual to participate in the affairs of a bank or savings and loan holding company is currently vested in the FRS or OTS, respectively, the policy statement is clarified to note the authority to grant consent to participate in the affairs of a savings and loan holding company will change effective on the Transfer Date as that term is used in § 311 of Dodd-Frank.

B. Standards for Determining Whether an Application Is Required

(1) Convictions

This subsection has been changed to address the interpretation of what is a complete expungement, as that term is used in the SOP. Historically, it has been the FDIC's position that unless the expungement is complete, a section 19 application would be required. The FDIC is amending the SOP to explain that an expungement is complete, and thus an application will not be required, only if the records of conviction are not accessible by any party, including law enforcement, even by court order. In all other circumstances an application will be required.

B. (5) De minimis Offenses

The 1998 SOP created a category of covered offenses that it would deem to be de minimis due to the minor nature of the offenses and the low risk that the covered party would pose to an insured institution based on the conviction. Based on its experience in the processing and approving of numerous applications involving such minor crimes, the FDIC has recognized a category of offenses to which it would grant blanket approval under section 19 without the need to file an application. The FDIC is clarifying in two ways which offenses fall within the de minimis offenses exception of the SOP.

First is a change in the language in the SOP that addresses the maximum sentence, in terms of jail time and/or fine, which a party might face, based on the covered crime of which they are convicted, but where the offense would still be considered de minimis. The current language can be read not to allow the de minimis offense exception to apply if the potential sentence for the covered crime is one year and/or $1,000. The FDIC is clarifying this aspect of the SOP so that the de minimis offenses provision will apply if the potential sentence could be one year or less and/or $1,000 or less. The change will remove any uncertainty in the existing language, and will add greater clarity to the public and insured institutions in evaluating whether an application is necessary.

A second clarification addresses when an offense involves an insured depository institution or insured credit union. The current language can be read not to allow the de minimis exception to apply when the covered party was convicted of writing a check that was returned for insufficient funds (i.e. a bad check), since the process of writing a check which is dishonored for insufficient funds usually involves depositing the check into the banking system at some point. However, the FDIC has determined that a conviction for issuing a bad check that does not cause loss to an insured depository institution or insured credit union, may, in limited circumstances, be subject to the de minimis offense exception. Therefore, subject to meeting the other provisions of the de minimis offenses exception, the FDIC is clarifying the language to allow, in certain limited circumstances, convictions for insufficient funds checks (bad checks) to fit with the de minimis rule. If there is one conviction for issuing an insufficient funds check (bad check) based on one or more checks which have an aggregate face value of $1,000 or less, and no insured financial institution or insured credit union was a payee on any of the checks, the conviction will qualify under the de minimis offense exception, and a section 19 application will not be required.

III. Paperwork Reduction Act

In accordance with section 3512 of the Paperwork Reduction Act of 1995 (“PRA”), 44 U.S.C. 3501 et seq., an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid Office of Management and Budget (“OMB”) control number. These Amendments to the Statement of Policy for Section 19 of the FDI Act include clarification of reporting requirements in an existing FDIC information collection, entitled Application Pursuant to Section 19 of the Federal Deposit Insurance Act (3064-0018) that should result in a decrease in the number of applications filed. Specifically, the revised policy statement clarifies that the following two offenses are deemed de minimis due to the minor nature of the offenses and the low risk that the covered party would pose to an insured institution based on the conviction: Offenses that were punishable by imprisonment for a term of one year or less and/or a fine of $1,000 or less, and for which the individual did not serve any time in jail; and, in certain limited circumstances, conviction of a crime based on the writing of a “bad” or insufficient funds check. By clarifying these provisions, the FDIC believes that there will be a reduction in the submission of applications in situations where blanket approval has been granted by virtue of the de minimis offenses section of the policy statement. This change in burden will be submitted to OMB as a non-significant, nonmaterial change to an existing information collection. The estimated new burden for the information collection is as follows:

Title: “Application Pursuant to Section 19 of the Federal Deposit Insurance Act.”

Affected Public: Insured depository institutions and individuals.

OMB Number: 3064-0018.

Estimated Number of Respondents: 26.

Frequency of Response: On occasion.

Average Time per Response: 16 hours.

Estimated Annual Burden: 416 hours.

Comments are invited on:

(a) Whether this collection of information is necessary for the proper performance of the FDIC's functions, including whether the information has practical utility;

(b) The accuracy of the estimates of the burden of the information collection, including the validity of the methodologies and assumptions used;

(c) Ways to enhance the quality, utility, and clarity of the information to be collected;

(d) Ways to minimize the burden of the information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and

All comments will become a matter of public record. Comments may be submitted to the FDIC by any of the following methods:

• http://www.FDIC.gov/regulations/laws/federal/propose.html.
• E-mail: comments@fdic.gov. Include the name and number of the collection in the subject line of the message.
• Mail: Leneta Gregorie (202-898-3719), Counsel, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
• Hand Delivery: Comments may be hand-delivered to the guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7 a.m. and 5 p.m.

A copy of the comment may also be submitted to the OMB Desk Officer for the FDIC, Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 3208, Washington, DC 20503. All comments should refer to the “Application Pursuant to Section 19 of the Federal Deposit Insurance Act,” OMB No. 3064-0018.

IV. Changes to FDIC Statement of Policy for Section 19

For the reasons set forth above, the FDIC hereby revises the FDIC Statement of Policy for Section 19 as follows:

1. Revise subsection A. Scope of Policy, first paragraph, and add a new paragraph after the first paragraph, to read:

Section 19 covers institution-affiliated parties, as defined by 12 U.S.C. 1813(u), and others who are participants in the conduct of the affairs of an insured institution. This Statement of Policy applies only to insured institutions, their institution-affiliated parties, and those participating in the affairs of an insured depository institution. Therefore, all employees of an insured institution fall within the scope of section 19. In addition, those deemed to be de facto employees as determined by the FDIC based upon generally applicable standards of employment law, will also be subject to section 19. Whether other persons who are not institution-affiliated parties are covered depends upon their degree of influence or control over the management or affairs of an insured institution. For example, section 19 would not apply to persons who are merely employees of an insured institution's holding company, but would apply to its directors and officers to the extent that they have the power to define and direct the policies of the insured institution. Similarly, directors and officers of affiliates, subsidiaries or joint ventures of an insured institution or its holding company will be covered if they are in a position to influence or control the management or affairs of the insured institution. Those who exercise major policymaking functions of an insured institution would be deemed participants in the affairs of that institution and covered by section 19. Typically, an independent contractor does not have a relationship with the insured institution other than the activity for which the insured institution has contracted. Under 12 U.S.C. 1813(u), independent contractors are institution-affiliated parties if they knowingly or recklessly participate in violations, unsafe or unsound practices or breaches of fiduciary duty which are likely to cause significant loss to, or a significant adverse effect on, an insured institution. In terms of participation, an independent contractor who influences or controls the management or affairs of the insured institution, would be covered by section 19. Further, “person” for purposes of section 19 means an individual, and does not include a corporation, firm or other business entity.

Individuals who file an application with the FDIC under the provisions of Section 19 who are participating in the affairs of a bank or savings and loan holding company may also have to comply with any filing requirements of the Board of the Governors of the Federal Reserve System under 12 U.S.C. 1819(d) in the case of a bank holding company, and the Office of Thrift Supervision under 12 U.S.C. 1819(e), in the case of a savings and loan holding company until the Transfer Date as that term is used in the Dodd-Frank Wall Street Reform Act (Pub. L. 111-203, § 311, July 21 2010). Upon the Transfer Date applications related to savings and loan holding companies should be filed with the Board of Governors of the Federal Reserve System.

2. Revise subsection B. Standards for Determining Whether an Application Is Required to read:

(1) Convictions. There must be present a conviction of record. Section 19 does not cover arrests, pending cases not brought to trial, acquittals, or any conviction which has been reversed on appeal. A conviction with regard to which an appeal is pending will require an application until or unless reversed. A conviction for which a pardon has been granted will require an application. A conviction which has been completely expunged is not considered a conviction of record and will not require an application. For an expungement to be considered complete, no one, including law enforcement, can be permitted access to the record even by court order under the state or federal law which was the basis of the expungement.

(5) De minimis Offenses. Approval is automatically granted and an application will not be required where the covered offense is considered de minimis, because it meets all of the following criteria:

• There is only one conviction or program entry of record for a covered offense;
• The offense was punishable by imprisonment for a term of one year or less and/or a fine of $1,000 or less, and the individual did not serve time in jail;
• The conviction or program was entered at least five years prior to the date an application would otherwise be required; and
• The offense did not involve an insured depository institution or insured credit union.

A conviction or program entry of record based on the writing of a “bad” or insufficient funds check(s) shall be considered a de minimis offense under this provision even if it involved an insured depository institution or insured credit union if the following applies:

• All other requirements of the de minimis offense provisions are met;
• The aggregate total face value of the bad or insufficient funds check(s) cited in the conviction was $1,000 or less; and
• No insured depository institution or insured credit union was a payee on any of the bad or insufficient funds checks that were the basis of the conviction.

Any person who meets the foregoing criteria shall be covered by a fidelity bond to the same extent as others in similar positions, and shall disclose the presence of the conviction or program entry to all insured institutions in the affairs of which he or she intends to participate.