Final Rule to Revise FDIC Regulations Concerning Section 19 of the Federal Deposit Insurance Act

Summary:

The Federal Deposit Insurance Corporation (FDIC) Board of Directors approved a final rule that revises 12 C.F.R. part 303, subpart L, and part 308, subpart M, thereby updating the FDIC’s regulations concerning section 19 of the Federal Deposit Insurance Act (12 U.S.C. § 1829) (Section 19) to conform with the Fair Hiring in Banking Act (Act).  On December 23, 2022, the James M. Inhofe National Defense Authorization Act for Fiscal Year 2023, which contained the Act, was signed into law and became immediately effective.  The Act made significant changes to Section 19, particularly by excluding several categories of offenses from the scope of Section 19.  The FDIC published a Notice of Proposed Rulemaking in the Federal Register on November 14, 2023, for which the public comment period closed on January 16, 2024.  In the final rule, the FDIC made certain clarifying changes based on public comments received.

Section 19 prohibits a person from participating in the affairs of an FDIC-insured institution if he or she has been convicted of an offense involving dishonesty, breach of trust, or money laundering, or has entered into a pretrial diversion or similar program in connection with a prosecution for such an offense, without the prior written consent of the FDIC, among other provisions.

Statement of Applicability: The contents of, and material referenced in, this FIL apply to all FDIC-supervised financial institutions.

Highlights:

Notable Changes to Section 19:

• Certain older offenses. The Act excludes certain offenses from the scope of Section 19 based on the amount of time that has passed since the offense occurred or since the individual was released from incarceration.
• De minimis offenses.  The Act excludes “de minimis” offenses from the scope of Section 19, and this category includes relatively minor offenses that are specified either by the Act or by the FDIC through regulations.  In the Act, a subcategory of de minimis offenses is called “designated lesser offenses,” which offenses include the use of fake identification, shoplifting, trespass, fare evasion, driving with an expired license or tag (and such other low-risk offenses as the FDIC may designate), if one year or more has passed since the applicable conviction or program entry.
• Criminal offenses involving dishonesty.  The Act excludes certain offenses from the definition of “criminal offenses involving dishonesty,” including “an offense involving the possession of controlled substances.”  Historically, the FDIC has required an application as to drug-related offenses—aside from simple-possession offenses.  In light of the Act, however, the FDIC believes that Congress intended to exclude, at least, the offenses of simple possession and possession with intent to distribute from the “involving dishonesty” category because of the statute’s use of the phrase “involving the possession of controlled substances.”  Additionally, the final rule shifts the FDIC’s position from its previous presumption that other drug-related offenses are subject to Section 19 as crimes involving dishonesty, breach of trust, or money laundering.  This revised approach treats drug offenses the same as all other types of crimes, which do not automatically trigger the need for an application, but which may require an application depending on the elements of the underlying criminal offense.
• Expunged, sealed, and dismissed criminal records.  The Act excludes certain convictions from the scope of Section 19 that have been expunged, sealed, or dismissed.  The existing FDIC regulations already exclude most of those offenses.  The final rule modestly broadens the statutory language concerning such offenses to harmonize the FDIC’s current regulations concerning expunged and sealed records with the statutory language.
• Standards for FDIC review of Section 19 applications.  The Act prescribes standards for the FDIC’s review of applications submitted under Section 19.  The FDIC will process new and pending applications under the provisions of the amended law.  Prospective applicants may contact the appropriate regional office as instructed on the FDIC’s website for Section 19 Applications.

The final rule also provides interpretive language that addresses, among other topics, when an offense “occurred” or was “committed” under the Act and whether otherwise-covered offenses that occurred in foreign jurisdictions are covered by Section 19.

FDIC Actions Related to the Changes.  In 2023, the FDIC began:

• Reviewing its Section 19 regulations to determine whether and how they should be revised in light of the Act.
• Analyzing the number of Section 19 applications that have been filed after the passage of the Act, and reviewing the rates of approval and denial for those applications.
• Reviewing Section 19 Orders and Section 19 Letters previously published on the FDIC's Enforcement Decisions and Orders webpage to determine whether, in light of the Act, particular Orders should be terminated (as to Orders) and removed from the webpage (as to both types of documents).
• Revising its Section 19 application form and industry guidance.