[Federal Register: February 15, 1996 (Volume 61, Number 32)]
[Rules and Regulations]
[Page 5926-5934]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303 and 359
RIN 3064-AB11
Regulation of Golden Parachutes and Other Benefits Which May Be
Subject to Misuse
AGENCY: Federal Deposit Insurance Corporation (FDIC or Corporation).
ACTION: Final rule.
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SUMMARY: The FDIC is adopting a rule limiting golden parachute and
indemnification payments to institution-affiliated parties by insured
depository institutions and depository institution holding companies.
The
[[Page 5927]]
purpose of this rule is to prevent the improper disposition of
institution assets and to protect the financial soundness of insured
depository institutions, depository institution holding companies, and
the federal deposit insurance funds.
EFFECTIVE DATE: April 1, 1996.
FOR FURTHER INFORMATION CONTACT: Robert F. Miailovich, Associate
Director, Division of Supervision, (202) 898-6918, 550 17th Street,
N.W., Washington, D.C.; Michael D. Jenkins, Examination Specialist,
Division of Supervision, (202) 898-6896, 1776 F Street, N.W.,
Washington, D.C. 20429; Jeffrey M. Kopchik, Counsel, Legal Division,
(202) 898-3872; Federal Deposit Insurance Corporation, 550 17th Street,
N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
No collection of information pursuant to section 3504(h) of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in this
rule. Consequently, no information was submitted to the Office of
Management and Budget for review.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that this rule will
not have a significant impact on a substantial number of small
entities.
Background
On March 29, 1995, the FDIC published for public comment a notice
of proposed rulemaking entitled ``Regulation of Golden Parachutes and
Other Benefits Which May Be Subject to Misuse''. 60 FR 16069 (1995).
This proposal (the Second Proposal) followed an earlier notice of
proposed rulemaking concerning the same topic (the First Proposal),
which was published in the Federal Register on October 7, 1991. 56 FR
50529 (1991). Both the First and Second Proposals were efforts to
implement section 18(k) of the Federal Deposit Insurance Act (12 U.S.C.
1828(k)) (FDI Act). Section 18(k) provides that the FDIC may prohibit
or limit, by regulation or order, any golden parachute or
indemnification payment.
The FDIC received 23 comment letters in response to the Second
Proposal. The comment letters were submitted by major financial
institution trade associations, insured depository institutions,
insured depository institution holding companies, a law firm and a
trade association representing life insurance underwriters. Virtually
all of the commenters expressed the view that the Second Proposal
represented a significant improvement over the First Proposal in terms
of the burden that the proposed regulation would place on the industry.
In fact, the majority of commenters expressed support for the Second
Proposal, while submitting well thought-out suggestions. These
suggestions encompassed technical revisions to the regulation as well
as broader proposals aimed at making it easier for insured depository
institutions and holding companies to make golden parachute and
indemnification payments in certain limited circumstances.
Issues Raised by the Commenters--Golden Parachute Payments
The FDIC has carefully reviewed and analyzed the comment letters it
received in response to the Second Proposal. With respect to the golden
parachute portion of the Second Proposal, the most significant issues
raised by the comment letters and the FDIC's responses are discussed
below.
1. Bona Fide Deferred Compensation Plans
The Second Proposal includes a definition of ``bona fide deferred
compensation plan or arrangement'' that was created specifically for
this regulation. This definition, which appears in Sec. 359.1(d) of the
Second Proposal, includes a provision that allows plans to provide for
the crediting of a reasonable investment return on elective deferrals
of compensation, wages or fees. Several commenters suggested that the
definition of ``bona fide deferred compensation plan or arrangement''
should be expanded to further define the term ``reasonable investment
return''. One comment letter included suggested language to be
incorporated into the regulation. The FDIC is of the opinion that
including an additional definition of ``reasonable investment return''
would not provide any advantage to the industry and would only serve to
make the regulation more complicated. This provision is provided in the
definition to permit financial institutions to follow normal business
practices. It is not intended to have the regulators make close
distinctions of what is a reasonable investment return. It is intended
merely to prevent the inclusion of exorbitant returns that would result
in a circumvention of the primary purpose of this regulation. The
suggested definitions provided by the commenters are considered to
clearly fit the requirements of this term; however, the FDIC also
recognizes that there are several other definitions of ``reasonable
investment return'' that also fit these requirements.
Several commenters asked whether a finding by the FDIC that a bona
fide deferred compensation plan provided for an unreasonable investment
return on elective deferrals would invalidate the entire plan. The FDIC
is of the view that such a finding would not invalidate such a plan
which otherwise conforms to Sec. 359.1(d). However, that portion of the
investment return which is found to be unreasonable would be a
prohibited golden parachute payment.
2. Nondiscriminatory Severance Pay Plans
Section 359.1(f)(2) of the Second Proposal contains certain
exceptions to the definition of ``golden parachute payment''. One of
those exceptions is for nondiscriminatory severance pay plans. Second
Proposal Sec. 359.1(f)(2)(v). Several commenters suggested that the
FDIC delete the requirement that the exception apply only in cases of a
reduction in force (RIF). This section of the Second Proposal also
would require 30 days prior written notice to the appropriate federal
banking agency and the FDIC prior to making such a severance payment to
a senior executive officer. Several commenters also urged the deletion
of the prior notice requirement. After careful consideration, the FDIC
agrees with these suggestions. If a nondiscriminatory severance pay
plan conforms to the other requirements set forth in
Sec. 359.1(f)(2)(v), it should not be necessary that an employee's
involuntary termination be part of a RIF in order for that employee to
collect severance pay. This section's other requirements are more than
adequate protection that the exception will not be used to circumvent
the regulation's primary purpose, i.e., the prohibition of golden
parachute payments. Also, the advantages of the prior notice provision
for severance payments to senior executive officers do not outweigh the
burden such a requirement would place on the industry, so this
requirement has been deleted.
3. Definition of Nondiscriminatory
Section 359.1(j) of the Second Proposal contains the definition of
``nondiscriminatory'' as it relates to severance pay plans or
arrangements. These are the only type of severance pay plans or
arrangements that may qualify as an exception to the regulation's
prohibition. In order to be considered nondiscriminatory, a severance
pay plan must apply to all employees of an
[[Page 5928]]
insured depository institution or depository institution holding
company who meet reasonable and customary eligibility requirements
applicable to all employees, such as minimum length of service
requirements. The Second Proposal provides that a nondiscriminatory
severance pay plan may provide different benefits to IAPs based only
upon length of service and/or position. In the event that an employee's
position is used as a basis for providing a different level of
benefits, employees who are not senior executive officers shall be
treated more favorably than senior executive officers.
The reason for this approach was the FDIC's concern that severance
pay plans could be designed in such a way that they would circumvent
the basic purpose of the regulation. In other words, as an example, to
permit severance payments of one year's salary to the top five senior
executive officers of an insured depository institution in contrast to
one week's salary to all tellers on the basis that such payments are
made pursuant to a bona fide severance pay plan, a recognized exception
to the golden parachute prohibition, would undermine the purpose of FDI
Act section 18(k). However, several commenters noted that many existing
severance plans do pay somewhat more generous benefits to higher
ranking IAPs. These commenters suggested that a modest disparity in
severance benefits linked to objective criteria like job title or
length of service should be permitted by the regulation since such
plans are common in the financial services industry and do not violate
the basic premise of FDI Act section 18(k). The FDIC has been persuaded
that this position represents a good compromise between preventing the
payment of prohibited golden parachutes and permitting insured
depository institutions and holding companies to offer severance
benefits that conform to well-established industry norms.
Based upon suggestions made in the comment letters, the definition
of ``nondiscriminatory'' contained in Sec. 359.1(j) of the Second
Proposal has been amended to provide that a nondiscriminatory severance
plan may provide for different levels of benefits based only on
objective criteria such as salary, total compensation, length of
service, job grade or classification. In addition, any group of
employees which is designated for a different level of benefits based
upon such acceptable objective criteria must consist of the lesser of
not less than 33 percent of all employees or 1,000 employees.
Furthermore, the differential in benefits between the groups shall not
be more than plus or minus 10 percent.
4. White Knight Exception
Both the First and Second Proposals contained a provision which
would permit a troubled depository institution or holding company to
hire an individual and agree to pay him/her a golden parachute payment
upon termination of employment, provided that the amount and terms of
the payment receive the prior written consent of the appropriate
federal banking agency and the FDIC. Second Proposal Sec. 359.4(a)(2).
All commenters that discussed the issue were supportive of the FDIC's
``white knight'' exception to the golden parachute prohibition. They
were particularly supportive of the revisions to the exception that
were made in response to comment letters concerning the First Proposal.
However, a number of commenters reiterated the suggestion that the FDIC
broaden the exception to include current officers and employees who are
promoted to executive positions at a time when the institution is
troubled.1 The FDIC has carefully considered this suggestion once
again and remains unconvinced that the regulation should be amended in
this way. White knight severance payments will be approved in limited
circumstances as a way to entice competent management to sever
established ties with their current employer and take a calculated risk
that they can assist in bringing a troubled institution back to
financial health. This rationale does not apply to the case of a
current employee of a troubled institution since he/she does not need
to be enticed to give up an established, stable career with another
employer.
\1\ In the course of this preamble, the term ``troubled'' shall
be used to refer to any of the criteria listed in Sec. 359.1(f)(ii)
of this final regulation.
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5. Change In Control Exception
Section 359.4(a)(3) of the Second Proposal contains the change in
control exception to the golden parachute prohibition. This exception
permits an insured depository institution or holding company to make a
reasonable severance payment, not to exceed twelve months salary, to an
IAP in the event of a change in control with the prior consent of the
appropriate federal banking agency. Once again, every commenter who
discussed this exception expressed their support. However, a
substantial number of those recommended that the FDIC delete the one
year's salary cap.
This exception was added to the Second Proposal in response to
comment letters received concerning the First Proposal. While the FDIC
considers this to be an important exception, we believe that certain
limits need to be placed on such payments. One year's salary appears to
be a reasonable compromise between a prohibition on any payment and
more generous payments. The FDIC is of the opinion that one year's
salary will provide ample incentive for an IAP (usually a senior
executive officer) to objectively consider a takeover bid which may
result in the loss of that IAP's job. It must be remembered that this
exception is relevant only in the event of the takeover of a troubled
depository institution or holding company.
6. Condition of the Institution at Time of Termination
The FDIC specified in the preamble to the Second Proposal that a
golden parachute payment which is prohibited from being paid at the
time of an IAP's termination due to the troubled condition of the
insured depository institution or holding company cannot be paid to
that IAP at some later point in time once the institution or holding
company is no longer troubled. See Second Proposal
Sec. 359.1(f)(1)(iii). Several commenters requested that the FDIC
reconsider its position on this point.
The FDIC believes the position taken in the Second Proposal is
consistent with the language and spirit of the statute. The language of
section 18(k)(4)(A)(ii) of the FDI Act provides that any payment which
is contingent on the termination of an IAP's employment and is received
on or after an institution or holding company becomes troubled is a
prohibited golden parachute. If this payment is prohibited under the
prescribed circumstances, it is prohibited forever. However, the
regulation contains several exceptions and procedures for affected
individuals to avoid an undeserved prohibition on a potential golden
parachute payment. Thus, the final regulation is consistent with the
Second Proposal in this regard.
Issues Raised by the Commenters-- Indemnification Payments
The vast majority of commenters were very supportive of the changes
which the FDIC made to the indemnification payments portion of the
First Proposal in response to the first set of comment letters. While
most commenters indicated they thought the Second Proposal set forth a
rational and fair scheme for determining indemnification, many
commenters urged the FDIC to further amend the
[[Page 5929]]
regulation to make it somewhat easier for IAPs to be indemnified. The
FDIC has decided to adopt some, but not all, of the suggestions it
received as discussed below.
1. Partial Indemnification
The most prevalent comment with regard to the indemnification
portion of the Second Proposal noted that the proposed regulation would
not permit partial indemnification in instances where it has been
determined that an IAP has not violated certain banking laws or
regulations or has not engaged in certain unsafe or unsound banking
practices or breaches of fiduciary duty for which the individual has
been charged. The FDIC has carefully considered this point and agrees
with the commenters that indemnification should not be an ``all or
nothing'' proposition. Therefore, the final regulation has been revised
to permit partial indemnification for legal or professional expenses
specifically attributable to particular charges for which there has
been a formal and final adjudication or finding in connection with a
settlement that the IAP has not violated certain banking laws or
regulations or engaged in certain unsafe or unsound banking practices
or breaches of fiduciary duty. Thus, in any administrative proceeding
or civil action instituted by any federal banking agency which results
in a final order or settlement pursuant to which the IAP is assessed a
civil money penalty or is subject to a cease and desist order,
indemnification will be permitted only for that portion of the
liability or legal expenses incurred which relate to the particular
charges for which an adjudication or finding in connection with a
settlement in favor of the IAP has been made. Partial indemnification
will not be permitted in cases where an IAP is removed from office and/
or prohibited from participating in the affairs of an institution.
Under no circumstances shall an IAP be indemnified for the amount of a
civil money penalty or judgement assessed against him/her. See Final
Regulation Secs. 359.1(l) and 359.5(a). The FDIC recognizes that in
many cases the appropriate amount of any partial indemnification will
be difficult to ascertain with certainty.
2. Prior Notification of Indemnification Payments
Several commenters suggested that the FDIC delete the
Sec. 359.5(a)(5) requirement that the institution or holding company
give the FDIC and the primary federal regulator prior written
notification of the granting of any indemnification. The commenters
pointed out that, in view of the limitations which the Second Proposal
would place on the granting of indemnification payments and the various
safeguards incorporated into the proposed regulation, prior
notification would be unnecessary and burdensome. The FDIC agrees and
this requirement has been deleted.
3. Prevention of Double Payments
Several commenters pointed out that Sec. 359.5(a)(4) of the Second
Proposal is worded in such a way that it could result in double
payments to the institution in the event that a liability or legal
expense incurred by the institution is reimbursed by insurance or a
fidelity bond. The commenters are correct that the FDIC did not intend
this result and the final regulation has been amended to make it clear
that an IAP will not be obligated to reimburse the depository
institution or holding company for indemnification payments made for
his/her benefit to the extent that the institution or holding company
is reimbursed by an insurance policy or fidelity bond.
4. Definition of Independent Counsel
A few comment letters noted that the Second Proposal does not
contain a definition of the term ``independent legal counsel'',
utilized in Secs. 359.5 (c) and (d). The FDIC considered including such
a definition when the Second Proposal was being written, but decided
against it in an effort to shorten and simplify the regulation. The
Corporation was of the opinion that the term ``independent legal
counsel'' was not overly technical and could be determined on a case-
by-case basis. Also, the preamble to the Second Proposal provided that:
The FDIC would regard legal counsel as being ``independent''
(for purposes of this regulation) if the attorney(s) is not a member
of the depository institution's or holding company's in-house legal
staff, does not have an ongoing relationship with the depository
institution or holding company and no other conflict of interest is
present.
60 FR 16076 (1995). Thus, the FDIC has elected not to define this term
in the final regulation.
5. Standard for Indemnification
In response to comments received with regard to the First Proposal,
the FDIC made significant modifications to the indemnification portion
of the proposed regulation in an effort to make it easier for an
institution's or holding company's board of directors to approve IAPs
to be indemnified for expenses incurred in administrative or civil
actions commenced by a federal banking agency. Those modifications were
discussed in great detail in the preamble to the Second Proposal. See
60 FR 16075-16076 (1995).
While all the commenters who raised the issue were supportive of
these revisions, some commenters urged the FDIC to further revise the
Second Proposal to make it even easier for IAPs to be indemnified.
Several of these commenters referred to the Model Business Corporation
Act (MBCA) and recommended that the FDIC adopt the indemnification
standard set forth in section 8.51 thereof.
The Office of the Comptroller of the Currency (OCC) published a
Notice of Proposed Rulemaking on March 3, 1995 concerning proposed
modifications to 12 CFR part 7. See 60 FR 11924 (1995). This OCC
proposal contained suggested revisions to OCC interpretive rulings
concerning, among other topics, the indemnification of directors,
officers and employees of national banks. Several of those who
commented on the Second Proposal urged the FDIC and the OCC to adopt
consistent regulations. In an effort to achieve inter-agency
conformity, the FDIC and OCC have consulted with each other and have
agreed to adopt consistent regulations.
While the Corporation understands the commenters' desires to make
indemnification as easy as would be reasonable and to utilize the
standard set forth in the MBCA, the FDIC Board has concluded that it is
not required to follow the MBCA and that a slightly more stringent
standard for insured depository institutions and their holding
companies makes sense in view of the fact that this indemnification
prohibition only applies to actions brought by the federal banking
agencies. Such actions are only brought after substantial investigation
and as part of a strict regulatory scheme. Such actions are intended to
protect and maintain the solvency and integrity of the federal deposit
insurance funds. Moreover, the FDIC Board is of the opinion that the
indemnification standard set forth in the Second Proposal, with the
revisions described above, appropriately balances the need to indemnify
IAPs for actions taken in their official capacities with the necessity
of making sure that they are held accountable for substantive
violations of law or regulation. The standard also serves the purpose
of protecting the financial viability of the insured depository
institution or holding company which may make the indemnification
payment. Thus, no further modifications to the standards are considered
warranted.
[[Page 5930]]
6. Commencement of an Administrative Action
Several commenters suggested that the FDIC clarify when an
administrative action is commenced by a federal banking agency. This
time frame is important in view of the FDIC's position that expenses
incurred prior to the commencement of a formal action are not subject
to the regulation. See 60 FR 16077. The FDIC considers a formal
administrative action to be commenced by the issuance of a ``Notice of
Charges''. See e.g., 12 CFR 308.18.
List of Subjects
12 CFR Part 303
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, banking,
Reporting and recordkeeping requirements, Savings associations.
12 CFR Part 359
Banks, banking, Golden parachute payments, Indemnity payments.
For the reasons set out in the preamble, the FDIC Board of
Directors hereby amends part 303 and adds part 359 of title 12, chapter
III, of the Code of Federal Regulations as follows:
PART 303--APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF
AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR
REGULATION
1. The authority citation for part 303 continues to read as
follows:
Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817(j), 1818,
1819(``Seventh'' and ``Tenth''), 1828, 1831e, 1831o, 1831p-1; 15
U.S.C. 1607.
2. In Sec. 303.7, a new paragraph (g) is added to read as follows:
Sec. 303.7 Delegation of authority to the Director (DOS) and to the
associate directors, regional directors and deputy regional directors
to act on certain applications, requests, and notices of acquisition of
control.
* * * * *
(g) Requests pursuant to section 18(k) of the Act. Authority is
delegated to the Director, and where confirmed in writing by the
Director, to an associate director, or to the appropriate regional
director or deputy regional director, to approve or deny requests
pursuant to section 18(k) of the Act to make:
(1) Excess nondiscriminatory severance plan payments as provided by
12 CFR 359.1(f)(2)(v); and
(2) Golden parachute payments permitted by 12 CFR 359.4.
3. New part 359 is added to read as follows:
PART 359--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS
Sec.
359.0 Scope.
359.1 Definitions.
359.2 Golden parachute payments prohibited.
359.3 Prohibited indemnification payments.
359.4 Permissible golden parachute payments.
359.5 Permissible indemnification payments.
359.6 Filing instructions.
359.7 Applicability in the event of receivership.
Authority: 12 U.S.C. 1828(k).
Sec. 359.0 Scope.
(a) This part limits and/or prohibits, in certain circumstances,
the ability of insured depository institutions, their subsidiaries and
affiliated depository institution holding companies to enter into
contracts to pay and to make golden parachute and indemnification
payments to institution-affiliated parties (IAPs).
(b) The limitations on golden parachute payments apply to troubled
insured depository institutions which seek to enter into contracts to
pay or to make golden parachute payments to their IAPs. The limitations
also apply to depository institution holding companies which are
troubled and seek to enter into contracts to pay or to make golden
parachute payments to their IAPs as well as healthy holding companies
which seek to enter into contracts to pay or to make golden parachute
payments to IAPs of a troubled insured depository institution
subsidiary. A ``golden parachute payment'' is generally considered to
be any payment to an IAP which is contingent on the termination of that
person's employment and is received when the insured depository
institution making the payment is troubled or, if the payment is being
made by an affiliated holding company, either the holding company
itself or the insured depository institution employing the IAP, is
troubled. The definition of golden parachute payment does not include
payments pursuant to qualified retirement plans, nonqualified bona fide
deferred compensation plans, nondiscriminatory severance pay plans,
other types of common benefit plans, state statutes and death benefits.
Certain limited exceptions to the golden parachute payment prohibition
are provided for in cases involving the hiring of a white knight and
unassisted changes in control. A procedure is also set forth whereby an
institution or IAP can request permission to make what would otherwise
be a prohibited golden parachute payment.
(c) The limitations on indemnification payments apply to all
insured depository institutions, their subsidiaries and affiliated
depository institution holding companies regardless of their financial
health. Generally, this part prohibits insured depository institutions,
their subsidiaries and affiliated holding companies from indemnifying
an IAP for that portion of the costs sustained with regard to an
administrative or civil enforcement action commenced by any federal
banking agency which results in a final order or settlement pursuant to
which the IAP is assessed a civil money penalty, removed from office,
prohibited from participating in the affairs of an insured depository
institution or required to cease and desist from or take an affirmative
action described in section 8(b) (12 U.S.C. 1818(b)) of the Federal
Deposit Insurance Act (FDI Act). However, there are exceptions to this
general prohibition. First, an institution or holding company may
purchase commercial insurance to cover such expenses, except judgments
and penalties. Second, the institution or holding company may advance
legal and other professional expenses to an IAP directly (except for
judgments and penalties) if its board of directors makes certain
specific findings and the IAP agrees in writing to reimburse the
institution if it is ultimately determined that the IAP violated a law,
regulation or other fiduciary duty.
Sec. 359.1 Definitions.
(a) Act means the Federal Deposit Insurance Act, as amended (12
U.S.C. 1811, et seq.).
(b) Appropriate federal banking agency, bank holding company,
depository institution holding company and savings and loan holding
company have the meanings given to such terms in section 3 of the Act.
(c) Benefit plan means any plan, contract, agreement or other
arrangement which is an ``employee welfare benefit plan'' as that term
is defined in section 3(1) of the Employee Retirement Income Security
Act of 1974, as amended (29 U.S.C. 1002(1)), or other usual and
customary plans such as dependent care, tuition reimbursement, group
legal services or cafeteria plans; provided however, that such term
shall not include any plan intended to be subject to paragraphs (f)(2)
(iii) and (v) of this section.
(d) Bona fide deferred compensation plan or arrangement means any
plan, contract, agreement or other arrangement whereby:
[[Page 5931]]
(1) An IAP voluntarily elects to defer all or a portion of the
reasonable compensation, wages or fees paid for services rendered which
otherwise would have been paid to such party at the time the services
were rendered (including a plan that provides for the crediting of a
reasonable investment return on such elective deferrals) and the
insured depository institution or depository institution holding
company either:
(i) Recognizes compensation expense and accrues a liability for the
benefit payments according to generally accepted accounting principles
(GAAP); or
(ii) Segregates or otherwise sets aside assets in a trust which may
only be used to pay plan and other benefits, except that the assets of
such trust may be available to satisfy claims of the institution's or
holding company's creditors in the case of insolvency; or
(2) An insured depository institution or depository institution
holding company establishes a nonqualified deferred compensation or
supplemental retirement plan, other than an elective deferral plan
described in paragraph (e)(1) of this section:
(i) Primarily for the purpose of providing benefits for certain
IAPs in excess of the limitations on contributions and benefits imposed
by sections 415, 401(a)(17), 402(g) or any other applicable provision
of the Internal Revenue Code of 1986 (26 U.S.C. 415, 401(a)(17),
402(g)); or
(ii) Primarily for the purpose of providing supplemental retirement
benefits or other deferred compensation for a select group of
directors, management or highly compensated employees (excluding
severance payments described in paragraph (f)(2)(v) of this section and
permissible golden parachute payments described in Sec. 359.4); and
(3) In the case of any nonqualified deferred compensation or
supplemental retirement plans as described in paragraphs (d) (1) and
(2) of this section, the following requirements shall apply:
(i) The plan was in effect at least one year prior to any of the
events described in paragraph (f)(1)(ii) of this section;
(ii) Any payment made pursuant to such plan is made in accordance
with the terms of the plan as in effect no later than one year prior to
any of the events described in paragraph (f)(1)(ii) of this section and
in accordance with any amendments to such plan during such one year
period that do not increase the benefits payable thereunder;
(iii) The IAP has a vested right, as defined under the applicable
plan document, at the time of termination of employment to payments
under such plan;
(iv) Benefits under such plan are accrued each period only for
current or prior service rendered to the employer (except that an
allowance may be made for service with a predecessor employer);
(v) Any payment made pursuant to such plan is not based on any
discretionary acceleration of vesting or accrual of benefits which
occurs at any time later than one year prior to any of the events
described in paragraph (f)(1)(ii) of this section;
(vi) The insured depository institution or depository institution
holding company has previously recognized compensation expense and
accrued a liability for the benefit payments according to GAAP or
segregated or otherwise set aside assets in a trust which may only be
used to pay plan benefits, except that the assets of such trust may be
available to satisfy claims of the institution's or holding company's
creditors in the case of insolvency; and
(vii) Payments pursuant to such plans shall not be in excess of the
accrued liability computed in accordance with GAAP.
(e) Corporation means the Federal Deposit Insurance Corporation, in
its corporate capacity.
(f) Golden parachute payment. (1) The term golden parachute payment
means any payment (or any agreement to make any payment) in the nature
of compensation by any insured depository institution or an affiliated
depository institution holding company for the benefit of any current
or former IAP pursuant to an obligation of such institution or holding
company that:
(i) Is contingent on, or by its terms is payable on or after, the
termination of such party's primary employment or affiliation with the
institution or holding company; and
(ii) Is received on or after, or is made in contemplation of, any
of the following events:
(A) The insolvency (or similar event) of the insured depository
institution which is making the payment or bankruptcy or insolvency (or
similar event) of the depository institution holding company which is
making the payment; or
(B) The appointment of any conservator or receiver for such insured
depository institution; or
(C) A determination by the insured depository institution's or
depository institution holding company's appropriate federal banking
agency, respectively, that the insured depository institution or
depository institution holding company is in a troubled condition, as
defined in the applicable regulations of the appropriate federal
banking agency (Sec. 303.14(a)(4) of this chapter); or
(D) The insured depository institution is assigned a composite
rating of 4 or 5 by the appropriate federal banking agency or informed
in writing by the Corporation that it is rated a 4 or 5 under the
Uniform Financial Institutions Rating System of the Federal Financial
Institutions Examination Council, or the depository institution holding
company is assigned a composite rating of 4 or 5 or unsatisfactory by
its appropriate federal banking agency; or
(E) The insured depository institution is subject to a proceeding
to terminate or suspend deposit insurance for such institution; and
(iii)(A) Is payable to an IAP whose employment by or affiliation
with an insured depository institution is terminated at a time when the
insured depository institution by which the IAP is employed or with
which the IAP is affiliated satisfies any of the conditions enumerated
in paragraphs (f)(1)(ii) (A) through (E) of this section, or in
contemplation of any of these conditions; or
(B) Is payable to an IAP whose employment by or affiliation with an
insured depository institution holding company is terminated at a time
when the insured depository institution holding company by which the
IAP is employed or with which the IAP is affiliated satisfies any of
the conditions enumerated in paragraphs (f)(1)(ii)(A), (C) or (D) of
this section, or in contemplation of any of these conditions.
(2) Exceptions. The term golden parachute payment shall not
include:
(i) Any payment made pursuant to a pension or retirement plan which
is qualified (or is intended within a reasonable period of time to be
qualified) under section 401 of the Internal Revenue Code of 1986 (26
U.S.C. 401) or pursuant to a pension or other retirement plan which is
governed by the laws of any foreign country; or
(ii) Any payment made pursuant to a benefit plan as that term is
defined in paragraph (c) of this section; or
(iii) Any payment made pursuant to a bona fide deferred
compensation plan or arrangement as defined in paragraph (d) of this
section; or
(iv) Any payment made by reason of death or by reason of
termination caused by the disability of an institution-affiliated
party; or
(v) Any payment made pursuant to a nondiscriminatory severance pay
plan
[[Page 5932]]
or arrangement which provides for payment of severance benefits to all
eligible employees upon involuntary termination other than for cause,
voluntary resignation, or early retirement; provided, however, that no
employee shall receive any such payment which exceeds the base
compensation paid to such employee during the twelve months (or such
longer period or greater benefit as the Corporation shall consent to)
immediately preceding termination of employment, resignation or early
retirement, and such severance pay plan or arrangement shall not have
been adopted or modified to increase the amount or scope of severance
benefits at a time when the insured depository institution or
depository institution holding company was in a condition specified in
paragraph (f)(1)(ii) of this section or in contemplation of such a
condition without the prior written consent of the appropriate federal
banking agency; or
(vi) Any severance or similar payment which is required to be made
pursuant to a state statute or foreign law which is applicable to all
employers within the appropriate jurisdiction (with the exception of
employers that may be exempt due to their small number of employees or
other similar criteria); or
(vii) Any other payment which the Corporation determines to be
permissible in accordance with Sec. 359.4.
(g) Insured depository institution means any bank or savings
association the deposits of which are insured by the Corporation
pursuant to the Act, or any subsidiary thereof.
(h) Institution-affiliated party (IAP) means:
(1) Any director, officer, employee, or controlling stockholder
(other than a depository institution holding company) of, or agent for,
an insured depository institution or depository institution holding
company;
(2) Any other person who has filed or is required to file a change-
in-control notice with the appropriate federal banking agency under
section 7(j) of the Act (12 U.S.C. 1817(j));
(3) Any shareholder (other than a depository institution holding
company), consultant, joint venture partner, and any other person as
determined by the appropriate federal banking agency (by regulation or
case-by-case) who participates in the conduct of the affairs of an
insured depository institution or depository institution holding
company; and
(4) Any independent contractor (including any attorney, appraiser,
or accountant) who knowingly or recklessly participates in: Any
violation of any law or regulation, any breach of fiduciary duty, or
any unsafe or unsound practice, which caused or is likely to cause more
than a minimal financial loss to, or a significant adverse effect on,
the insured depository institution or depository institution holding
company.
(i) Liability or legal expense means:
(1) Any legal or other professional fees and expenses incurred in
connection with any claim, proceeding, or action;
(2) The amount of, and any cost incurred in connection with, any
settlement of any claim, proceeding, or action; and
(3) The amount of, and any cost incurred in connection with, any
judgment or penalty imposed with respect to any claim, proceeding, or
action.
(j) Nondiscriminatory means that the plan, contract or arrangement
in question applies to all employees of an insured depository
institution or depository institution holding company who meet
reasonable and customary eligibility requirements applicable to all
employees, such as minimum length of service requirements. A
nondiscriminatory plan, contract or arrangement may provide different
benefits based only on objective criteria such as salary, total
compensation, length of service, job grade or classification, which are
applied on a proportionate basis (with a variance in severance benefits
relating to any criterion of plus or minus ten percent) to groups of
employees consisting of not less than the lesser of 33 percent of
employees or 1,000 employees.
(k) Payment means:
(1) Any direct or indirect transfer of any funds or any asset;
(2) Any forgiveness of any debt or other obligation;
(3) The conferring of any benefit, including but not limited to
stock options and stock appreciation rights; and
(4) Any segregation of any funds or assets, the establishment or
funding of any trust or the purchase of or arrangement for any letter
of credit or other instrument, for the purpose of making, or pursuant
to any agreement to make, any payment on or after the date on which
such funds or assets are segregated, or at the time of or after such
trust is established or letter of credit or other instrument is made
available, without regard to whether the obligation to make such
payment is contingent on:
(i) The determination, after such date, of the liability for the
payment of such amount; or
(ii) The liquidation, after such date, of the amount of such
payment.
(l) Prohibited indemnification payment. (1) The term prohibited
indemnification payment means any payment (or any agreement or
arrangement to make any payment) by any insured depository institution
or an affiliated depository institution holding company for the benefit
of any person who is or was an IAP of such insured depository
institution or holding company, to pay or reimburse such person for any
civil money penalty or judgment resulting from any administrative or
civil action instituted by any federal banking agency, or any other
liability or legal expense with regard to any administrative proceeding
or civil action instituted by any federal banking agency which results
in a final order or settlement pursuant to which such person:
(i) Is assessed a civil money penalty;
(ii) Is removed from office or prohibited from participating in the
conduct of the affairs of the insured depository institution; or
(iii) Is required to cease and desist from or take any affirmative
action described in section 8(b) of the Act with respect to such
institution.
(2) Exceptions. (i) The term prohibited indemnification payment
shall not include any reasonable payment by an insured depository
institution or depository institution holding company which is used to
purchase any commercial insurance policy or fidelity bond, provided
that such insurance policy or bond shall not be used to pay or
reimburse an IAP for the cost of any judgment or civil money penalty
assessed against such person in an administrative proceeding or civil
action commenced by any federal banking agency, but may pay any legal
or professional expenses incurred in connection with such proceeding or
action or the amount of any restitution to the insured depository
institution, depository institution holding company or receiver.
(ii) The term prohibited indemnification payment shall not include
any reasonable payment by an insured depository institution or
depository institution holding company that represents partial
indemnification for legal or professional expenses specifically
attributable to particular charges for which there has been a formal
and final adjudication or finding in connection with a settlement that
the IAP has not violated certain banking laws or regulations or has not
engaged in certain unsafe or unsound banking practices or breaches of
fiduciary duty, unless the administrative action or civil
[[Page 5933]]
proceeding has resulted in a final prohibition order against the IAP.
Sec. 359.2 Golden parachute payments prohibited.
No insured depository institution or depository institution holding
company shall make or agree to make any golden parachute payment,
except as provided in this part.
Sec. 359.3 Prohibited indemnification payments.
No insured depository institution or depository institution holding
company shall make or agree to make any prohibited indemnification
payment, except as provided in this part.
Sec. 359.4 Permissible golden parachute payments.
(a) An insured depository institution or depository institution
holding company may agree to make or may make a golden parachute
payment if and to the extent that:
(1) The appropriate federal banking agency, with the written
concurrence of the Corporation, determines that such a payment or
agreement is permissible; or
(2) Such an agreement is made in order to hire a person to become
an IAP either at a time when the insured depository institution or
depository institution holding company satisfies or in an effort to
prevent it from imminently satisfying any of the criteria set forth in
Sec. 359.1(f)(1)(ii), and the institution's appropriate federal banking
agency and the Corporation consent in writing to the amount and terms
of the golden parachute payment. Such consent by the FDIC and the
institution's appropriate federal banking agency shall not improve the
IAP's position in the event of the insolvency of the institution since
such consent can neither bind a receiver nor affect the provability of
receivership claims. In the event that the institution is placed into
receivership or conservatorship, the FDIC and/or the institution's
appropriate federal banking agency shall not be obligated to pay the
promised golden parachute and the IAP shall not be accorded
preferential treatment on the basis of such prior approval; or
(3) Such a payment is made pursuant to an agreement which provides
for a reasonable severance payment, not to exceed twelve months salary,
to an IAP in the event of a change in control of the insured depository
institution; provided, however, that an insured depository institution
or depository institution holding company shall obtain the consent of
the appropriate federal banking agency prior to making such a payment
and this paragraph (a)(3) shall not apply to any change in control of
an insured depository institution which results from an assisted
transaction as described in section 13 of the Act (12 U.S.C. 1823) or
the insured depository institution being placed into conservatorship or
receivership; and
(4) An insured depository institution, depository institution
holding company or IAP making a request pursuant to paragraphs (a)(1)
through (3) of this section shall demonstrate that it does not possess
and is not aware of any information, evidence, documents or other
materials which would indicate that there is a reasonable basis to
believe, at the time such payment is proposed to be made, that:
(i) The IAP has committed any fraudulent act or omission, breach of
trust or fiduciary duty, or insider abuse with regard to the depository
institution or depository institution holding company that has had or
is likely to have a material adverse effect on the institution or
holding company;
(ii) The IAP is substantially responsible for the insolvency of,
the appointment of a conservator or receiver for, or the troubled
condition, as defined by applicable regulations of the appropriate
federal banking agency, of the insured depository institution,
depository institution holding company or any insured depository
institution subsidiary of such holding company;
(iii) The IAP has materially violated any applicable federal or
state banking law or regulation that has had or is likely to have a
material effect on the insured depository institution or depository
institution holding company; and
(iv) The IAP has violated or conspired to violate section 215, 656,
657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the United
States Code, or section 1341 or 1343 of such title affecting a
federally insured financial institution as defined in title 18 of the
United States Code.
(b) In making a determination under paragraphs (a) (1) through (3)
of this section, the appropriate federal banking agency and the
Corporation may consider:
(1) Whether, and to what degree, the IAP was in a position of
managerial or fiduciary responsibility;
(2) The length of time the IAP was affiliated with the insured
depository institution or depository institution holding company, and
the degree to which the proposed payment represents a reasonable
payment for services rendered over the period of employment; and
(3) Any other factors or circumstances which would indicate that
the proposed payment would be contrary to the intent of section 18(k)
of the Act or this part.
Sec. 359.5 Permissible indemnification payments.
(a) An insured depository institution or depository institution
holding company may make or agree to make reasonable indemnification
payments to an IAP with respect to an administrative proceeding or
civil action initiated by any federal banking agency if:
(1) The insured depository institution's or depository institution
holding company's board of directors, in good faith, determines in
writing after due investigation and consideration that the institution-
affiliated party acted in good faith and in a manner he/she believed to
be in the best interests of the institution;
(2) The insured depository institution's or depository institution
holding company's board of directors, respectively, in good faith,
determines in writing after due investigation and consideration that
the payment of such expenses will not materially adversely affect the
institution's or holding company's safety and soundness;
(3) The indemnification payments do not constitute prohibited
indemnification payments as that term is defined in Sec. 359.1(l); and
(4) The IAP agrees in writing to reimburse the insured depository
institution or depository institution holding company, to the extent
not covered by payments from insurance or bonds purchased pursuant to
Sec. 359.1(l)(2), for that portion of the advanced indemnification
payments which subsequently become prohibited indemnification payments,
as defined in Sec. 359.1(l)
(b) An IAP requesting indemnification payments shall not
participate in any way in the board's discussion and approval of such
payments; provided, however, that such IAP may present his/her request
to the board and respond to any inquiries from the board concerning
his/her involvement in the circumstances giving rise to the
administrative proceeding or civil action.
(c) In the event that a majority of the members of the board of
directors are named as respondents in an administrative proceeding or
civil action and request indemnification, the remaining members of the
board may authorize independent legal counsel to review the
indemnification request and provide the remaining members of the board
with a written opinion of counsel as to whether the conditions
delineated in paragraph (a) of this section have been met. If
independent legal counsel
[[Page 5934]]
opines that said conditions have been met, the remaining members of the
board of directors may rely on such opinion in authorizing the
requested indemnification.
(d) In the event that all of the members of the board of directors
are named as respondents in an administrative proceeding or civil
action and request indemnification, the board shall authorize
independent legal counsel to review the indemnification request and
provide the board with a written opinion of counsel as to whether the
conditions delineated in paragraph (a) of this section have been met.
If independent legal counsel opines that said conditions have been met,
the board of directors may rely on such opinion in authorizing the
requested indemnification.
Sec. 359.6 Filing instructions.
Requests to make excess nondiscriminatory severance plan payments
pursuant to Sec. 359.1(f)(2)(v) and golden parachute payments permitted
by Sec. 359.4 shall be submitted in writing to the FDIC regional
director (Supervision) for the region in which the institution is
located. The request shall be in letter form and shall contain all
relevant factual information as well as the reasons why such approval
should be granted. In the event that the consent of the institution's
primary federal regulator is required in addition to that of the FDIC,
the requesting party shall submit a copy of its letter to the FDIC to
the institution's primary federal regulator. In the case of national
banks, such written requests shall be submitted to the OCC. In the case
of state member banks and bank holding companies, such written requests
shall be submitted to the Federal Reserve district bank where the
institution or holding company, respectively, is located. In the case
of savings associations and savings association holding companies, such
written requests shall be submitted to the OTS regional office where
the institution or holding company, respectively, is located. In cases
where the prior consent of only the institution's primary federal
regulator is required and that agency is not the FDIC, a written
request satisfying the requirements of this section shall be submitted
to the primary federal regulator as described in this section.
Sec. 359.7 Applicability in the event of receivership.
The provisions of this part, or any consent or approval granted
under the provisions of this part by the FDIC (in its corporate
capacity), shall not in any way bind any receiver of a failed insured
depository institution. Any consent or approval granted under the
provisions of this part by the FDIC or any other federal banking agency
shall not in any way obligate such agency or receiver to pay any claim
or obligation pursuant to any golden parachute, severance,
indemnification or other agreement. Claims for employee welfare
benefits or other benefits which are contingent, even if otherwise
vested, when the FDIC is appointed as receiver for any depository
institution, including any contingency for termination of employment,
are not provable claims or actual, direct compensatory damage claims
against such receiver. Nothing in this part may be construed to permit
the payment of salary or any liability or legal expense of any IAP
contrary to 12 U.S.C. 1828(k)(3).
By order of the Board of Directors, dated at Washington, DC,
this 6th day of February, 1996.
Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 96-3273 Filed 2-14-96; 8:45 am]
BILLING CODE 6714-01-P