16069Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules
1 The Comprehensive Thrift and Bank Fraud
Prosecution and Taxpayer Recovery Act of 1990 is
title XXV of the Crime Control Act of 1990, S. 3266,
which was passed by Congress on October 27, 1990
and signed by the President on November 29, 1990.
2 The terms ‘‘golden parachute payment’’ and
‘‘golden parachute’’ are used interchangeably
throughout this discussion.
3 The use of the term ‘‘troubled’’ in this preamble
shall refer to an institution or holding company
which meets any of the criteria set forth in
§§ 359.1(f)(1)(ii) (A) through (E) of the Second
Proposal.
the word ‘‘Japan’’ and adding the phrase
‘‘the country of origin’’ in its place.
e. Paragraph (b)(4)(ii) would be
amended by removing the phrase
‘‘Japanese Plant Protection Service’’ and
adding the phrase ‘‘plant protection
service of the country of origin’’ in its
place.
f. Paragraph (b)(7) would be removed.
g. In paragraph (f), the word ‘‘Japan’’
would be removed and the phrase ‘‘the
country of origin of the Unshu oranges’’
would be added in its place.
Done in Washington, DC, this 22nd day of
March 1995.
Terry L. Medley,
Acting Administrator, Animal and Plant
Health Inspection Service.
[FR Doc. 95–7600 Filed 3–28–95; 8:45 am]
BILLING CODE 3410–34–P
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: Notice of proposed rulemaking.
SUMMARY: The FDIC is proposing a rule
limiting golden parachute and
indemnification payments to
institution-affiliated parties by insured
depository institutions and depository
institution holding companies. The
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.
DATES: Comments must be received by
May 30, 1995.
ADDRESSES: Send comments to Robert E.
Feldman, Acting Executive Secretary,
Federal Deposit Insurance Corporation,
550 17th Street, N.W., Washington, D.C.
20429. Comments may be hand-
delivered to room 400, 1776 F Street,
N.W., Washington, D.C. 20429, on
business days between 8:30 a.m. and
5:00 p.m. [FAX number: (202) 898–
3838.]
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 the proposed 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 the proposed rule will not have a
significant impact on a substantial
number of small entities.
Background
Section 2523 of the Comprehensive
Thrift and Bank Fraud Prosecution and
Taxpayer Recovery Act of 1990 1 (Fraud
Act) amended the Federal Deposit
Insurance Act (FDI Act) by adding a
new section 18(k). Pub. L. No. 101–647,
§ 2523 (1990). This section 18(k)(1)
provides that ‘‘[t]he Corporation may
prohibit or limit, by regulation or order,
any golden parachute payment or
indemnification payment’’. 12 U.S.C.
1828(k)(1). The terms ‘‘golden parachute
payment’’ and ‘‘indemnification
payment’’ are defined in sections
18(k)(4) and (5)(A) of the FDI Act,
respectively. Id. at 1828(k) (4) and
(5)(A). The statute’s proscriptions are
applicable to insured depository
institutions and depository institution
holding companies. Id.
On October 7, 1991, the FDIC
published a notice of proposed
rulemaking entitled ‘‘Regulation of
Golden Parachutes and Other Benefits
Which Are Subject to Misuse’’ to
implement this provision of the Fraud
Act. 56 FR 50529 (1991) (to be codified
at 12 CFR Part 359). By the end of the
sixty day comment period, the FDIC
received 186 letters commenting on the
proposed regulation. The majority of
these comment letters suggested that the
FDIC revise the proposed rule in order
to strike a more equitable balance
between the protection of the deposit
insurance funds and the needs of
depository institutions and depository
institution holding companies to attract
and retain qualified directors and
management. Many of the comment
letters also suggested certain technical
amendments to the proposed rule to
make it reflect more accurately the
FDIC’s intentions as stated in the
preamble. A few comment letters
requested that no regulation be
promulgated. These letters expressed
the opinion that abuses should be dealt
with on a case-by-case basis through the
use of enforcement proceedings. It
should be noted that the FDIC was
gratified to observe the exceptionally
high level of preparation and thought
which went into many of the comment
letters.
Due to the significant amount of time
which has passed since the publication
of the first proposed rule (the First
Proposal), the FDIC has decided to
publish a second proposal for public
comment (the Second Proposal). The
Second Proposal incorporates many of
the suggestions which were made by the
commenters to the First Proposal.
Summary of the Second Proposal
The golden parachute portion of the
Second Proposal affects insured
depository institutions seeking to make
the golden parachute payments 2 only if
the institution is in a ‘‘troubled’’
condition.3 The proposed regulation
would apply to affiliated depository
institution holding companies either if
the holding company itself is troubled
or if it seeks to make a golden parachute
payment to an institution-affiliated
party (IAP) of a troubled subsidiary
insured depository institution. The
indemnification portion of the Second
Proposal is applicable to all insured
depository institutions and their
holding companies regardless of their
financial condition.
Generally, the Second Proposal
prohibits institutions which are
insolvent, in conservatorship or
receivership, rated ‘‘4’’ or ‘‘5’’, in a
troubled condition as defined in the
regulations of the appropriate federal
banking agency, or which are subject to
a proceeding to terminate deposit
insurance from making any payment to
an institution-affiliated party which is
contingent on the termination of that
person’s affiliation with the institution,
except payments of death or disability
benefits, payments pursuant to qualified
retirement plans and employee welfare
1 The Comprehensive Thrift and Bank Fraud
Prosecution and Taxpayer Recovery Act of 1990 is
title XXV of the Crime Control Act of 1990, S. 3266,
which was passed by Congress on October 27, 1990
and signed by the President on November 29, 1990.
2 The terms ‘‘golden parachute payment’’ and
‘‘golden parachute’’ are used interchangeably
throughout this discussion.
3 The use of the term ‘‘troubled’’ in this preamble
shall refer to an institution or holding company
which meets any of the criteria set forth in
§§ 359.1(f)(1)(ii) (A) through (E) of the Second
Proposal.
the word ‘‘Japan’’ and adding the phrase
‘‘the country of origin’’ in its place.
e. Paragraph (b)(4)(ii) would be
amended by removing the phrase
‘‘Japanese Plant Protection Service’’ and
adding the phrase ‘‘plant protection
service of the country of origin’’ in its
place.
f. Paragraph (b)(7) would be removed.
g. In paragraph (f), the word ‘‘Japan’’
would be removed and the phrase ‘‘the
country of origin of the Unshu oranges’’
would be added in its place.
Done in Washington, DC, this 22nd day of
March 1995.
Terry L. Medley,
Acting Administrator, Animal and Plant
Health Inspection Service.
[FR Doc. 95–7600 Filed 3–28–95; 8:45 am]
BILLING CODE 3410–34–P
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: Notice of proposed rulemaking.
SUMMARY: The FDIC is proposing a rule
limiting golden parachute and
indemnification payments to
institution-affiliated parties by insured
depository institutions and depository
institution holding companies. The
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.
DATES: Comments must be received by
May 30, 1995.
ADDRESSES: Send comments to Robert E.
Feldman, Acting Executive Secretary,
Federal Deposit Insurance Corporation,
550 17th Street, N.W., Washington, D.C.
20429. Comments may be hand-
delivered to room 400, 1776 F Street,
N.W., Washington, D.C. 20429, on
business days between 8:30 a.m. and
5:00 p.m. [FAX number: (202) 898–
3838.]
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 the proposed 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 the proposed rule will not have a
significant impact on a substantial
number of small entities.
Background
Section 2523 of the Comprehensive
Thrift and Bank Fraud Prosecution and
Taxpayer Recovery Act of 1990 1 (Fraud
Act) amended the Federal Deposit
Insurance Act (FDI Act) by adding a
new section 18(k). Pub. L. No. 101–647,
§ 2523 (1990). This section 18(k)(1)
provides that ‘‘[t]he Corporation may
prohibit or limit, by regulation or order,
any golden parachute payment or
indemnification payment’’. 12 U.S.C.
1828(k)(1). The terms ‘‘golden parachute
payment’’ and ‘‘indemnification
payment’’ are defined in sections
18(k)(4) and (5)(A) of the FDI Act,
respectively. Id. at 1828(k) (4) and
(5)(A). The statute’s proscriptions are
applicable to insured depository
institutions and depository institution
holding companies. Id.
On October 7, 1991, the FDIC
published a notice of proposed
rulemaking entitled ‘‘Regulation of
Golden Parachutes and Other Benefits
Which Are Subject to Misuse’’ to
implement this provision of the Fraud
Act. 56 FR 50529 (1991) (to be codified
at 12 CFR Part 359). By the end of the
sixty day comment period, the FDIC
received 186 letters commenting on the
proposed regulation. The majority of
these comment letters suggested that the
FDIC revise the proposed rule in order
to strike a more equitable balance
between the protection of the deposit
insurance funds and the needs of
depository institutions and depository
institution holding companies to attract
and retain qualified directors and
management. Many of the comment
letters also suggested certain technical
amendments to the proposed rule to
make it reflect more accurately the
FDIC’s intentions as stated in the
preamble. A few comment letters
requested that no regulation be
promulgated. These letters expressed
the opinion that abuses should be dealt
with on a case-by-case basis through the
use of enforcement proceedings. It
should be noted that the FDIC was
gratified to observe the exceptionally
high level of preparation and thought
which went into many of the comment
letters.
Due to the significant amount of time
which has passed since the publication
of the first proposed rule (the First
Proposal), the FDIC has decided to
publish a second proposal for public
comment (the Second Proposal). The
Second Proposal incorporates many of
the suggestions which were made by the
commenters to the First Proposal.
Summary of the Second Proposal
The golden parachute portion of the
Second Proposal affects insured
depository institutions seeking to make
the golden parachute payments 2 only if
the institution is in a ‘‘troubled’’
condition.3 The proposed regulation
would apply to affiliated depository
institution holding companies either if
the holding company itself is troubled
or if it seeks to make a golden parachute
payment to an institution-affiliated
party (IAP) of a troubled subsidiary
insured depository institution. The
indemnification portion of the Second
Proposal is applicable to all insured
depository institutions and their
holding companies regardless of their
financial condition.
Generally, the Second Proposal
prohibits institutions which are
insolvent, in conservatorship or
receivership, rated ‘‘4’’ or ‘‘5’’, in a
troubled condition as defined in the
regulations of the appropriate federal
banking agency, or which are subject to
a proceeding to terminate deposit
insurance from making any payment to
an institution-affiliated party which is
contingent on the termination of that
person’s affiliation with the institution,
except payments of death or disability
benefits, payments pursuant to qualified
retirement plans and employee welfare
16070 Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules
4 More precisely, only two of these are actual
exceptions to the prohibition in that they permit a
payment or agreement which is covered by the
statutory language. The others are definitions of
statutory terms which have been developed or
refined by the Corporation.
5 These criteria are that the institution or holding
company is insolvent, in conservatorship of
receivership, troubled, rated ‘‘4’’ or ‘‘5’’, or subject
to a proceeding to terminate deposit insurance.
benefit plans and two other exceptions
which are described in more detail
below. The Second Proposal also
prohibits institutions from paying or
reimbursing an institution-affiliated
party’s legal and other professional
expenses incurred in administrative or
civil proceedings instituted by any
federal banking agency unless certain
criteria are satisfied. Under no
circumstances does the Second Proposal
allow the reimbursement or payment of
fines or penalties assessed against an
institution-affiliated party as a result of
such a proceeding.
The Second Proposal recognizes
several ‘‘exceptions’’ to the prohibition
against golden parachute payments.4
First, § 359.4(b) of the Second Proposal
allows an insured depository institution
or its depository institution holding
company to make a golden parachute
payment to an institution-affiliated
party who is hired by an institution or
holding company with the written
consent of the appropriate federal
banking agency at a time when the
institution or holding company satisfies
or is expected to satisfy any of the
criteria set forth in § 359.1(f)(1)(ii) of the
Second Proposal,5 and whose golden
parachute agreement is approved by the
FDIC in its corporate capacity as the
regulator of operating state nonmember
banks. These criteria are taken from
section 18(k) of the FDI Act. (12 U.S.C
1828(k)(4)(A)(ii)).
Second, § 359.4(c) of the Second
Proposal permits a golden parachute
payment, not to exceed twelve months
salary, to an institution-affiliated party
in the event of an unassisted change in
control, with the prior consent of the
appropriate federal banking agency.
The third ‘‘exception’’ is contained in
§ 359.1(f) of the Second Proposal, which
defines a ‘‘golden parachute payment’’.
The FDIC recognizes that one important
tool in restoring an institution to
financial health may be institutional
downsizing through personnel
reductions in force. In such situations,
institutions may choose to employ an
existing severance pay plan or adopt a
new plan to assist employees whose
employment is terminated. In addition,
many corporations (in various
industries) maintain severance pay
plans which pay benefits to employees
who lose their jobs through no fault of
their own, for reasons such as an overall
reduction in force. Thus, § 359.1(f)(2)(v)
of the Second Proposal provides that the
term ‘‘golden parachute payment’’ does
not include any payment made pursuant
to a nondiscriminatory severance plan
or arrangement which provides for the
payment of severance benefits to all
eligible employees upon involuntary
termination for other than cause, or
early retirement, in conjunction with a
reduction in force. However, the Second
Proposal limits the maximum severance
benefit that any employee may receive
pursuant to such a plan to twelve
months’ base salary, although an
institution may request consent to make
larger payments. In the event that any
senior executive officer, as defined in
§ 303.14(a)(3) of these regulations, is
eligible for such severance benefits, the
depository institution or holding
company must provide 30 days prior
written notice to its primary regulator
and the FDIC before making such a
payment to those individuals.
The fourth ‘‘exception’’ to the golden
parachute payment prohibition is
contained in § 359.1(d) of the Second
Proposal which defines ‘‘bona fide
deferred compensation plan or
arrangement’’. Section 18(k) of the FDI
Act explicitly authorizes the FDIC to
define, by regulation or order,
permissible bona fide deferred
compensation plan[s] or arrangement[s].
(12 U.S.C. 1828(k)(4)(C)(ii)).
The definition of ‘‘golden parachute
payment’’ contained in § 359.1(f) of the
Second Proposal also sets forth several
other straightforward exceptions which
do not require further discussion here.
Section 18(k)(2) of the FDI Act
provides that the FDIC ‘‘shall prescribe,
by regulation, the factors to be
considered by the Corporation in taking
any action pursuant to paragraph (1) [its
authority to prohibit or limit golden
parachute payments and
indemnification payments]’’. The
section also sets forth a number of
illustrative factors that should be
considered. The Corporation has
carefully considered these factors in
arriving at the conclusion that golden
parachute payments generally should be
prohibited, except in the narrow
circumstances delineated in § 359.4 of
the Second Proposal. Section 359.4 of
the Second Proposal also sets forth a
procedure to allow an institution or
institution-affiliated party which desires
to make a payment or enter into an
agreement which it determines should
not be prohibited, but which is not
clearly covered by any of the express
‘‘exceptions’’ to the prohibition, to
solicit appropriate regulatory approvals.
In so doing, the institution or
institution-affiliated party will be
required to address certain of the factors
enumerated in section 18(k) of the FDI
Act, and the appropriate federal banking
agency and the Corporation may
consider the remaining factors and any
other circumstances which bear on the
issue of whether the proposed payment
would be contrary to the intent of the
prohibition.
Section 18(k) of the FDI Act also
authorizes the FDIC to prohibit or limit
indemnification payments. (12 U.S.C.
1828(k)(5).) A ‘‘prohibited
indemnification payment’’ is defined in
the Second Proposal as payment by an
insured depository institution or its
depository institution holding company
for the benefit of an IAP in order to pay
or reimburse such person for any
liability or legal expense sustained with
regard to an administrative or civil
enforcement action 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 conduct of the
affairs of an insured depository
institution or required to cease and
desist from or take any affirmative
action described in section 8(b) of the
FDI Act. The legislative history of the
Fraud Act, which added section 18(k) to
the FDI Act, makes it clear that this
section is intended (i) to preserve the
deterrent effects of administrative
enforcement or civil actions by insuring
that institution-affiliated parties who are
found to have violated the law, engaged
in unsafe or unsound banking practices
or breached any fiduciary duty to the
institution, pay any civil money
penalties and associated legal expenses
out of their own pockets without
reimbursement from the institution or
its holding company and (ii) to
safeguard the assets of financial
institutions by prohibiting the
expenditure of funds to defend, pay
penalties imposed on or reimburse
institution-affiliated parties who have
been found to have violated the law. 136
Cong. Rec. E3687 (daily ed. November 2,
1990) (statement of Rep. Schumer).
The FDIC is of the opinion that it
would be inconsistent with the intent of
the Fraud Act categorically to prohibit
insured depository institutions and
holding companies from advancing
funds to pay or reimburse IAP’s for
reasonable legal or other professional
expenses incurred in defending against
an administrative or civil action brought
by a federal banking agency prior to the
entry of a final order. Therefore, § 359.5
of the Second Proposal sets forth the
circumstances under which such
indemnification payments may be
4 More precisely, only two of these are actual
exceptions to the prohibition in that they permit a
payment or agreement which is covered by the
statutory language. The others are definitions of
statutory terms which have been developed or
refined by the Corporation.
5 These criteria are that the institution or holding
company is insolvent, in conservatorship of
receivership, troubled, rated ‘‘4’’ or ‘‘5’’, or subject
to a proceeding to terminate deposit insurance.
benefit plans and two other exceptions
which are described in more detail
below. The Second Proposal also
prohibits institutions from paying or
reimbursing an institution-affiliated
party’s legal and other professional
expenses incurred in administrative or
civil proceedings instituted by any
federal banking agency unless certain
criteria are satisfied. Under no
circumstances does the Second Proposal
allow the reimbursement or payment of
fines or penalties assessed against an
institution-affiliated party as a result of
such a proceeding.
The Second Proposal recognizes
several ‘‘exceptions’’ to the prohibition
against golden parachute payments.4
First, § 359.4(b) of the Second Proposal
allows an insured depository institution
or its depository institution holding
company to make a golden parachute
payment to an institution-affiliated
party who is hired by an institution or
holding company with the written
consent of the appropriate federal
banking agency at a time when the
institution or holding company satisfies
or is expected to satisfy any of the
criteria set forth in § 359.1(f)(1)(ii) of the
Second Proposal,5 and whose golden
parachute agreement is approved by the
FDIC in its corporate capacity as the
regulator of operating state nonmember
banks. These criteria are taken from
section 18(k) of the FDI Act. (12 U.S.C
1828(k)(4)(A)(ii)).
Second, § 359.4(c) of the Second
Proposal permits a golden parachute
payment, not to exceed twelve months
salary, to an institution-affiliated party
in the event of an unassisted change in
control, with the prior consent of the
appropriate federal banking agency.
The third ‘‘exception’’ is contained in
§ 359.1(f) of the Second Proposal, which
defines a ‘‘golden parachute payment’’.
The FDIC recognizes that one important
tool in restoring an institution to
financial health may be institutional
downsizing through personnel
reductions in force. In such situations,
institutions may choose to employ an
existing severance pay plan or adopt a
new plan to assist employees whose
employment is terminated. In addition,
many corporations (in various
industries) maintain severance pay
plans which pay benefits to employees
who lose their jobs through no fault of
their own, for reasons such as an overall
reduction in force. Thus, § 359.1(f)(2)(v)
of the Second Proposal provides that the
term ‘‘golden parachute payment’’ does
not include any payment made pursuant
to a nondiscriminatory severance plan
or arrangement which provides for the
payment of severance benefits to all
eligible employees upon involuntary
termination for other than cause, or
early retirement, in conjunction with a
reduction in force. However, the Second
Proposal limits the maximum severance
benefit that any employee may receive
pursuant to such a plan to twelve
months’ base salary, although an
institution may request consent to make
larger payments. In the event that any
senior executive officer, as defined in
§ 303.14(a)(3) of these regulations, is
eligible for such severance benefits, the
depository institution or holding
company must provide 30 days prior
written notice to its primary regulator
and the FDIC before making such a
payment to those individuals.
The fourth ‘‘exception’’ to the golden
parachute payment prohibition is
contained in § 359.1(d) of the Second
Proposal which defines ‘‘bona fide
deferred compensation plan or
arrangement’’. Section 18(k) of the FDI
Act explicitly authorizes the FDIC to
define, by regulation or order,
permissible bona fide deferred
compensation plan[s] or arrangement[s].
(12 U.S.C. 1828(k)(4)(C)(ii)).
The definition of ‘‘golden parachute
payment’’ contained in § 359.1(f) of the
Second Proposal also sets forth several
other straightforward exceptions which
do not require further discussion here.
Section 18(k)(2) of the FDI Act
provides that the FDIC ‘‘shall prescribe,
by regulation, the factors to be
considered by the Corporation in taking
any action pursuant to paragraph (1) [its
authority to prohibit or limit golden
parachute payments and
indemnification payments]’’. The
section also sets forth a number of
illustrative factors that should be
considered. The Corporation has
carefully considered these factors in
arriving at the conclusion that golden
parachute payments generally should be
prohibited, except in the narrow
circumstances delineated in § 359.4 of
the Second Proposal. Section 359.4 of
the Second Proposal also sets forth a
procedure to allow an institution or
institution-affiliated party which desires
to make a payment or enter into an
agreement which it determines should
not be prohibited, but which is not
clearly covered by any of the express
‘‘exceptions’’ to the prohibition, to
solicit appropriate regulatory approvals.
In so doing, the institution or
institution-affiliated party will be
required to address certain of the factors
enumerated in section 18(k) of the FDI
Act, and the appropriate federal banking
agency and the Corporation may
consider the remaining factors and any
other circumstances which bear on the
issue of whether the proposed payment
would be contrary to the intent of the
prohibition.
Section 18(k) of the FDI Act also
authorizes the FDIC to prohibit or limit
indemnification payments. (12 U.S.C.
1828(k)(5).) A ‘‘prohibited
indemnification payment’’ is defined in
the Second Proposal as payment by an
insured depository institution or its
depository institution holding company
for the benefit of an IAP in order to pay
or reimburse such person for any
liability or legal expense sustained with
regard to an administrative or civil
enforcement action 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 conduct of the
affairs of an insured depository
institution or required to cease and
desist from or take any affirmative
action described in section 8(b) of the
FDI Act. The legislative history of the
Fraud Act, which added section 18(k) to
the FDI Act, makes it clear that this
section is intended (i) to preserve the
deterrent effects of administrative
enforcement or civil actions by insuring
that institution-affiliated parties who are
found to have violated the law, engaged
in unsafe or unsound banking practices
or breached any fiduciary duty to the
institution, pay any civil money
penalties and associated legal expenses
out of their own pockets without
reimbursement from the institution or
its holding company and (ii) to
safeguard the assets of financial
institutions by prohibiting the
expenditure of funds to defend, pay
penalties imposed on or reimburse
institution-affiliated parties who have
been found to have violated the law. 136
Cong. Rec. E3687 (daily ed. November 2,
1990) (statement of Rep. Schumer).
The FDIC is of the opinion that it
would be inconsistent with the intent of
the Fraud Act categorically to prohibit
insured depository institutions and
holding companies from advancing
funds to pay or reimburse IAP’s for
reasonable legal or other professional
expenses incurred in defending against
an administrative or civil action brought
by a federal banking agency prior to the
entry of a final order. Therefore, § 359.5
of the Second Proposal sets forth the
circumstances under which such
indemnification payments may be