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Inactive Financial Institution Letters 


[Federal Register: March 29, 1995 (Volume 60, Number 60)]
[Proposed Rules]               
[Page 16069-16082]
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: Notice of proposed rulemaking.

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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 19901 (Fraud Act) amended the Federal 
Deposit Insurance Act (FDI Act) by adding a new section 18(k). Pub. L. 
No. 101-647, Sec. 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.

    \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.
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    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 
payments2 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.

    \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 Secs. 359.1(f)(1)(ii) (A) through (E) of the 
Second Proposal.
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    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 [[Page 16070]] 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, 
Sec. 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 Sec. 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)).

    \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.
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    Second, Sec. 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 Sec. 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, 
Sec. 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 Sec. 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 Sec. 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 
Sec. 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 Sec. 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, Sec. 359.5 of the Second Proposal sets forth the 
circumstances under which such indemnification payments may be 
[[Page 16071]] made. The FDIC is of the opinion that five criteria must 
be satisfied in order to permit an institution to make or agree to make 
any indemnification payment to or for the benefit of any IAP prior to 
the entry of a final order in the IAP's favor. However, an institution 
or its holding company may purchase commercial insurance policies or 
fidelity bonds, at a reasonable cost, which may pay the cost of 
defending an administrative proceeding or civil action. Such insurance 
cannot pay any penalty or judgement. However, it may pay restitution to 
the insured depository institution, depository institution holding 
company or the receiver.

Issues Raised By Commentators--Golden Parachutes

    The FDIC has carefully reviewed and analyzed the substantial number 
of comment letters which it received in response to the First Proposal. 
With regard to the golden parachute portion of the First Proposal, the 
most significant issues raised by the comment letters are discussed 
below.

1. Bona Fide Deferred Compensation Plans

    A substantial number of commenters raised the issue of whether the 
requirement that bona fide deferred compensation plans be ``funded'' in 
order to be excluded from the regulation's proscriptions is 
appropriate. Section 359.1(d)(2) of the First Proposal established a 
requirement that a nonqualified6 deferred compensation plan be 
``funded'' in order to be considered a ``bona fide deferred 
compensation plan or arrangement'' which is excluded from the 
definition of golden parachute payment. The term funded was defined as 
meaning that ``specific assets are segregated or otherwise set aside so 
that such assets are not available to the institution or holding 
company for any purpose other than distribution to the participating 
employee(s) and are not available to satisfy claims of the 
institution's or holding company's creditors''. First Proposal 
Sec. 359.1(d)(2). The vast majority of comment letters which the FDIC 
received raised the issue of the appropriate definition of bona fide 
deferred compensation plan and virtually every letter which raised this 
issue disagreed with the Corporation's imposition of the funding 
requirement. The predominant argument against such a requirement is 
that when Congress drafted section 18(k)(4)(C)(ii) of the FDI Act to 
exclude bona fide deferred compensation plans from the definition of 
golden parachute, it was aware and approved of the established industry 
practice of utilizing unfunded, nonqualified deferred compensation 
plans (commonly referred to as elective, excess or supplemental plans) 
to supplement the traditional tax qualified defined benefit or defined 
contribution retirement plan. Many of the comment letters also pointed 
out that the Internal Revenue Code (26 U.S.C. 1 et seq.) (the ``Code'') 
recognizes these types of nonqualified deferred compensation plans and 
urged the FDIC to look to the Code as being dispositive. Almost all of 
the relevant comment letters expressed grave concerns that the FDIC's 
imposition of the funding requirement would upset established deferred 
compensation plans and prompt depository institutions and holding 
companies to incur significant unwanted expenses by terminating these 
plans and making cash payments to the beneficiaries. Nonetheless, 
Congress chose not to define the term ``bona fide deferred compensation 
plan'', but explicitly left that task to the FDIC.

    \6\ The term ``nonqualified'' refers to a benefit plan which is 
not qualified (or is not 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).
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    First, it should be pointed out that the FDIC is not bound by the 
provisions of the Internal Revenue Code, or any other federal statute, 
in defining the term bona fide deferred compensation plan or 
arrangement. While the Code's explanation and treatment of such plans 
may be instructive, it is not binding on the Corporation in the context 
of this rulemaking. Similarly, the fact that the industry has utilized 
unfunded, non-qualified plans for a period of time and would be 
inconvenienced by the implementation of the proposed regulation is 
insufficient to compel the change that the majority of comments 
advocate. The FDIC's responsibility is to ascertain the proper meaning 
of the term bona fide deferred compensation plan, while ensuring that 
such definition does not permit depository institutions, holding 
companies or institution-affiliated parties to circumvent the intent of 
the statute by exploiting an imprecisely drafted definition. On the 
other hand, if the Corporation can accomplish its purposes in a manner 
that is less disruptive but just as effective as the scheme set forth 
in the First Proposal, such an alternative bears close scrutiny.
    The FDIC has been persuaded by the many comments it received with 
regard to the definition of bona fide deferred compensation plan that 
the funding requirement which was contained in Sec. 359.1(d)(2) of the 
First Proposal is not necessary and should be deleted. Thus, the 
definition of bona fide deferred compensation plan or arrangement, 
which appears in Sec. 359.1(d) of the Second Proposal, does not contain 
such a requirement. This provision of the Second Proposal permits 
unfunded, nonqualified deferred compensation plans provided the 
institution or holding company utilizes either a rabbi or a secular 
trust (which are properly accounted for) or the benefits or payments 
are expensed as an accrued liability according to generally accepted 
accounting principles (GAAP). Second Proposal Sec. 359.1(d). It is the 
FDIC's judgment that these requirements will permit depository 
institutions and holding companies to utilize deferred compensation 
plans for legitimate purposes, while ensuring that such plans can not 
be used as a vehicle to make what would otherwise be considered a 
prohibited golden parachute payment.

2. Severance Pay Plans

    All the comment letters which raised the issue expressed support 
for the FDIC's decision to except traditional severance pay plans which 
cover reductions in force from the definition of golden parachute 
payment. However, a substantial percentage of these letters urged the 
Corporation to increase the allowable amount of severance pay from six 
to twelve months salary and to expand the exception to include payments 
pursuant to voluntary resignations or early retirements which occur in 
conjunction with a reduction in force instituted by a depository 
institution or holding company. After careful consideration, the 
Corporation has elected to increase the permissible amount of severance 
pay from six to twelve months' salary. In addition, the regulation has 
been amended to permit institutions to request consent to pay greater 
severance benefits. Second Proposal Sec. 359.1(f)(2)(v). The FDIC 
requests public comment on this new alternative. The inclusion in the 
exception of voluntary resignations and early retirements in 
conjunction with a reduction in force provides depository institutions 
and holding companies with more flexibility in achieving an optimum 
workforce size and cost savings. Second Proposal Sec. 359.1(f)(2)(v). 
The FDIC has also decided to include a definition of the term 
``nondiscriminatory'' in Sec. 359.1(j) of the Second Proposal in an 
effort to make it clear how this term should be applied in the context 
of this regulation. The Corporation emphasizes that this exception is 
only applicable to institution-affiliated parties who are 
[[Page 16072]] terminated, resign or retire due to a reduction in force 
and receive severance benefits pursuant to a existing nondiscriminatory 
severance pay plan.

3. White Knight Exception

    Section 359.4 of the First Proposal sets forth what is commonly 
referred to as the ``white knight'' exception to the golden parachute 
prohibition. This provision permits 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 golden parachute payment receive the prior 
written consent of the appropriate federal banking agency and the FDIC. 
As we stated in the preamble to the First Proposal:

    The purpose of this exception is to permit a troubled 
institution or holding company to attempt to reverse its slide 
toward economic failure by attracting competent, new management 
which enjoys the confidence of that institution's primary federal 
regulator and the FDIC. . . . [T]he FDIC is aware that individuals 
who possess the experience and expertise which qualify them for such 
a position are highly sought after business persons who, in most 
circumstances, already have established successful careers with 
other financial institutions. In order to induce such an individual 
to leave an established, stable career for a job in a troubled 
institution which may not survive regardless of that individual's 
efforts, it is generally necessary to agree to pay that individual 
some sort of severance payment in the event that the efforts of the 
individual for the institution are not successful. It is the FDIC's 
view that . . . such agreements reflect good business judgment, 
recognize the realities of the marketplace and may benefit both the 
institution and the deposit insurance funds.

(56 FR 50531, October 7, 1991). While every comment letter which 
addressed this exception supported it, a significant percentage of 
those letters urged the FDIC to broaden the exception in certain 
respects. First, it was recommended that the Corporation revise 
Sec. 359.4 of the First Proposal to automatically grandfather 
institution-affiliated parties who were hired to assist troubled 
depository institutions and holding companies prior to the effective 
date of the final regulation. The FDIC has carefully considered this 
suggestion and is of the opinion that such an across-the-board 
grandfathering would not be prudent. Section 359.4 is structured so 
that the appropriate federal banking agency and the FDIC have an 
opportunity to review the amount and terms of any proposed severance 
arrangement prior to it being entered into. To grandfather all such 
existing severance agreements would deny the appropriate federal 
banking agency and the FDIC the opportunity to conduct this review. 
However, institution-affiliated parties, insured depository 
institutions and holding companies are of course free to request review 
and approval of existing agreements for institution-affiliated parties 
who were hired at a time when the depository institution or holding 
company already met any of the criteria listed in Sec. 359.1(f)(1)(ii) 
of the Second Proposal.
    Second, a significant number of commentators also suggested that 
the white knight exception be broadened to encompass individuals who 
are hired ``in contemplation of'' the depository institution or holding 
company becoming troubled. These letters urged this revision as a way 
to allow depository institutions to address their problems sooner and, 
thus, more effectively. The FDIC concurs in this line of reasoning. It 
makes good sense that the value of this exception can be enhanced by 
not restricting its coverage to institutions which are already 
categorized as troubled. If existing management or a board of directors 
is of the reasoned opinion that the institution in question is sliding 
toward becoming troubled and that new management is needed to arrest 
that slide, then prudent business practice would suggest that it is 
better to hire such new management sooner rather than later. Therefore, 
the exception has been expanded to allow applicants to apply for an 
exemption prior to becoming troubled when they are of the opinion that 
they are approaching a troubled condition and new management is needed. 
Second Proposal Sec. 359.4(b).
    Third, several comment letters suggested that the FDIC broaden the 
Sec. 359.4 exception of the First Proposal to include current officers 
and employees of a depository institution who are promoted to executive 
positions at a time when the institution is troubled. While the FDIC 
agrees that ``it is not axiomatic that competent new management can 
only be found outside of an institution'', the underlying reason for 
allowing what would otherwise be a prohibited golden parachute payment 
is not present in the case of a current employee who is promoted to an 
executive position. As we stated earlier, this type of severance 
payment 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.

    The FDIC's experience since the publication of the First Proposal 
has made it clear that some confusion exists concerning the proper 
procedure to request and the effect of obtaining prior written consent 
for a white knight exception. Interested parties are referred to new 
Sec. 359.6 of the Second Proposal, ``Filing Instructions''. In terms of 
effect, the FDIC would like to clarify that approval of a white knight 
exception does not improve the white knight's position in the event of 
the insolvency of the institution as the FDIC (in its corporate 
capacity) can neither bind a receiver nor affect the provability of 
receivership claims. In the event that the insured depository 
institution is placed into receivership or conservatorship, the FDIC 
(in its corporate capacity) would not be obligated to pay the promised 
severance benefit and the white knight would be accorded no 
preferential treatment on the basis of such prior approval.

4. Permissible Golden Parachutes in Changes in Control

    Several comment letters noted that the First Proposal does not 
provide an exception to the prohibition against golden parachute 
payments in the case of a change in control where the depository 
institution to be acquired is troubled. These letters raised the 
arguments which were briefly mentioned in the preamble to the First 
Proposal (56 FR 50529, October 7, 1991) concerning the benefits of 
protecting executive officers of companies which are the subject of 
hostile takeovers so that their business decisions concerning what is 
best for their company are not influenced by the acquisition's ultimate 
effect on their employment. While the FDIC agrees that golden parachute 
payments can serve a useful purpose in such circumstances, expanding 
the exceptions permitted pursuant to Sec. 359.4 of the First Proposal 
to include golden parachute payments made in the context of changes in 
control would open the door to the possibility of payments being made 
to institution-affiliated parties who are substantially responsible for 
the depository institution's troubled condition. After balancing the 
relative advantages and disadvantages of expanding Sec. 359.4 to 
include this exception, the FDIC is of the opinion that the safety of 
the deposit insurance funds and the soundness of the banking system in 
general is best served by permitting limited golden parachute payments 
with prior regulatory approval in the context of 
[[Page 16073]] unassisted changes in control.\7\ While this decision 
does not adopt completely the position advocated by the majority of 
comment letters, the FDIC is concerned that a more open-ended exception 
would have the unfortunate result of allowing institution-affiliated 
parties who are substantially responsible for the troubled condition of 
their depository institutions to receive golden parachute payments.

    \7\Obviously, this analysis does not apply to situations where 
the Corporation is assisting in the acquisition of a troubled 
insured depository institution pursuant to section 13 of the FDI 
Act.
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5. Definition of Golden Parachute Payment

    A significant number of comment letters pointed out that a literal 
reading of the definition of golden parachute payment contained in 
Sec. 359.1(g) of the First Proposal would include certain forms of 
retirement payments being made to former institution-affiliated parties 
who retired and began collecting such payments at a time when the 
depository institution or its holding company did not satisfy any of 
the circumstances delineated in Secs. 359.1(g)(1)(ii) (A) through (E) 
of the First Proposal, but which institution or holding company 
subsequently became troubled. It was also brought to our attention that 
a literal reading of the definition seemed to provide that even when a 
troubled depository institution or its holding company ceased 
satisfying any of the criteria delineated in Secs. 359.1(g)(1)(ii) (A) 
through (E) of the First Proposal, golden parachute payments to 
institution-affiliated parties who leave the institution subsequent to 
its return to financial health would continue to be prohibited. It is 
not the FDIC's intent that the regulation produce either of these 
results. Institution-affiliated parties who retire from an insured 
depository institution or holding company at a time when it is not 
troubled and begin collecting periodic retirement payments should not 
have to worry that the subsequent deterioration of the institution or 
holding company will jeopardize their continuing to receive such 
payments, at least as far as this regulation is concerned.\8\ 
Similarly, if a depository institution or holding company recovers from 
its troubled condition, then it is no longer covered under the scope of 
the regulation with respect to its existing institution-affiliated 
parties, and what might have been considered prohibited golden 
parachute payments would no longer be unlawful and could be paid to an 
institution-affiliated party whose employment is terminated once the 
institution or holding company is no longer troubled.\9\ It is our 
opinion that the revised definition of bona fide deferred compensation 
plan or arrangement contained in Sec. 359.1(d) of the Second Proposal 
should alleviate these concerns since the revised definition recognizes 
and includes well-established forms of deferred compensation. However, 
the FDIC has also chosen to revise the definition of golden parachute 
payment, which is contained in Sec. 359.1(f) of the Second Proposal, to 
make it clear that to be a golden parachute, an institution-affiliated 
party's employment by or affiliation with an insured depository 
institution or holding company must terminate at a time when the 
institution or holding company is troubled or in contemplation of it 
becoming troubled. Second Proposal Sec. 359.1(f)(1)(iii). If an 
institution-affiliated party's employment is terminated at a time when 
the depository institution or holding company is troubled, the payment 
of prohibited golden parachute payments to that individual will 
continue to be prohibited even after the institution or holding company 
ceases to be troubled.

    \8\Obviously, the financial deterioration of the institution or 
holding company may adversely affect the institution's or holding 
company's ability to make the payments regardless of the regulation.
    \9\This payment could include benefits which continued to accrue 
during the tenure of the institution's or holding company's troubled 
condition.
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6. Definition of Depository Institution Holding Company

    Section 359.1(f) of the First Proposal, the definition of 
``depository institution holding company'', includes any bank holding 
company, savings and loan holding company and any direct or indirect 
subsidiary thereof, other than an insured depository institution. A 
number of comment letters raised the concern that the definition in the 
First Proposal is not consistent with the definition of depository 
institution holding company contained in section 3(w)(1) of the FDI 
Act. A number of comment letters also argued that the broader 
definition used in the First Proposal would improperly include non-
financial services affiliates that are not involved with the business 
conducted by the insured depository institution within the purview of 
the regulation. Pursuant to the First Proposal, golden parachute 
payments by a non-financial services company to one of its executives 
would be restricted simply because that company was ultimately owned by 
a holding company which also owned an insured depository institution. 
After considering this point, the FDIC agrees that the definition of 
depository institution holding company in the Second Proposal should 
mirror the definition contained in section 3(w)(1) of the FDI Act. 
Second Proposal Sec. 359.1(b).

7. Scope of Rule

    Section 359.1(j) of the First Proposal contains the definition of 
institution-affiliated party. A number of comment letters raised the 
issue that the regulatory definition proposed by the FDIC goes beyond 
the statutory definition contained in section 3(u) of the FDI Act by 
including persons who have a certain relationship with a depository 
institution holding company. However, in carefully reviewing the 
language of section 18(k)(4)(A) of the FDI Act, the FDIC is of the 
opinion that Congress intended to include within the statute's scope 
individuals who are institution-affiliated parties of depository 
institution holding companies.

    The term ``golden parachute payment'' means any payment * * * by 
any insured depository institution or depository institution holding 
company for the benefit of any institution-affiliated party pursuant 
to an obligation of such institution or holding company that * * * 
is contingent on the termination of such party's affiliation with 
the institution or holding company * * * [Emphasis added].

12 U.S.C. 1828(k)(4)(A). This interpretation is consistent with section 
8(b)(3) of the FDI Act which provides that the Act's enforcement 
provisions are equally applicable to bank holding companies. Our 
consultations with the Federal Reserve Board staff have established 
that the Federal Reserve Board's established position is that it has 
the authority to take enforcement action against institution-affiliated 
parties of bank holding companies pursuant to section 8(b)(3) of the 
FDI Act.
    The FDIC is also of the opinion that to interpret section 18(k) to 
not apply to institution-affiliated parties of holding companies would 
subvert the statute's intent by leaving a significant gap in its 
coverage. Federal Reserve staff has advised the Corporation that some 
of the most abusive golden parachute payments which were made prior to 
the enactment of the statute and were known to Congress at the time 
involved IAPs of holding companies. Thus, the FDIC has decided not to 
revise the definition of IAP contained in the First Proposal, except 
for a minor technical change. [[Page 16074]] 

8. Limitation to Executive Officers and Directors

    Several comment letters suggested that the scope of the regulation 
should be limited to cover only executive officers and directors of 
insured depository institutions and depository institution holding 
companies, as opposed to institution-affiliated parties of institutions 
and holding companies. On the other hand, section 18(k)(4) of the FDI 
Act explicitly refers to ``institution-affiliated party''.
    While potential golden parachute abuses could theoretically involve 
non-executive officers and non-directors, it has been the FDIC's 
experience that such instances are extremely rare. It is not the FDIC's 
intent to place unfair and inappropriate limits on payments to a bank 
or holding company's non-official or non-managerial staff. This is 
evidenced, for example, by the severance pay exception which is 
contained in Sec. 359.1(f)(2)(v) of the Second Proposal. In the 
Corporation's view, it is very unlikely that a bank teller (or other 
non-executive/non-director) would come within the scope of this rule 
since bank tellers generally do not get paid golden parachutes. That 
being the case, and in view of the fact that the statute uses the term 
``institution-affiliated party'', the FDIC has chosen not to explicitly 
exclude employees who are not senior executive officers or directors 
from the Second Proposal's scope. It should also be pointed out that 
any such employee who feels that he/she is being unfairly affected by 
the rule could apply for permission to receive a payment pursuant to 
Sec. 359.4 of the Second Proposal.

9. Golden Parachute Agreements Entered Into Prior to Effective Date of 
Final Regulation

    The First Proposal took the position that the regulation could 
limit or prohibit golden parachute and/or indemnification payments 
which are sought to be made pursuant to contracts and agreements which 
were entered into prior to the effective date of the final regulation, 
i.e., as of the effective date of the statute. A number of comment 
letters briefly asserted that the regulation could not lawfully affect 
such agreements since to do so would be ``unconstitutional''. However, 
the vast majority of comment letters which raised this issue did not 
explain in any detail the basis for this alleged unconstitutionality.
    The FDIC has examined this issue in greater depth and while we 
remain convinced that ample precedent exists to support the position 
which was taken in the First Proposal, no compelling need exists to 
apply the regulation in this fashion. However, the FDIC views the 
Second Proposal as putting institutions and IAPs on notice of the 
Corporation's views with regard to these types of agreements and the 
FDIC will look unfavorably upon any golden parachute agreement which is 
entered into after the date of this proposal but before the effective 
date of the final regulation as an attempt to circumvent the 
regulation.

10. Prior Approval of Otherwise Prohibited Golden Parachutes

    Section 359.2(b) of the First Proposal permits the payment of a 
golden parachute provided that such payment is approved by the 
institution's appropriate federal banking agency, with the written 
concurrence of the FDIC. Several comment letters pointed out, however, 
that this subsection afforded only depository institutions and holding 
companies the right to request such an exception. In the interest of 
fairness, the FDIC has revised this subsection to permit institution-
affiliated parties to also request permission to receive such a 
payment.10

    \10\ Such a request should be in letter form to the FDIC's 
Regional Director (DOS) for the region in which the depository 
institution or holding company is headquartered.
---------------------------------------------------------------------------

    Section 359.2(b) of the First Proposal also requires that 
applicants requesting permission to make or receive an otherwise 
prohibited golden parachute payment shall provide the appropriate 
federal banking agency and the FDIC with certain information. First 
Proposal Secs. 359.2(b) (1) through (4). A significant number of 
commentators asserted that this section of the First Proposal 
improperly reverses the burden of proof as delineated in section 
18(k)(2) of the FDI Act to compel the applicant to demonstrate that the 
applicant has no reasonable basis to believe that the institution-
affiliated party to whom the payment is to be made has committed any 
fraudulent act, is substantially responsible for the insolvency of the 
institution or holding company, has materially violated any banking law 
or regulation or has violated certain specific federal criminal laws. 
These comment letters also asserted that the structure of the proposed 
regulation requires the applicant to ``prove a negative'', an 
impossible task.
    The FDIC is of the opinion that the arguments advanced in the 
comment letters concerning an inappropriate reversal of the burden of 
proof are misplaced. First, a careful reading of section 18(k)(2) of 
the FDI Act reveals that it does not establish a burden of proof, in 
the traditional legal sense, at all. What this subsection does is to 
delineate certain factors which Congress suggests that the FDIC 
consider in evaluating a request to pay or receive an otherwise 
prohibited golden parachute payment. This list of factors is not 
mandatory, nor is it exclusive. The only mandatory language in section 
18(k)(2) requires the FDIC to prescribe whatever factors it ultimately 
decides to consider in any regulation it promulgates. The statute does 
not address the question of which party bears the burden of producing 
evidence or the burden of proof. What the FDIC has chosen to do in the 
First Proposal is to place the burden of production of evidence where 
it most reasonably belongs, with the party that possesses or has the 
most complete access to the information which is necessary for the 
Corporation to make an informed and equitable judgment. The FDIC is not 
requiring that a party seeking to make or receive a golden parachute 
payment ``prove his or her innocence''.
    In response to the comment letters, the FDIC has revised 
Sec. 359.2(b) of the First Proposal in an effort to clarify how this 
section will function. These revisions make it clear that the 
depository institution, holding company or institution-affiliated party 
seeking a determination that an otherwise prohibited golden parachute 
payment is permissible is required to inform the appropriate federal 
banking agency and the FDIC of any information of which it is aware 
that would indicate that there is a reasonable basis to believe that 
the institution-affiliated party in question satisfies any of the 
criteria set forth in Secs. 359.4(d) (1) through (4) of the Second 
Proposal. If the applicant is not aware of any such information, it 
shall so certify.

11. Condition of Institution at Time of Termination of Employment Is 
Crucial

    Previously in this preamble, we clarified that the Second Proposal 
should not be construed to cut off the payment of retirement benefits 
to former institution-affiliated employees who retired and began 
receiving retirement payments at a time when the depository institution 
or its holding company was not troubled, in the event that such 
institution or holding company subsequently becomes troubled. This same 
question arises in the case of non-retirement benefits. For example, 
while most golden parachute payments are lump sum, the Corporation is 
aware of instances where such payments are made in periodic 
installments. The [[Page 16075]] FDIC is of the opinion that as long as 
the institution-affiliated party did not terminate his/her employment 
in contemplation of the depository institution or holding company 
becoming troubled in an effort to circumvent the regulation's 
proscriptions, such payments should be allowed to continue because the 
nexus between the institution-affiliated party and the institution's or 
holding company's troubled condition would not be present. However, 
this is not meant to suggest that such retirement benefits or 
permissible golden parachute payments will be continued in the event 
that the institution is placed into conservatorship or receivership.

12. Other Golden Parachute Issues

    A number of comment letters took issue with the fact that the First 
Proposal prohibits the payment of a golden parachute by both an insured 
depository institution and its holding company when either of those 
entities is troubled. These letters suggested that the First Proposal 
should be revised to provide that only the troubled entity be 
prohibited from making a golden parachute payment. The FDIC has 
carefully considered this suggestion and has decided to scale back its 
original proposal and to adopt a modified version of the commenters' 
suggestion. Thus, a troubled insured depository institution may not 
make a golden parachute payment to any of its IAPs, excluding any of 
the exceptions described previously. In addition, a depository 
institution holding company may not make a golden parachute payment to 
any of its IAPs if it is troubled and may not pay a golden parachute to 
an IAP of an affiliated insured depository institution if that 
institution is troubled.
    The FDIC received several comment letters which suggested that the 
Corporation make an exception to the golden parachute prohibition for 
depository institutions with a composite rating of ``4'', but which 
exceed all applicable regulatory capital requirements. The FDIC has 
decided not to incorporate this exception into the Second Proposal 
since an institution's capital level is only one indication of its 
overall financial health.
    A significant number of comment letters expressed concern that the 
criteria delineated in Sec. 359.1(g)(1)(ii)(C) of the First Proposal 
(that the depository institution or holding company be designated 
troubled by its primary federal regulator) is overly broad since it 
would include any institution or holding company which is subject to a 
written supervisory agreement even if that institution or holding 
company is not experiencing significant financial difficulties. Since 
the nature of written supervisory agreements vary and that the facts of 
each case are so individual, the FDIC prefers not to make a blanket 
exception to the rule in this case. Rather, the Corporation will 
consider exceptions on a case by case basis pursuant to Sec. 359.4(d) 
of the Second Proposal.

Issues Raised By Commentators--Indemnification Payments

    The FDIC has carefully reviewed and analyzed the comment letters 
with regard to the indemnification portion of the First Proposal.

1. Criteria for Making Indemnification Payments

    Section 359.5 of the First Proposal delineates the circumstances 
under which an insured depository institution or depository institution 
holding company may make or agree to make indemnification payments to 
institution-affiliated parties. The comment letters made it clear that 
this section of the First Proposal is viewed as being just as 
significant as the sections dealing with golden parachute payments. The 
overwhelming majority of comment letters expressed the opinion that the 
prohibitions contained in this section of the First Proposal would make 
it unreasonably difficult for depository institutions and holding 
companies to attract and retain competent officers, directors and 
employees.
    Section 359.5(a) of the First Proposal sets forth six criteria 
which must be met in order for a depository institution or holding 
company to make or agree to make indemnification payments to an 
institution-affiliated party. The majority of comment letters which 
raised indemnification issues focused on Sec. 359.5(a)(1) of the First 
Proposal. This subsection provides that in order to indemnify an 
institution-affiliated party, the institution's or holding company's 
board of directors, in good faith, must determine in writing that the 
institution-affiliated party has a ``substantial likelihood of 
prevailing on the merits''. The consensus of commentators' opinions was 
that this standard is so difficult to meet that a board of directors 
very rarely, if ever, would be able to authorize indemnification. Many 
comment letters pointed out that requests for indemnification are 
customarily made at the commencement of an administrative action or 
civil proceeding when the institution-affiliated party and his/her 
counsel are just beginning to assemble their case. Thus, many of the 
facts and circumstances surrounding the conduct in question are not yet 
known. This being the case, the commentators argued that it would be 
very difficult for a board of directors to find that an institution-
affiliated party had a substantial likelihood of prevailing on the 
merits. Too many unanswered questions would be present for such a 
finding to be realistically made. The commentators recommended a 
variety of lesser standards, most notably 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'', that there is a 
``reasonable likelihood of prevailing on the merits'' or that the FDIC 
defer to the applicable state law standard.
    After considerable review, the FDIC agrees with the position 
expressed by the majority of commentators that the standard contained 
in Sec. 359.5(a)(1) of the First Proposal imposes too significant an 
obstacle to reasonable and fair indemnification payments. However, the 
Corporation does not agree with the commentators who suggested that it 
should defer to the applicable state law standard. In enacting section 
18(k) of the FDI Act, Congress made it quite clear that there was to be 
one uniform federal standard to govern the making of indemnification 
payments by insured depository institutions and depository institution 
holding companies. In an effort to balance the need of depository 
institutions to attract and retain qualified directors and management 
with the protection of the deposit insurance funds, the FDIC has 
decided to revise Sec. 359.5(a)(1) of the First Proposal to utilize a 
somewhat less stringent standard. Therefore, Sec. 359.5 of the Second 
Proposal requires that the depository institution's or holding 
company's board of directors determines in writing that the 
institution-affiliated party requesting indemnification ``acted in good 
faith and in a manner which he/she believed to be in the best interests 
of the institution''. Of course, the FDIC expects that an institution's 
board of directors will make such a finding only after due 
investigation.

2. Continual Monitoring by Board of Directors Not Required

    A significant number of comment letters also took issue with the 
FDIC's requirement, contained in Sec. 359.5(a)(3) of the First 
Proposal, that the institution's or holding company's board of 
directors continually monitor actions against institution-affiliated 
parties so that it can reassess its [[Page 16076]] decision to permit 
indemnification. These commentators expressed the opinion that such a 
requirement places an unfair and undue burden on both the board of 
directors and the institution-affiliated party seeking indemnification. 
The proposed standard would mean that a board's decision would never be 
``final'', regardless of the amount of time, effort and painstaking 
review that went into it. It would also mean that an institution-
affiliated party could never depend on indemnification since a prior 
decision to approve indemnification could be revoked at any time. The 
FDIC agrees that there is value in encouraging an amount of certainty 
in such cases. Thus, this requirement has been deleted from the Second 
Proposal.

3. Permissible Indemnification Payments

    Section 359.5(a)(4) of the First Proposal prohibits the use of 
indemnification payments to pay or reimburse an institution-affiliated 
party for the amount of, or any cost incurred in connection with, any 
settlement of an administrative proceeding or civil action instituted 
by any federal banking agency or any judgment or penalty imposed with 
respect to any such matter where the IAP is assessed a civil money 
penalty, removed from office or made subject to a cease and desist 
order. The FDIC received a substantial number of comment letters which 
addressed this particular restriction. Interestingly, however, while 
the proscription of the use of indemnification to pay for settlements 
was criticized, the arguments against it were often diametrically 
opposed. For example, a number of comment letters made the argument 
that to prohibit the use of indemnification to pay for costs associated 
with settlements would force institution-affiliated parties to litigate 
every action to its ultimate conclusion in the hope of earning the 
right to be indemnified. On the other hand, an approximately equal 
number of comment letters argued just as vociferously that this 
requirement would compel institution-affiliated parties to settle 
actions immediately before costs became prohibitively high, thereby 
denying them an opportunity to defend themselves. Other comment letters 
pointed out that negotiated settlements benefit all parties involved 
and that a settlement where the institution-affiliated party does not 
admit to wrongdoing should not come within the definition of 
indemnification payment contained in section 18(k)(5)(A) of the FDI Act 
because the settlement agreement would not contain any penalty or 
require any affirmative action that would, if embodied in a final 
order, preclude indemnification under FDI Act section 18(k)(5)(A) and 
Sec. 359.5(a)(5) of the First Proposal.
    After considerable review, the FDIC has chosen not to permit 
indemnification of settlement costs by the depository institution or 
holding company where the IAP is assessed a civil money penalty, 
removed from office or prohibited from participating in the conduct of 
the affairs of the insured depository institution or required to cease 
and desist from or take any affirmative action described in section 
8(b) of the Act.11 However, insured depository institutions and 
depository institution holding companies may purchase commercial 
insurance policies or fidelity bonds, at a reasonable cost, which may 
pay all costs incurred in an action or proceeding which is settled, 
except civil money penalties and judgements. As we noted earlier, it is 
also permissible for insurance policies and bonds to pay restitution to 
the depository institution, holding company or receiver.

    \11\If indemnification was authorized and paid by the depository 
institution or holding company pursuant to section 359.5 of this 
part, the IAP is obligated to reimburse the institution or holding 
company, respectively.
---------------------------------------------------------------------------

4. Involvement by Majority or All of Board of Directors

    A significant number of comment letters pointed out that 
Sec. 359.5(b) of the First Proposal, which prohibits an institution-
affiliated party who is requesting indemnification from participating 
in any way in the board's discussion and approval of such payments, 
does not take into account situations where the majority or all the 
members of the board of directors are the subject of an enforcement 
action or civil proceeding. Thus, consistent with several 
recommendations we received, the FDIC has added new Secs. 359.5 (c) and 
(d) to the Second Proposal. Section 359.5(c) provides that if a 
majority of the members of an institution's or holding company's board 
of directors are named as respondents in an administrative proceeding 
or civil action commenced by any federal banking agency the remaining 
board member(s) may either make an independent decision concerning 
authorization of indemnification payments or retain independent legal 
counsel to provide an opinion as to whether the conditions contained in 
Sec. 359.5(a) of the Second Proposal have been met. If the entire board 
of directors is subject to the administrative action or civil 
proceeding, Sec. 359.5(d) of the Second Proposal requires the board to 
retain independent legal counsel to opine as to whether the conditions 
set forth in Sec. 359.5(a) have been met. If independent legal counsel 
is of the opinion that these conditions have been met, the board may 
rely on such an opinion in authorizing the requested 
indemnification.12 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. The FDIC is of the opinion that these procedures 
effectively address the difficulties inherent in situations where the 
majority of or the entire board of directors of an institution or 
holding company are the subjects of an enforcement proceeding. The use 
of independent legal counsel ensures an unbiased review of the five 
criteria necessary to approve indemnification and does not impose any 
undue hardship upon the depository institution or holding company in 
question.

    \12\Of course, the board of directors could decline to approve 
the indemnification request despite counsel's favorable opinion.
---------------------------------------------------------------------------

5. Definition of Indemnification Payment

    Section 359.1(h) of the First Proposal contained the definition of 
``indemnification payment''. A number of comment letters expressed 
concern that even if an institution or holding company could qualify to 
purchase a commercial insurance policy or fidelity bond which would 
cover the costs of defending and/or settling an administrative action 
or civil proceeding commenced by a federal banking agency, the proposed 
regulation prohibited an institution or holding company from purchasing 
such coverage. First Proposal Sec. 359.1(h)(2). Upon further 
consideration, as we noted earlier herein, the FDIC is of the opinion 
that if a depository institution or holding company can purchase, at 
reasonable rates, a commercial insurance policy or fidelity bond which 
will pay the costs of defending and/or settling an administrative 
action or civil proceeding commenced by a federal banking agency, 
neither the statute nor any consideration of safe and sound banking 
practice require the Corporation to interfere with such an arrangement. 
Section 359.1(l)(2) of the Second Proposal reflects this change. This 
revision should address the concerns [[Page 16077]] raised by numerous 
comment letters that the proposed regulation's restriction would impair 
the ability of depository institutions and holding companies to attract 
and retain competent management and directors. It is important to 
emphasize that the Second Proposal would prohibit such an insurance 
policy or bond from being used to pay or reimburse an institution-
affiliated party for the amount of any judgment or civil money penalty 
assessed against him/her.

6. Fees Incurred During Investigations

    The First Proposal did not address the question of whether 
indemnification for counsel fees incurred during the investigative 
stage of a potential administrative enforcement action should be 
permitted. In view of the definition of indemnification payment 
contained in section 18(k)(5)(A) of the FDI Act and its specific 
reference to ``any administrative proceeding or civil action instituted 
by the appropriate Federal banking agency'', the FDIC is of the opinion 
that indemnification of such expenses incurred prior to the 
commencement of a formal action should not be prohibited.

Technical Amendments

    The comment letters also suggested a number of technical revisions 
to the First Proposal to clarify certain provisions or avoid certain 
anomalies. The definition of golden parachute payment contained in 
section 18(k)(4)(A) of the FDI Act refers to ``any payment (or any 
agreement to make any payment) in the nature of compensation * * *.'' 
The definition contained in section 359.1(g)(1) of the First Proposal 
deleted the phrase ``in the nature of compensation''. Several comment 
letters pointed out that the deletion of this phrase from the 
regulatory definition could be construed to prohibit the customary 
payment of certain accrued benefits upon termination of employment 
(e.g., accrued vacation, sick leave, etc.). Since it is not the FDIC's 
intent to prohibit depository institutions and holding companies, even 
those that are troubled, from paying terminating employees for accrued 
but unused benefits such as vacation or sick time, this phrase has been 
added to the Second Proposal.13 Second Proposal Sec. 359.1(f)(1).

    \13\ Claims for certain benefits may not be provable or 
constitute ``actual direct compensatory damages'' under 12 U.S.C. 
1821(e)(3) if the institution is placed into receivership. This 
regulation does not provide otherwise.
---------------------------------------------------------------------------

    Several comment letters also pointed out that the definition of 
``bona fide deferred compensation plan or arrangement'' contained in 
Sec. 359.1(d)(1) of the First Proposal did not allow for reasonable 
earnings on elective deferred compensation. Section 359.1(d)(1) of the 
Second Proposal makes it clear that a bona fide deferred compensation 
plan includes the reasonable investment return on such elective 
deferrals.
    Section 18(k)(4)(C) of the FDI Act and Sec. 359.1(g)(2) of the 
First Proposal delineate certain types of payments which are not 
included within the definition of golden parachute. In describing such 
payments, the words ``nondiscriminatory'' and ``benefit plan'' are 
used. In view of the fact that the precise definition of these terms is 
very important, the FDIC has added them to the list of definitions 
contained in the Second Proposal. Second Proposal Secs. 359.1 (c) and 
(j). In a similar vein, several comment letters suggested that the term 
``indemnification payment'' contained in Sec. 359.1(h) of the First 
Proposal be changed to ``prohibited indemnification payment'' in order 
to avoid confusion with certain types of indemnification payments which 
are permissible. The FDIC agrees with and has adopted this suggestion. 
Second Proposal Sec. 359.1(l).
    A significant number of comment letters pointed out that while the 
definition of an excess deferred compensation plan contained in 
Sec. 359.1(d)(2)(i) of the First Proposal correctly referenced the 
limitations imposed by section 415 of the Internal Revenue Code of 
1986, sections 401(a)(17) and 402(g) of the Code are also applicable, 
but were not referenced. The FDIC has revised the Second Proposal to 
include references to these two provisions of the Internal Revenue 
Code, as well as any other applicable provisions. Second Proposal 
Sec. 359.1(d)(2)(i).
    A very small number of comment letters informed us that certain 
states, particularly California, have statutes which require all 
covered employers to pay severance benefits in certain circumstances. 
These commentators were concerned that the definition of golden 
parachute payment in the First Proposal would conflict with such state 
statutes. In order to avoid such a conflict, the FDIC revised the 
definition of golden parachute payment to explicitly exclude any 
severance or similar payment which is required to be paid pursuant to 
state law which applies to all employers, except those that are 
exempted due to their small number of employees or other similar 
criteria. Second Proposal Sec. 359.1(f)(2)(vi).
    The FDIC has also chosen to clarify the definition of ``payment'' 
contained in Sec. 359.1(l) of the First Proposal by making it explicit 
that the phrase ``the conferring of any benefit'' includes the granting 
of stock options and stock appreciation rights. Second Proposal 
Sec. 359.1(k)(3).
    The FDIC has added a new subsection to the proposed regulation, 
Sec. 359.6, entitled ``Filing Instructions''. This new subsection 
contains instructions on where and how to file written requests for 
prior approval to make certain payments which are otherwise not 
permitted.

Closed Bank/Receivership Issues

    The FDIC has added a new Sec. 359.7 to the proposed regulation to 
make it clear that this regulation would not bind any receiver of a 
failed insured depository institution. The fact that the FDIC or any 
other federal banking agency consents to certain types of payments does 
not imply that the approving agency or the receiver will be responsible 
for making the payments in event of the insolvency of the institution 
or that the recipient will receive some sort of preference over other 
creditors from the receivership.

Other Enforcement Authority

    The FDIC notes that its authority to regulate golden parachutes and 
indemnification payments pursuant to section 18(k) of the FDI Act is in 
addition to its safety and soundness enforcement authority pursuant to 
section 8 of the FDI Act.

Delegations of Authority

    The FDIC is also proposing to amend Sec. 303.7 of its regulations, 
12 CFR 303.7, to add a new paragraph (g) which would delegate the 
Board's authority to the Executive Director, Supervision and 
Resolutions, Director of the Division of Supervision, 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 to make excess nondiscriminatory severance 
plan payments as permitted by Sec. 359.1(f)(2)(v) and golden parachute 
payments to ``white knights'', in change of control situations and 
other golden parachute payments which are not covered under any of the 
regulation's explicit exceptions, as permitted by Sec. 359.4.

Request for Public Comment

    The FDIC hereby requests comment on all aspects of the Second 
Proposal, including both legal and policy considerations. In 
particular, the Corporation is especially interested in whether the 
revisions to the First Proposal in response to the first set of 
[[Page 16078]] public comment letters adequately address the concerns 
which were raised. Of course, commenters should discuss any new issues 
which have been raised as a result of these revisions by the FDIC. 
Interested parties are invited to submit comments during a 60 day 
comment period.

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 proposes to amend 12 CFR part 303 and to add part 359 
to title 12, chapter III, subchapter B, 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(a)(2)(b), 
1817(j), 1818, 1819 (``Seventh'', ``Eighth'' and ``Tenth''), 1828, 
1831e, 1831o, 1831p-1(a); 15 U.S.C. 1607.


    2. In Sec. 303.7, the section heading is revised and a new 
paragraph (g) is added to read as follows:


Sec. 303.7  Delegation of authority to the Executive Director for 
Supervision and Resolutions, the Director of the Division of 
Supervision 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 Executive Director, the Director, and where confirmed 
in writing by the Executive Director or 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 make golden 
parachute and indemnification payments to institution-affiliated 
parties (IAP).
    (b) The limitations on golden parachute payments apply to troubled 
insured depository institutions which seek to make golden parachute 
payments to their IAPs. The limitations also apply to depository 
institution holding companies which are troubled and seek to make 
golden parachute payments to their IAPs as well as healthy holding 
companies which seek 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 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 indemnify an 
IAP directly, except for judgments and penalties, if its board of 
directors makes certain specific findings.


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:
    (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 
[[Page 16079]] 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) Solely 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 
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)(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 termination caused by the death 
or disability of an institution-affiliated party; or
    (v) Any payment made pursuant to a nondiscriminatory severance pay 
plan 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, in conjunction with 
a reduction in force instituted by the insured depository institution 
or depository institution holding company; [[Page 16080]] 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; provided further, however, that 
no such payment shall be made to any senior executive officer (as 
defined in Sec. 303.14(a)(3) of this chapter) of any insured depository 
institution or depository institution holding company without providing 
30 days prior written notice to the appropriate federal banking agency 
and the FDIC; 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 of this part.
    (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 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 (as defined in Sec. 303.14(a)(3) of this chapter) of the 
insured depository institution or depository institution holding 
company shall be treated more favorably than senior executive officers.
    (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, to pay or reimburse such person for any 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) Exception. 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 the amount of any 
restitution to the insured depository institution, depository 
institution holding company or receiver.


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. [[Page 16081]] 


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 are limited to the payment or 
reimbursement of reasonable legal, professional or other expenses 
incurred in connection with an IAP's involvement in an administrative 
proceeding or civil action instituted by any federal banking agency; 
but in no event shall such indemnification pay or reimburse an IAP for 
the amount of, or any cost incurred in connection with, any judgment, 
penalty or settlement with respect to any such claim, proceeding or 
action, pursuant to which the IAP:
    (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;
    (4) The IAP agrees in writing to reimburse the insured depository 
institution or depository institution holding company for such 
indemnification payments in the event that the proceeding or action 
results in a final order or is settled on terms under which the IAP:
    (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; and
    (5) The insured depository institution or depository institution 
holding company provides the appropriate federal banking agency and the 
FDIC with prior written notice of its board of directors' authorization 
of such indemnification.
    (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 
[[Page 16082]] 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 an 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 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 an 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 district 
office where the institution is located. 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 paragraph shall be 
submitted to the primary federal regulator as described in this 
paragraph.


Sec. 359.7  Applicability in the event of receivership.

    The provisions of this part, or any consent or approval granted 
hereunder 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 hereunder 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, D.C., 
this 21st day of March, 1995.

Federal Deposit Insurance Corporation
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 95-7603 Filed 3-28-95; 8:45 am]
BILLING CODE 6714-01-P
Last Updated 07/17/1999 communications@fdic.gov