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[Federal Register: February 15, 1996 (Volume 61, Number 32)]

[Rules and Regulations]

[Page 5926-5934]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]



 

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FEDERAL DEPOSIT INSURANCE CORPORATION


 

12 CFR Parts 303 and 359


 

RIN 3064-AB11


 

 

Regulation of Golden Parachutes and Other Benefits Which May Be

Subject to Misuse


 

AGENCY: Federal Deposit Insurance Corporation (FDIC or Corporation).


 

ACTION: Final rule.


 

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SUMMARY: The FDIC is adopting a rule limiting golden parachute and

indemnification payments to institution-affiliated parties by insured

depository institutions and depository institution holding companies.

The


 

[[Page 5927]]

purpose of this rule is to prevent the improper disposition of

institution assets and to protect the financial soundness of insured

depository institutions, depository institution holding companies, and

the federal deposit insurance funds.


 

EFFECTIVE DATE: April 1, 1996.


 

FOR FURTHER INFORMATION CONTACT: Robert F. Miailovich, Associate

Director, Division of Supervision, (202) 898-6918, 550 17th Street,

N.W., Washington, D.C.; Michael D. Jenkins, Examination Specialist,

Division of Supervision, (202) 898-6896, 1776 F Street, N.W.,

Washington, D.C. 20429; Jeffrey M. Kopchik, Counsel, Legal Division,

(202) 898-3872; Federal Deposit Insurance Corporation, 550 17th Street,

N.W., Washington, D.C. 20429.


 

SUPPLEMENTARY INFORMATION:


 

Paperwork Reduction Act


 

No collection of information pursuant to section 3504(h) of the

Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in this

rule. Consequently, no information was submitted to the Office of

Management and Budget for review.


 

Regulatory Flexibility Act


 

Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.

L. 96-354, 5 U.S.C. 601 et seq.), it is certified that this rule will

not have a significant impact on a substantial number of small

entities.


 

Background


 

On March 29, 1995, the FDIC published for public comment a notice

of proposed rulemaking entitled ``Regulation of Golden Parachutes and

Other Benefits Which May Be Subject to Misuse''. 60 FR 16069 (1995).

This proposal (the Second Proposal) followed an earlier notice of

proposed rulemaking concerning the same topic (the First Proposal),

which was published in the Federal Register on October 7, 1991. 56 FR

50529 (1991). Both the First and Second Proposals were efforts to

implement section 18(k) of the Federal Deposit Insurance Act (12 U.S.C.

1828(k)) (FDI Act). Section 18(k) provides that the FDIC may prohibit

or limit, by regulation or order, any golden parachute or

indemnification payment.

The FDIC received 23 comment letters in response to the Second

Proposal. The comment letters were submitted by major financial

institution trade associations, insured depository institutions,

insured depository institution holding companies, a law firm and a

trade association representing life insurance underwriters. Virtually

all of the commenters expressed the view that the Second Proposal

represented a significant improvement over the First Proposal in terms

of the burden that the proposed regulation would place on the industry.

In fact, the majority of commenters expressed support for the Second

Proposal, while submitting well thought-out suggestions. These

suggestions encompassed technical revisions to the regulation as well

as broader proposals aimed at making it easier for insured depository

institutions and holding companies to make golden parachute and

indemnification payments in certain limited circumstances.


 

Issues Raised by the Commenters--Golden Parachute Payments


 

The FDIC has carefully reviewed and analyzed the comment letters it

received in response to the Second Proposal. With respect to the golden

parachute portion of the Second Proposal, the most significant issues

raised by the comment letters and the FDIC's responses are discussed

below.


 

1. Bona Fide Deferred Compensation Plans


 

The Second Proposal includes a definition of ``bona fide deferred

compensation plan or arrangement'' that was created specifically for

this regulation. This definition, which appears in Sec. 359.1(d) of the

Second Proposal, includes a provision that allows plans to provide for

the crediting of a reasonable investment return on elective deferrals

of compensation, wages or fees. Several commenters suggested that the

definition of ``bona fide deferred compensation plan or arrangement''

should be expanded to further define the term ``reasonable investment

return''. One comment letter included suggested language to be

incorporated into the regulation. The FDIC is of the opinion that

including an additional definition of ``reasonable investment return''

would not provide any advantage to the industry and would only serve to

make the regulation more complicated. This provision is provided in the

definition to permit financial institutions to follow normal business

practices. It is not intended to have the regulators make close

distinctions of what is a reasonable investment return. It is intended

merely to prevent the inclusion of exorbitant returns that would result

in a circumvention of the primary purpose of this regulation. The

suggested definitions provided by the commenters are considered to

clearly fit the requirements of this term; however, the FDIC also

recognizes that there are several other definitions of ``reasonable

investment return'' that also fit these requirements.

Several commenters asked whether a finding by the FDIC that a bona

fide deferred compensation plan provided for an unreasonable investment

return on elective deferrals would invalidate the entire plan. The FDIC

is of the view that such a finding would not invalidate such a plan

which otherwise conforms to Sec. 359.1(d). However, that portion of the

investment return which is found to be unreasonable would be a

prohibited golden parachute payment.


 

2. Nondiscriminatory Severance Pay Plans


 

Section 359.1(f)(2) of the Second Proposal contains certain

exceptions to the definition of ``golden parachute payment''. One of

those exceptions is for nondiscriminatory severance pay plans. Second

Proposal Sec. 359.1(f)(2)(v). Several commenters suggested that the

FDIC delete the requirement that the exception apply only in cases of a

reduction in force (RIF). This section of the Second Proposal also

would require 30 days prior written notice to the appropriate federal

banking agency and the FDIC prior to making such a severance payment to

a senior executive officer. Several commenters also urged the deletion

of the prior notice requirement. After careful consideration, the FDIC

agrees with these suggestions. If a nondiscriminatory severance pay

plan conforms to the other requirements set forth in

Sec. 359.1(f)(2)(v), it should not be necessary that an employee's

involuntary termination be part of a RIF in order for that employee to

collect severance pay. This section's other requirements are more than

adequate protection that the exception will not be used to circumvent

the regulation's primary purpose, i.e., the prohibition of golden

parachute payments. Also, the advantages of the prior notice provision

for severance payments to senior executive officers do not outweigh the

burden such a requirement would place on the industry, so this

requirement has been deleted.


 

3. Definition of Nondiscriminatory


 

Section 359.1(j) of the Second Proposal contains the definition of

``nondiscriminatory'' as it relates to severance pay plans or

arrangements. These are the only type of severance pay plans or

arrangements that may qualify as an exception to the regulation's

prohibition. In order to be considered nondiscriminatory, a severance

pay plan must apply to all employees of an


 

[[Page 5928]]

insured depository institution or depository institution holding

company who meet reasonable and customary eligibility requirements

applicable to all employees, such as minimum length of service

requirements. The Second Proposal provides that a nondiscriminatory

severance pay plan may provide different benefits to IAPs based only

upon length of service and/or position. In the event that an employee's

position is used as a basis for providing a different level of

benefits, employees who are not senior executive officers shall be

treated more favorably than senior executive officers.

The reason for this approach was the FDIC's concern that severance

pay plans could be designed in such a way that they would circumvent

the basic purpose of the regulation. In other words, as an example, to

permit severance payments of one year's salary to the top five senior

executive officers of an insured depository institution in contrast to

one week's salary to all tellers on the basis that such payments are

made pursuant to a bona fide severance pay plan, a recognized exception

to the golden parachute prohibition, would undermine the purpose of FDI

Act section 18(k). However, several commenters noted that many existing

severance plans do pay somewhat more generous benefits to higher

ranking IAPs. These commenters suggested that a modest disparity in

severance benefits linked to objective criteria like job title or

length of service should be permitted by the regulation since such

plans are common in the financial services industry and do not violate

the basic premise of FDI Act section 18(k). The FDIC has been persuaded

that this position represents a good compromise between preventing the

payment of prohibited golden parachutes and permitting insured

depository institutions and holding companies to offer severance

benefits that conform to well-established industry norms.

Based upon suggestions made in the comment letters, the definition

of ``nondiscriminatory'' contained in Sec. 359.1(j) of the Second

Proposal has been amended to provide that a nondiscriminatory severance

plan may provide for different levels of benefits based only on

objective criteria such as salary, total compensation, length of

service, job grade or classification. In addition, any group of

employees which is designated for a different level of benefits based

upon such acceptable objective criteria must consist of the lesser of

not less than 33 percent of all employees or 1,000 employees.

Furthermore, the differential in benefits between the groups shall not

be more than plus or minus 10 percent.


 

4. White Knight Exception


 

Both the First and Second Proposals contained a provision which

would permit a troubled depository institution or holding company to

hire an individual and agree to pay him/her a golden parachute payment

upon termination of employment, provided that the amount and terms of

the payment receive the prior written consent of the appropriate

federal banking agency and the FDIC. Second Proposal Sec. 359.4(a)(2).

All commenters that discussed the issue were supportive of the FDIC's

``white knight'' exception to the golden parachute prohibition. They

were particularly supportive of the revisions to the exception that

were made in response to comment letters concerning the First Proposal.

However, a number of commenters reiterated the suggestion that the FDIC

broaden the exception to include current officers and employees who are

promoted to executive positions at a time when the institution is

troubled.1 The FDIC has carefully considered this suggestion once

again and remains unconvinced that the regulation should be amended in

this way. White knight severance payments will be approved in limited

circumstances as a way to entice competent management to sever

established ties with their current employer and take a calculated risk

that they can assist in bringing a troubled institution back to

financial health. This rationale does not apply to the case of a

current employee of a troubled institution since he/she does not need

to be enticed to give up an established, stable career with another

employer.


 

\1\ In the course of this preamble, the term ``troubled'' shall

be used to refer to any of the criteria listed in Sec. 359.1(f)(ii)

of this final regulation.

---------------------------------------------------------------------------


 

5. Change In Control Exception


 

Section 359.4(a)(3) of the Second Proposal contains the change in

control exception to the golden parachute prohibition. This exception

permits an insured depository institution or holding company to make a

reasonable severance payment, not to exceed twelve months salary, to an

IAP in the event of a change in control with the prior consent of the

appropriate federal banking agency. Once again, every commenter who

discussed this exception expressed their support. However, a

substantial number of those recommended that the FDIC delete the one

year's salary cap.

This exception was added to the Second Proposal in response to

comment letters received concerning the First Proposal. While the FDIC

considers this to be an important exception, we believe that certain

limits need to be placed on such payments. One year's salary appears to

be a reasonable compromise between a prohibition on any payment and

more generous payments. The FDIC is of the opinion that one year's

salary will provide ample incentive for an IAP (usually a senior

executive officer) to objectively consider a takeover bid which may

result in the loss of that IAP's job. It must be remembered that this

exception is relevant only in the event of the takeover of a troubled

depository institution or holding company.


 

6. Condition of the Institution at Time of Termination


 

The FDIC specified in the preamble to the Second Proposal that a

golden parachute payment which is prohibited from being paid at the

time of an IAP's termination due to the troubled condition of the

insured depository institution or holding company cannot be paid to

that IAP at some later point in time once the institution or holding

company is no longer troubled. See Second Proposal

Sec. 359.1(f)(1)(iii). Several commenters requested that the FDIC

reconsider its position on this point.

The FDIC believes the position taken in the Second Proposal is

consistent with the language and spirit of the statute. The language of

section 18(k)(4)(A)(ii) of the FDI Act provides that any payment which

is contingent on the termination of an IAP's employment and is received

on or after an institution or holding company becomes troubled is a

prohibited golden parachute. If this payment is prohibited under the

prescribed circumstances, it is prohibited forever. However, the

regulation contains several exceptions and procedures for affected

individuals to avoid an undeserved prohibition on a potential golden

parachute payment. Thus, the final regulation is consistent with the

Second Proposal in this regard.


 

Issues Raised by the Commenters-- Indemnification Payments


 

The vast majority of commenters were very supportive of the changes

which the FDIC made to the indemnification payments portion of the

First Proposal in response to the first set of comment letters. While

most commenters indicated they thought the Second Proposal set forth a

rational and fair scheme for determining indemnification, many

commenters urged the FDIC to further amend the


 

[[Page 5929]]

regulation to make it somewhat easier for IAPs to be indemnified. The

FDIC has decided to adopt some, but not all, of the suggestions it

received as discussed below.


 

1. Partial Indemnification


 

The most prevalent comment with regard to the indemnification

portion of the Second Proposal noted that the proposed regulation would

not permit partial indemnification in instances where it has been

determined that an IAP has not violated certain banking laws or

regulations or has not engaged in certain unsafe or unsound banking

practices or breaches of fiduciary duty for which the individual has

been charged. The FDIC has carefully considered this point and agrees

with the commenters that indemnification should not be an ``all or

nothing'' proposition. Therefore, the final regulation has been revised

to permit partial indemnification for legal or professional expenses

specifically attributable to particular charges for which there has

been a formal and final adjudication or finding in connection with a

settlement that the IAP has not violated certain banking laws or

regulations or engaged in certain unsafe or unsound banking practices

or breaches of fiduciary duty. Thus, in any administrative proceeding

or civil action instituted by any federal banking agency which results

in a final order or settlement pursuant to which the IAP is assessed a

civil money penalty or is subject to a cease and desist order,

indemnification will be permitted only for that portion of the

liability or legal expenses incurred which relate to the particular

charges for which an adjudication or finding in connection with a

settlement in favor of the IAP has been made. Partial indemnification

will not be permitted in cases where an IAP is removed from office and/

or prohibited from participating in the affairs of an institution.

Under no circumstances shall an IAP be indemnified for the amount of a

civil money penalty or judgement assessed against him/her. See Final

Regulation Secs. 359.1(l) and 359.5(a). The FDIC recognizes that in

many cases the appropriate amount of any partial indemnification will

be difficult to ascertain with certainty.


 

2. Prior Notification of Indemnification Payments


 

Several commenters suggested that the FDIC delete the

Sec. 359.5(a)(5) requirement that the institution or holding company

give the FDIC and the primary federal regulator prior written

notification of the granting of any indemnification. The commenters

pointed out that, in view of the limitations which the Second Proposal

would place on the granting of indemnification payments and the various

safeguards incorporated into the proposed regulation, prior

notification would be unnecessary and burdensome. The FDIC agrees and

this requirement has been deleted.


 

3. Prevention of Double Payments


 

Several commenters pointed out that Sec. 359.5(a)(4) of the Second

Proposal is worded in such a way that it could result in double

payments to the institution in the event that a liability or legal

expense incurred by the institution is reimbursed by insurance or a

fidelity bond. The commenters are correct that the FDIC did not intend

this result and the final regulation has been amended to make it clear

that an IAP will not be obligated to reimburse the depository

institution or holding company for indemnification payments made for

his/her benefit to the extent that the institution or holding company

is reimbursed by an insurance policy or fidelity bond.


 

4. Definition of Independent Counsel


 

A few comment letters noted that the Second Proposal does not

contain a definition of the term ``independent legal counsel'',

utilized in Secs. 359.5 (c) and (d). The FDIC considered including such

a definition when the Second Proposal was being written, but decided

against it in an effort to shorten and simplify the regulation. The

Corporation was of the opinion that the term ``independent legal

counsel'' was not overly technical and could be determined on a case-

by-case basis. Also, the preamble to the Second Proposal provided that:


 

The FDIC would regard legal counsel as being ``independent''

(for purposes of this regulation) if the attorney(s) is not a member

of the depository institution's or holding company's in-house legal

staff, does not have an ongoing relationship with the depository

institution or holding company and no other conflict of interest is

present.


 

60 FR 16076 (1995). Thus, the FDIC has elected not to define this term

in the final regulation.


 

5. Standard for Indemnification


 

In response to comments received with regard to the First Proposal,

the FDIC made significant modifications to the indemnification portion

of the proposed regulation in an effort to make it easier for an

institution's or holding company's board of directors to approve IAPs

to be indemnified for expenses incurred in administrative or civil

actions commenced by a federal banking agency. Those modifications were

discussed in great detail in the preamble to the Second Proposal. See

60 FR 16075-16076 (1995).

While all the commenters who raised the issue were supportive of

these revisions, some commenters urged the FDIC to further revise the

Second Proposal to make it even easier for IAPs to be indemnified.

Several of these commenters referred to the Model Business Corporation

Act (MBCA) and recommended that the FDIC adopt the indemnification

standard set forth in section 8.51 thereof.

The Office of the Comptroller of the Currency (OCC) published a

Notice of Proposed Rulemaking on March 3, 1995 concerning proposed

modifications to 12 CFR part 7. See 60 FR 11924 (1995). This OCC

proposal contained suggested revisions to OCC interpretive rulings

concerning, among other topics, the indemnification of directors,

officers and employees of national banks. Several of those who

commented on the Second Proposal urged the FDIC and the OCC to adopt

consistent regulations. In an effort to achieve inter-agency

conformity, the FDIC and OCC have consulted with each other and have

agreed to adopt consistent regulations.

While the Corporation understands the commenters' desires to make

indemnification as easy as would be reasonable and to utilize the

standard set forth in the MBCA, the FDIC Board has concluded that it is

not required to follow the MBCA and that a slightly more stringent

standard for insured depository institutions and their holding

companies makes sense in view of the fact that this indemnification

prohibition only applies to actions brought by the federal banking

agencies. Such actions are only brought after substantial investigation

and as part of a strict regulatory scheme. Such actions are intended to

protect and maintain the solvency and integrity of the federal deposit

insurance funds. Moreover, the FDIC Board is of the opinion that the

indemnification standard set forth in the Second Proposal, with the

revisions described above, appropriately balances the need to indemnify

IAPs for actions taken in their official capacities with the necessity

of making sure that they are held accountable for substantive

violations of law or regulation. The standard also serves the purpose

of protecting the financial viability of the insured depository

institution or holding company which may make the indemnification

payment. Thus, no further modifications to the standards are considered

warranted.


 

[[Page 5930]]



 

6. Commencement of an Administrative Action


 

Several commenters suggested that the FDIC clarify when an

administrative action is commenced by a federal banking agency. This

time frame is important in view of the FDIC's position that expenses

incurred prior to the commencement of a formal action are not subject

to the regulation. See 60 FR 16077. The FDIC considers a formal

administrative action to be commenced by the issuance of a ``Notice of

Charges''. See e.g., 12 CFR 308.18.


 

List of Subjects


 

12 CFR Part 303


 

Administrative practice and procedure, Authority delegations

(Government agencies), Bank deposit insurance, Banks, banking,

Reporting and recordkeeping requirements, Savings associations.


 

12 CFR Part 359


 

Banks, banking, Golden parachute payments, Indemnity payments.


 

For the reasons set out in the preamble, the FDIC Board of

Directors hereby amends part 303 and adds part 359 of title 12, chapter

III, of the Code of Federal Regulations as follows:


 

PART 303--APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF

AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR

REGULATION


 

1. The authority citation for part 303 continues to read as

follows:


 

Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817(j), 1818,

1819(``Seventh'' and ``Tenth''), 1828, 1831e, 1831o, 1831p-1; 15

U.S.C. 1607.


 

2. In Sec. 303.7, a new paragraph (g) is added to read as follows:



 

Sec. 303.7 Delegation of authority to the Director (DOS) and to the

associate directors, regional directors and deputy regional directors

to act on certain applications, requests, and notices of acquisition of

control.


 

* * * * *

(g) Requests pursuant to section 18(k) of the Act. Authority is

delegated to the Director, and where confirmed in writing by the

Director, to an associate director, or to the appropriate regional

director or deputy regional director, to approve or deny requests

pursuant to section 18(k) of the Act to make:

(1) Excess nondiscriminatory severance plan payments as provided by

12 CFR 359.1(f)(2)(v); and

(2) Golden parachute payments permitted by 12 CFR 359.4.

3. New part 359 is added to read as follows:


 

PART 359--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS


 

Sec.

359.0 Scope.

359.1 Definitions.

359.2 Golden parachute payments prohibited.

359.3 Prohibited indemnification payments.

359.4 Permissible golden parachute payments.

359.5 Permissible indemnification payments.

359.6 Filing instructions.

359.7 Applicability in the event of receivership.


 

Authority: 12 U.S.C. 1828(k).



 

Sec. 359.0 Scope.


 

(a) This part limits and/or prohibits, in certain circumstances,

the ability of insured depository institutions, their subsidiaries and

affiliated depository institution holding companies to enter into

contracts to pay and to make golden parachute and indemnification

payments to institution-affiliated parties (IAPs).

(b) The limitations on golden parachute payments apply to troubled

insured depository institutions which seek to enter into contracts to

pay or to make golden parachute payments to their IAPs. The limitations

also apply to depository institution holding companies which are

troubled and seek to enter into contracts to pay or to make golden

parachute payments to their IAPs as well as healthy holding companies

which seek to enter into contracts to pay or to make golden parachute

payments to IAPs of a troubled insured depository institution

subsidiary. A ``golden parachute payment'' is generally considered to

be any payment to an IAP which is contingent on the termination of that

person's employment and is received when the insured depository

institution making the payment is troubled or, if the payment is being

made by an affiliated holding company, either the holding company

itself or the insured depository institution employing the IAP, is

troubled. The definition of golden parachute payment does not include

payments pursuant to qualified retirement plans, nonqualified bona fide

deferred compensation plans, nondiscriminatory severance pay plans,

other types of common benefit plans, state statutes and death benefits.

Certain limited exceptions to the golden parachute payment prohibition

are provided for in cases involving the hiring of a white knight and

unassisted changes in control. A procedure is also set forth whereby an

institution or IAP can request permission to make what would otherwise

be a prohibited golden parachute payment.

(c) The limitations on indemnification payments apply to all

insured depository institutions, their subsidiaries and affiliated

depository institution holding companies regardless of their financial

health. Generally, this part prohibits insured depository institutions,

their subsidiaries and affiliated holding companies from indemnifying

an IAP for that portion of the costs sustained with regard to an

administrative or civil enforcement action commenced by any federal

banking agency which results in a final order or settlement pursuant to

which the IAP is assessed a civil money penalty, removed from office,

prohibited from participating in the affairs of an insured depository

institution or required to cease and desist from or take an affirmative

action described in section 8(b) (12 U.S.C. 1818(b)) of the Federal

Deposit Insurance Act (FDI Act). However, there are exceptions to this

general prohibition. First, an institution or holding company may

purchase commercial insurance to cover such expenses, except judgments

and penalties. Second, the institution or holding company may advance

legal and other professional expenses to an IAP directly (except for

judgments and penalties) if its board of directors makes certain

specific findings and the IAP agrees in writing to reimburse the

institution if it is ultimately determined that the IAP violated a law,

regulation or other fiduciary duty.



 

Sec. 359.1 Definitions.


 

(a) Act means the Federal Deposit Insurance Act, as amended (12

U.S.C. 1811, et seq.).

(b) Appropriate federal banking agency, bank holding company,

depository institution holding company and savings and loan holding

company have the meanings given to such terms in section 3 of the Act.

(c) Benefit plan means any plan, contract, agreement or other

arrangement which is an ``employee welfare benefit plan'' as that term

is defined in section 3(1) of the Employee Retirement Income Security

Act of 1974, as amended (29 U.S.C. 1002(1)), or other usual and

customary plans such as dependent care, tuition reimbursement, group

legal services or cafeteria plans; provided however, that such term

shall not include any plan intended to be subject to paragraphs (f)(2)

(iii) and (v) of this section.

(d) Bona fide deferred compensation plan or arrangement means any

plan, contract, agreement or other arrangement whereby:


 

[[Page 5931]]


 

(1) An IAP voluntarily elects to defer all or a portion of the

reasonable compensation, wages or fees paid for services rendered which

otherwise would have been paid to such party at the time the services

were rendered (including a plan that provides for the crediting of a

reasonable investment return on such elective deferrals) and the

insured depository institution or depository institution holding

company either:

(i) Recognizes compensation expense and accrues a liability for the

benefit payments according to generally accepted accounting principles

(GAAP); or

(ii) Segregates or otherwise sets aside assets in a trust which may

only be used to pay plan and other benefits, except that the assets of

such trust may be available to satisfy claims of the institution's or

holding company's creditors in the case of insolvency; or

(2) An insured depository institution or depository institution

holding company establishes a nonqualified deferred compensation or

supplemental retirement plan, other than an elective deferral plan

described in paragraph (e)(1) of this section:

(i) Primarily for the purpose of providing benefits for certain

IAPs in excess of the limitations on contributions and benefits imposed

by sections 415, 401(a)(17), 402(g) or any other applicable provision

of the Internal Revenue Code of 1986 (26 U.S.C. 415, 401(a)(17),

402(g)); or

(ii) Primarily for the purpose of providing supplemental retirement

benefits or other deferred compensation for a select group of

directors, management or highly compensated employees (excluding

severance payments described in paragraph (f)(2)(v) of this section and

permissible golden parachute payments described in Sec. 359.4); and

(3) In the case of any nonqualified deferred compensation or

supplemental retirement plans as described in paragraphs (d) (1) and

(2) of this section, the following requirements shall apply:

(i) The plan was in effect at least one year prior to any of the

events described in paragraph (f)(1)(ii) of this section;

(ii) Any payment made pursuant to such plan is made in accordance

with the terms of the plan as in effect no later than one year prior to

any of the events described in paragraph (f)(1)(ii) of this section and

in accordance with any amendments to such plan during such one year

period that do not increase the benefits payable thereunder;

(iii) The IAP has a vested right, as defined under the applicable

plan document, at the time of termination of employment to payments

under such plan;

(iv) Benefits under such plan are accrued each period only for

current or prior service rendered to the employer (except that an

allowance may be made for service with a predecessor employer);

(v) Any payment made pursuant to such plan is not based on any

discretionary acceleration of vesting or accrual of benefits which

occurs at any time later than one year prior to any of the events

described in paragraph (f)(1)(ii) of this section;

(vi) The insured depository institution or depository institution

holding company has previously recognized compensation expense and

accrued a liability for the benefit payments according to GAAP or

segregated or otherwise set aside assets in a trust which may only be

used to pay plan benefits, except that the assets of such trust may be

available to satisfy claims of the institution's or holding company's

creditors in the case of insolvency; and

(vii) Payments pursuant to such plans shall not be in excess of the

accrued liability computed in accordance with GAAP.

(e) Corporation means the Federal Deposit Insurance Corporation, in

its corporate capacity.

(f) Golden parachute payment. (1) The term golden parachute payment

means any payment (or any agreement to make any payment) in the nature

of compensation by any insured depository institution or an affiliated

depository institution holding company for the benefit of any current

or former IAP pursuant to an obligation of such institution or holding

company that:

(i) Is contingent on, or by its terms is payable on or after, the

termination of such party's primary employment or affiliation with the

institution or holding company; and

(ii) Is received on or after, or is made in contemplation of, any

of the following events:

(A) The insolvency (or similar event) of the insured depository

institution which is making the payment or bankruptcy or insolvency (or

similar event) of the depository institution holding company which is

making the payment; or

(B) The appointment of any conservator or receiver for such insured

depository institution; or

(C) A determination by the insured depository institution's or

depository institution holding company's appropriate federal banking

agency, respectively, that the insured depository institution or

depository institution holding company is in a troubled condition, as

defined in the applicable regulations of the appropriate federal

banking agency (Sec. 303.14(a)(4) of this chapter); or

(D) The insured depository institution is assigned a composite

rating of 4 or 5 by the appropriate federal banking agency or informed

in writing by the Corporation that it is rated a 4 or 5 under the

Uniform Financial Institutions Rating System of the Federal Financial

Institutions Examination Council, or the depository institution holding

company is assigned a composite rating of 4 or 5 or unsatisfactory by

its appropriate federal banking agency; or

(E) The insured depository institution is subject to a proceeding

to terminate or suspend deposit insurance for such institution; and

(iii)(A) Is payable to an IAP whose employment by or affiliation

with an insured depository institution is terminated at a time when the

insured depository institution by which the IAP is employed or with

which the IAP is affiliated satisfies any of the conditions enumerated

in paragraphs (f)(1)(ii) (A) through (E) of this section, or in

contemplation of any of these conditions; or

(B) Is payable to an IAP whose employment by or affiliation with an

insured depository institution holding company is terminated at a time

when the insured depository institution holding company by which the

IAP is employed or with which the IAP is affiliated satisfies any of

the conditions enumerated in paragraphs (f)(1)(ii)(A), (C) or (D) of

this section, or in contemplation of any of these conditions.

(2) Exceptions. The term golden parachute payment shall not

include:

(i) Any payment made pursuant to a pension or retirement plan which

is qualified (or is intended within a reasonable period of time to be

qualified) under section 401 of the Internal Revenue Code of 1986 (26

U.S.C. 401) or pursuant to a pension or other retirement plan which is

governed by the laws of any foreign country; or

(ii) Any payment made pursuant to a benefit plan as that term is

defined in paragraph (c) of this section; or

(iii) Any payment made pursuant to a bona fide deferred

compensation plan or arrangement as defined in paragraph (d) of this

section; or

(iv) Any payment made by reason of death or by reason of

termination caused by the disability of an institution-affiliated

party; or

(v) Any payment made pursuant to a nondiscriminatory severance pay

plan


 

[[Page 5932]]

or arrangement which provides for payment of severance benefits to all

eligible employees upon involuntary termination other than for cause,

voluntary resignation, or early retirement; provided, however, that no

employee shall receive any such payment which exceeds the base

compensation paid to such employee during the twelve months (or such

longer period or greater benefit as the Corporation shall consent to)

immediately preceding termination of employment, resignation or early

retirement, and such severance pay plan or arrangement shall not have

been adopted or modified to increase the amount or scope of severance

benefits at a time when the insured depository institution or

depository institution holding company was in a condition specified in

paragraph (f)(1)(ii) of this section or in contemplation of such a

condition without the prior written consent of the appropriate federal

banking agency; or

(vi) Any severance or similar payment which is required to be made

pursuant to a state statute or foreign law which is applicable to all

employers within the appropriate jurisdiction (with the exception of

employers that may be exempt due to their small number of employees or

other similar criteria); or

(vii) Any other payment which the Corporation determines to be

permissible in accordance with Sec. 359.4.

(g) Insured depository institution means any bank or savings

association the deposits of which are insured by the Corporation

pursuant to the Act, or any subsidiary thereof.

(h) Institution-affiliated party (IAP) means:

(1) Any director, officer, employee, or controlling stockholder

(other than a depository institution holding company) of, or agent for,

an insured depository institution or depository institution holding

company;

(2) Any other person who has filed or is required to file a change-

in-control notice with the appropriate federal banking agency under

section 7(j) of the Act (12 U.S.C. 1817(j));

(3) Any shareholder (other than a depository institution holding

company), consultant, joint venture partner, and any other person as

determined by the appropriate federal banking agency (by regulation or

case-by-case) who participates in the conduct of the affairs of an

insured depository institution or depository institution holding

company; and

(4) Any independent contractor (including any attorney, appraiser,

or accountant) who knowingly or recklessly participates in: Any

violation of any law or regulation, any breach of fiduciary duty, or

any unsafe or unsound practice, which caused or is likely to cause more

than a minimal financial loss to, or a significant adverse effect on,

the insured depository institution or depository institution holding

company.

(i) Liability or legal expense means:

(1) Any legal or other professional fees and expenses incurred in

connection with any claim, proceeding, or action;

(2) The amount of, and any cost incurred in connection with, any

settlement of any claim, proceeding, or action; and

(3) The amount of, and any cost incurred in connection with, any

judgment or penalty imposed with respect to any claim, proceeding, or

action.

(j) Nondiscriminatory means that the plan, contract or arrangement

in question applies to all employees of an insured depository

institution or depository institution holding company who meet

reasonable and customary eligibility requirements applicable to all

employees, such as minimum length of service requirements. A

nondiscriminatory plan, contract or arrangement may provide different

benefits based only on objective criteria such as salary, total

compensation, length of service, job grade or classification, which are

applied on a proportionate basis (with a variance in severance benefits

relating to any criterion of plus or minus ten percent) to groups of

employees consisting of not less than the lesser of 33 percent of

employees or 1,000 employees.

(k) Payment means:

(1) Any direct or indirect transfer of any funds or any asset;

(2) Any forgiveness of any debt or other obligation;

(3) The conferring of any benefit, including but not limited to

stock options and stock appreciation rights; and

(4) Any segregation of any funds or assets, the establishment or

funding of any trust or the purchase of or arrangement for any letter

of credit or other instrument, for the purpose of making, or pursuant

to any agreement to make, any payment on or after the date on which

such funds or assets are segregated, or at the time of or after such

trust is established or letter of credit or other instrument is made

available, without regard to whether the obligation to make such

payment is contingent on:

(i) The determination, after such date, of the liability for the

payment of such amount; or

(ii) The liquidation, after such date, of the amount of such

payment.

(l) Prohibited indemnification payment. (1) The term prohibited

indemnification payment means any payment (or any agreement or

arrangement to make any payment) by any insured depository institution

or an affiliated depository institution holding company for the benefit

of any person who is or was an IAP of such insured depository

institution or holding company, to pay or reimburse such person for any

civil money penalty or judgment resulting from any administrative or

civil action instituted by any federal banking agency, or any other

liability or legal expense with regard to any administrative proceeding

or civil action instituted by any federal banking agency which results

in a final order or settlement pursuant to which such person:

(i) Is assessed a civil money penalty;

(ii) Is removed from office or prohibited from participating in the

conduct of the affairs of the insured depository institution; or

(iii) Is required to cease and desist from or take any affirmative

action described in section 8(b) of the Act with respect to such

institution.

(2) Exceptions. (i) The term prohibited indemnification payment

shall not include any reasonable payment by an insured depository

institution or depository institution holding company which is used to

purchase any commercial insurance policy or fidelity bond, provided

that such insurance policy or bond shall not be used to pay or

reimburse an IAP for the cost of any judgment or civil money penalty

assessed against such person in an administrative proceeding or civil

action commenced by any federal banking agency, but may pay any legal

or professional expenses incurred in connection with such proceeding or

action or the amount of any restitution to the insured depository

institution, depository institution holding company or receiver.

(ii) The term prohibited indemnification payment shall not include

any reasonable payment by an insured depository institution or

depository institution holding company that represents partial

indemnification for legal or professional expenses specifically

attributable to particular charges for which there has been a formal

and final adjudication or finding in connection with a settlement that

the IAP has not violated certain banking laws or regulations or has not

engaged in certain unsafe or unsound banking practices or breaches of

fiduciary duty, unless the administrative action or civil


 

[[Page 5933]]

proceeding has resulted in a final prohibition order against the IAP.



 

Sec. 359.2 Golden parachute payments prohibited.


 

No insured depository institution or depository institution holding

company shall make or agree to make any golden parachute payment,

except as provided in this part.



 

Sec. 359.3 Prohibited indemnification payments.


 

No insured depository institution or depository institution holding

company shall make or agree to make any prohibited indemnification

payment, except as provided in this part.



 

Sec. 359.4 Permissible golden parachute payments.


 

(a) An insured depository institution or depository institution

holding company may agree to make or may make a golden parachute

payment if and to the extent that:

(1) The appropriate federal banking agency, with the written

concurrence of the Corporation, determines that such a payment or

agreement is permissible; or

(2) Such an agreement is made in order to hire a person to become

an IAP either at a time when the insured depository institution or

depository institution holding company satisfies or in an effort to

prevent it from imminently satisfying any of the criteria set forth in

Sec. 359.1(f)(1)(ii), and the institution's appropriate federal banking

agency and the Corporation consent in writing to the amount and terms

of the golden parachute payment. Such consent by the FDIC and the

institution's appropriate federal banking agency shall not improve the

IAP's position in the event of the insolvency of the institution since

such consent can neither bind a receiver nor affect the provability of

receivership claims. In the event that the institution is placed into

receivership or conservatorship, the FDIC and/or the institution's

appropriate federal banking agency shall not be obligated to pay the

promised golden parachute and the IAP shall not be accorded

preferential treatment on the basis of such prior approval; or

(3) Such a payment is made pursuant to an agreement which provides

for a reasonable severance payment, not to exceed twelve months salary,

to an IAP in the event of a change in control of the insured depository

institution; provided, however, that an insured depository institution

or depository institution holding company shall obtain the consent of

the appropriate federal banking agency prior to making such a payment

and this paragraph (a)(3) shall not apply to any change in control of

an insured depository institution which results from an assisted

transaction as described in section 13 of the Act (12 U.S.C. 1823) or

the insured depository institution being placed into conservatorship or

receivership; and

(4) An insured depository institution, depository institution

holding company or IAP making a request pursuant to paragraphs (a)(1)

through (3) of this section shall demonstrate that it does not possess

and is not aware of any information, evidence, documents or other

materials which would indicate that there is a reasonable basis to

believe, at the time such payment is proposed to be made, that:

(i) The IAP has committed any fraudulent act or omission, breach of

trust or fiduciary duty, or insider abuse with regard to the depository

institution or depository institution holding company that has had or

is likely to have a material adverse effect on the institution or

holding company;

(ii) The IAP is substantially responsible for the insolvency of,

the appointment of a conservator or receiver for, or the troubled

condition, as defined by applicable regulations of the appropriate

federal banking agency, of the insured depository institution,

depository institution holding company or any insured depository

institution subsidiary of such holding company;

(iii) The IAP has materially violated any applicable federal or

state banking law or regulation that has had or is likely to have a

material effect on the insured depository institution or depository

institution holding company; and

(iv) The IAP has violated or conspired to violate section 215, 656,

657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the United

States Code, or section 1341 or 1343 of such title affecting a

federally insured financial institution as defined in title 18 of the

United States Code.

(b) In making a determination under paragraphs (a) (1) through (3)

of this section, the appropriate federal banking agency and the

Corporation may consider:

(1) Whether, and to what degree, the IAP was in a position of

managerial or fiduciary responsibility;

(2) The length of time the IAP was affiliated with the insured

depository institution or depository institution holding company, and

the degree to which the proposed payment represents a reasonable

payment for services rendered over the period of employment; and

(3) Any other factors or circumstances which would indicate that

the proposed payment would be contrary to the intent of section 18(k)

of the Act or this part.



 

Sec. 359.5 Permissible indemnification payments.


 

(a) An insured depository institution or depository institution

holding company may make or agree to make reasonable indemnification

payments to an IAP with respect to an administrative proceeding or

civil action initiated by any federal banking agency if:

(1) The insured depository institution's or depository institution

holding company's board of directors, in good faith, determines in

writing after due investigation and consideration that the institution-

affiliated party acted in good faith and in a manner he/she believed to

be in the best interests of the institution;

(2) The insured depository institution's or depository institution

holding company's board of directors, respectively, in good faith,

determines in writing after due investigation and consideration that

the payment of such expenses will not materially adversely affect the

institution's or holding company's safety and soundness;

(3) The indemnification payments do not constitute prohibited

indemnification payments as that term is defined in Sec. 359.1(l); and

(4) The IAP agrees in writing to reimburse the insured depository

institution or depository institution holding company, to the extent

not covered by payments from insurance or bonds purchased pursuant to

Sec. 359.1(l)(2), for that portion of the advanced indemnification

payments which subsequently become prohibited indemnification payments,

as defined in Sec. 359.1(l)

(b) An IAP requesting indemnification payments shall not

participate in any way in the board's discussion and approval of such

payments; provided, however, that such IAP may present his/her request

to the board and respond to any inquiries from the board concerning

his/her involvement in the circumstances giving rise to the

administrative proceeding or civil action.

(c) In the event that a majority of the members of the board of

directors are named as respondents in an administrative proceeding or

civil action and request indemnification, the remaining members of the

board may authorize independent legal counsel to review the

indemnification request and provide the remaining members of the board

with a written opinion of counsel as to whether the conditions

delineated in paragraph (a) of this section have been met. If

independent legal counsel


 

[[Page 5934]]

opines that said conditions have been met, the remaining members of the

board of directors may rely on such opinion in authorizing the

requested indemnification.

(d) In the event that all of the members of the board of directors

are named as respondents in an administrative proceeding or civil

action and request indemnification, the board shall authorize

independent legal counsel to review the indemnification request and

provide the board with a written opinion of counsel as to whether the

conditions delineated in paragraph (a) of this section have been met.

If independent legal counsel opines that said conditions have been met,

the board of directors may rely on such opinion in authorizing the

requested indemnification.



 

Sec. 359.6 Filing instructions.


 

Requests to make excess nondiscriminatory severance plan payments

pursuant to Sec. 359.1(f)(2)(v) and golden parachute payments permitted

by Sec. 359.4 shall be submitted in writing to the FDIC regional

director (Supervision) for the region in which the institution is

located. The request shall be in letter form and shall contain all

relevant factual information as well as the reasons why such approval

should be granted. In the event that the consent of the institution's

primary federal regulator is required in addition to that of the FDIC,

the requesting party shall submit a copy of its letter to the FDIC to

the institution's primary federal regulator. In the case of national

banks, such written requests shall be submitted to the OCC. In the case

of state member banks and bank holding companies, such written requests

shall be submitted to the Federal Reserve district bank where the

institution or holding company, respectively, is located. In the case

of savings associations and savings association holding companies, such

written requests shall be submitted to the OTS regional office where

the institution or holding company, respectively, is located. In cases

where the prior consent of only the institution's primary federal

regulator is required and that agency is not the FDIC, a written

request satisfying the requirements of this section shall be submitted

to the primary federal regulator as described in this section.



 

Sec. 359.7 Applicability in the event of receivership.


 

The provisions of this part, or any consent or approval granted

under the provisions of this part by the FDIC (in its corporate

capacity), shall not in any way bind any receiver of a failed insured

depository institution. Any consent or approval granted under the

provisions of this part by the FDIC or any other federal banking agency

shall not in any way obligate such agency or receiver to pay any claim

or obligation pursuant to any golden parachute, severance,

indemnification or other agreement. Claims for employee welfare

benefits or other benefits which are contingent, even if otherwise

vested, when the FDIC is appointed as receiver for any depository

institution, including any contingency for termination of employment,

are not provable claims or actual, direct compensatory damage claims

against such receiver. Nothing in this part may be construed to permit

the payment of salary or any liability or legal expense of any IAP

contrary to 12 U.S.C. 1828(k)(3).


 

By order of the Board of Directors, dated at Washington, DC,

this 6th day of February, 1996.


 

Federal Deposit Insurance Corporation.

Jerry L. Langley,

Executive Secretary.

[FR Doc. 96-3273 Filed 2-14-96; 8:45 am]

BILLING CODE 6714-01-P