Rule Limiting "Golden Parachutes" and Indemnification
The FDIC Board
of Directors has issued a final rule that, with certain exceptions,
prohibits troubled holdinq companies, hanks and thrifts from making
"golden parachute" payments. These are typically large cash payments
to executives who resign Just before an institution is closed or
sold. The new rule also limits the ability of any holding company
or FDIC-insured institution to pay the liabilities or legal expenses
of an employee or director who is subject to an enforcement proceeding.
A copy of the final rule is attached.
was issued under authority granted by the Crime Control Act of 1990,
which includes provisions designed to stop abuses in golden parachutes
and indemnification payments. The law permits the FDIC to prohibit
or limit golden parachute and indemnification payments but provides
several exceptions. The agency first proposed rules in this area
in 1991, and then issued a second proposal for additional comment
in March of last year. The final rule, which is similar to the 1995
proposal, becomes effective on April 1, 1996. It applies to all
FDIC-insured financial institutions and their holding companies.
of this regulation, a golden parachute generally is defined as any
payment to an "institution-affiliated party" (typically an officer
or director) while an institution is in a troubled condition and
is contingent on this person's resignation. The FDIC has encountered
past abuses with golden parachutes when institutions pay substantial
sums to top executives who decide to resign after the institution
is troubled or immediately before the institution is sold or closed.
exceptions, the FDIC's final rule prohibits golden parachute agreements
or payments by troubled institutions, by troubled holding companies
or by healthy holding companies on behalf of a troubled subsidiary.
The exceptions include what may be considered legitimate business
expenses, such as: qualified retirement plans: nonqualified "bona
fide" deferred compensation plans: nondiscriminatory severance pay
plans: other types of common benefit plans: certain payments required
by state law; and death benefits.
exceptions are provided for in cases involving the hiring of a "white
knight" (a new manager to improve the institution's condition) or
when a troubled institution is sold without FDIC assistance. Under
the final rule, an institution or an institution-affiliated party
also can request FDIC permission to make or receive what would otherwise
be a prohibited golden parachute payment, or to enter into an agreement
to do so.
The FDIC believes
that individuals who violate banking laws should pay penalties and
legal expenses out of their own pockets and not be reimbursed by
insured institutions. This helps deter fraud and protect the deposit
The new rule
limiting indemnification payments applies to all FDIC- insured institutions,
their subsidiaries and affiliated depository institution holding
companies regardless of their financial health. Generally, the rule
prohibits indemnification payments made to or for an institution-affiliated
party in connection with a federal administrative or civil enforcement
action that results in a civil money penalty, removal from office,
prohibition from service or other penalties described in the attached
Federal Register notice.
are exceptions to this general prohibition. An institution or holding
company may purchase commercial insurance to cover expenses other
than judgments and penalties. Also, an institution or holding company
can pay "up front" for an employee's legal or other professional
expenses if: (1) its board of directors makes certain findings,
and (2) the employee agrees in writing to reimburse the institution
if the alleged violations of law, regulation or fiduciary duty are
the new regulation may be directed to Michael D. Jenkins, an Examination
Specialist in the Division of Supervision (202-898-6896), or Jeffrey
M. Kopchik, a Counsel in the Legal Division (202-898-3872).