Modifications to Statement of Policy for Section 19 of the Federal Deposit Insurance Act, 74847-74851 [2012-30351]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 77, Number 243 (Tuesday, December 18, 2012)]
[Notices]
[Pages 74847-74851]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30351]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Modifications to Statement of Policy for Section 19 of the 
Federal Deposit Insurance Act

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Modifications to Statement of Policy for Section 19 of the 
Federal Deposit Insurance Act.

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SUMMARY: The FDIC originally promulgated the Statement of Policy for 
Section 19 of the Federal Deposit Insurance Act (SOP) in December 1998. 
The FDIC, in 2007, issued a clarification to the SOP based on the 2006 
amendment to Section 19 of the Federal Deposit Insurance Act, which 
addressed institution-affiliated parties (IAPs) participating in the 
affairs of Bank Holding Companies, or Savings and Loan Holding 
Companies. The FDIC, in 2011, clarified the SOP as to: (i) The 
applicability of section 19 on bank and thrift holding company 
institution-affiliated parties; (ii) the term ``complete expungement;'' 
and (iii) the factors for considering de minimis convictions. The FDIC 
is restating the full SOP, including previous changes, and modifying 
what the FDIC views as the definition of de minimis offenses.

DATES: The change to the policy statement is effective December 18, 
2012.

FOR FURTHER INFORMATION CONTACT: Martin P. Thompson, Senior Review 
Examiner (202) 898-6767, in the Division of Risk Management 
Supervision; or Michael P. Condon, Counsel, (202) 898-6536, in the 
Legal Division.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829, 
(FDI Act) prohibits, without the prior written consent of the FDIC, a 
person convicted of any criminal offense involving dishonesty or breach 
of trust or money laundering (covered offenses), or who has agreed to 
enter into a pretrial

[[Page 74848]]

diversion or similar program in connection with a prosecution for such 
offense, from becoming or continuing as an institution-affiliated party 
(IAP), owning or controlling, directly or indirectly an insured 
depository institution (insured institution), or otherwise 
participating, directly or indirectly, in the conduct of the affairs of 
the insured institution. In addition, the law forbids an insured 
institution from permitting such a person to engage in any conduct or 
to continue any relationship prohibited by Section 19. The FDIC's SOP 
was published in December 1998 (63 FR 66177) to provide the public with 
guidance relating to Section 19, and the application thereof.
    The Financial Services Regulatory Relief Act of 2006, Public Law 
109-351, Sec.  710, modified Section 19 to include coverage of IAPs of 
Bank Holding Companies, and Savings and Loan Holding Companies. In 
response to this amendment of the statute, the FDIC amended the SOP by 
including a footnote that noted the authority of the Board of Governors 
of the Federal Reserve System and the Office of Thrift Supervision's in 
regard to bank and savings and loan holding companies under Section 19. 
(72 FR 73823, December 28, 2007, with correction issued at 73 FR 5270, 
January 29, 2008). In May of 2011, the FDIC subsequently eliminated the 
footnote added in December of 2007 and incorporated the change directly 
into the text of the SOP. It also noted the coming transfer of 
authority under the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-202, Sec.  312 (2010) (Dodd-Frank) of 
savings and loan holding company jurisdiction to the Board of Governors 
of the Federal Reserve System. In addition, the FDIC made certain 
clarifications regarding the scope of the de minimis exception to 
filing the requirement to file an application for the FDIC's consent 
under Section 19. (76 FR 28031, May 13, 2011). The FDIC now proposes to 
amend the SOP to address two de minimis exception factors regarding the 
potential fine and the jail time served.
    The SOP, as revised herein, will be on the FDIC's Web site at 
www.fdic.gov.

II. Modifications to the Statement of Policy

    The SOP will be clarified in the following areas:

B. Standards for Determining Whether an Application Is Required--De 
Minimis Offenses

    The 1998 SOP created a category of covered offenses that it would 
deem to be de minimis due to the minor nature of the offenses and the 
low risk that the covered party would pose to an insured institution 
based on the conviction. Based on its experience in the processing and 
approving of numerous applications involving such minor crimes, the 
FDIC has recognized a category of offenses to which it would grant 
blanket approval under section 19 without the need to file an 
application. The FDIC is modifying in two ways which offenses fall 
within the de minimis offenses exception of the SOP.
    The FDIC has received a number of Section 19 individual waiver 
applications where the filing did not meet one of the de minimis 
factors regarding the maximum potential fine or the jail time served. 
Experience has shown that a significant number of applications 
processed by the FDIC for approval involved individuals covered by 
Section 19 who are usually one-time offenders for minor infractions, 
who may have served some limited jail time, and for which the 
jurisdiction could have imposed fines of $2,500 or less. Adjusting the 
de minimis exceptions to permit an increase in the potential fine to 
$2,500 or less and a limited number days of actual jail time served for 
minor infractions appears just and reasonable. Additionally, we have 
seen numerous cases where minimal, actual jail time was included as 
part of the sentence, which has not been a significant factor in our 
decision.
    First, currently under that portion of the de minimis exception to 
filing an application, the maximum potential fine is $1,000 or less. 
The FDIC is modifying this aspect of the SOP so that this element of 
the de minimis exception to filing an application will apply if the 
maximum potential fine is $2,500 or less.
    Second, currently, the de minimis exception requires that no jail 
time was served as part of the sentencing or conviction. The FDIC is 
modifying this aspect of the SOP so that the de minimis offenses 
provision will apply if the individual has served three (3) days or 
less of actual jail time.
    The change to the maximum amount of the potential fine will apply 
to both convictions and program entries. Similarly, the change as to 
actual jail time will apply to both but is unlikely to impact program 
entries since no actual jail time is usually involved. These proposed 
changes should not have a material impact on the Deposit Insurance 
Fund, provide immediate relief to those currently covered by Section 
19, pose no significant additional risk to insured depository 
intuitions, and maintain the integrity of Section 19.

III. Paperwork Reduction Act

    In accordance with section 3512 of the Paperwork Reduction Act of 
1995, 44 U.S.C. 3501 et seq., an agency may not conduct or sponsor, and 
a person is not required to respond to, a collection of information 
unless it displays a currently valid Office of Management and Budget 
(OMB) control number. These modifications to the Statement of Policy 
for Section 19 of the FDI Act include clarification of reporting 
requirements in an existing FDIC information collection, entitled 
Application Pursuant to Section 19 of the Federal Deposit Insurance Act 
(3064-0018) that should result in a decrease in the number of 
applications filed. Specifically, the revised policy statement broadens 
the application of the de minimis exception to filing an application 
due to the minor nature of the offenses and the low risk that the 
covered party would pose to an insured institution based on the 
conviction or program entry. By modifying these provisions, the FDIC 
believes that there will be a reduction in the submission of 
applications in situations where blanket approval has been granted by 
virtue of the de minimis offenses section of the policy statement. If 
so, this change in burden would be submitted to OMB as a non-
significant, nonmaterial change to an existing information collection. 
The current estimated burden for the information collection is as 
follows:
    Title: ``Application Pursuant to Section 19 of the Federal Deposit 
Insurance Act''.
    Affected Public: Insured depository institutions and individuals.
    OMB Number: 3064-0018.
    Estimated Number of Respondents: 26.
    Frequency of Response: On occasion.
    Average Time per Response: 16 hours.
    Estimated Annual Burden: 416 hours.
    Comments are invited on:
    (a) Whether this collection of information is necessary for the 
proper performance of the FDIC's functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collection, including the validity of the methodologies and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected; and
    (d) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology.

[[Page 74849]]

    All comments will become a matter of public record. Comments may be 
submitted to the FDIC by any of the following methods:
     https://www.FDIC.gov/regulations/laws/federal/propose.html
     Email: comments@fdic.gov. Include the name and number of 
the collection in the subject line of the message.
     Mail: Gary A. Kuiper (202-898-3877), Counsel, Federal 
Deposit Insurance Corporation, 550 17th Street NW., NYA-5046, 
Washington, DC 20429.
     Hand Delivery: Comments may be hand-delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street), on business days between 7 a.m. and 5 p.m.

A copy of the comment may also be submitted to the OMB Desk Officer for 
the FDIC, Office of Information and Regulatory Affairs, Office of 
Management and Budget, New Executive Office Building, Room 3208, 
Washington, DC 20503. All comments should refer to the ``Application 
Pursuant to Section 19 of the Federal Deposit Insurance Act,'' OMB No. 
3064-0018.

IV. Changes to FDIC Statement of Policy for Section 19

    For the reasons set forth above, the entire text of the FDIC 
Statement of Policy for Section 19 is stated as follows. The revised 
text, as identified in this notice, is located in

B. Standards for Determining Whether an Application Is Required, 
Paragraph (5)

FDIC Statement of Policy for Section 19 of the FDI Act

    Section 19 of the Federal Deposit Insurance Act (12 U.S.C. 1829) 
prohibits, without the prior written consent of the Federal Deposit 
Insurance Corporation (FDIC), a person convicted of any criminal 
offense involving dishonesty or breach of trust or money laundering 
(covered offenses), or who has agreed to enter into a pretrial 
diversion or similar program in connection with a prosecution for such 
offense, from becoming or continuing as an institution-affiliated 
party, owning or controlling, directly or indirectly an insured 
depository institution (insured institution), or otherwise 
participating, directly or indirectly, in the conduct of the affairs of 
the insured institution. In addition, the law forbids an insured 
institution from permitting such a person to engage in any conduct or 
to continue any relationship prohibited by section 19. It imposes a 
ten-year ban against the FDIC's consent for persons convicted of 
certain crimes enumerated in Title 18 of the United States Code, absent 
a motion by the FDIC and court approval.
    Section 19 imposes a duty upon the insured institution to make a 
reasonable inquiry regarding an applicant's history, which consists of 
taking steps appropriate under the circumstances, consistent with 
applicable law, to avoid hiring or permitting participation in its 
affairs by a person who has a conviction or program entry for a covered 
offense. The FDIC believes that at a minimum, each insured institution 
should establish a screening process that provides the insured 
institution with information concerning any convictions or program 
entry pertaining to a job applicant. This would include, for example, 
the completion of a written employment application that requires a 
listing of all convictions and program entries. The FDIC will look to 
the circumstances of each situation to determine whether the inquiry is 
reasonable. Upon notice of a conviction or program entry, an 
application seeking the FDIC's consent prior to the person's 
participation must be filed,
    Section 19 applies, by operation of law, as a statutory bar to 
participation absent the written consent of the FDIC. The purpose of an 
application is to provide the applicant an opportunity to demonstrate 
that, notwithstanding the bar, a person is fit to participate in the 
conduct of the affairs of an insured institution without posing a risk 
to its safety and soundness or impairing public confidence in that 
institution. The burden is upon the applicant to establish that the 
application warrants approval.

A. Scope of Section 19

    Section 19 covers institution-affiliated parties, as defined by 12 
U.S.C. 1813(u) and others who are participants in the conduct of the 
affairs of an insured institution. This Statement of Policy applies 
only to insured institutions, their institution-affiliated parties, and 
those participating in the affairs of an insured depository 
institution. Therefore, all employees of an insured institution fall 
within the scope of Section 19. In addition, those deemed to be de 
facto employees as determined by the FDIC based upon generally 
applicable standards of employment law, will also be subject to Section 
19. Whether other persons who are not institution-affiliated parties 
are covered depends upon their degree of influence or control over the 
management or affairs of an insured institution. For example, Section 
19 would not apply to persons who are merely employees of an insured 
institution's holding company, but would apply to its directors and 
officers to the extent that they have the power to define and direct 
the policies of the insured institution. Similarly, directors and 
officers of affiliates, subsidiaries or joint ventures of an insured 
institution or its holding company will be covered if they are in a 
position to influence or control the management or affairs of the 
insured institution. Those who exercise major policymaking functions of 
an insured institution would be deemed participants in the affairs of 
that institution and covered by section 19. Typically, an independent 
contractor does not have a relationship with the insured institution 
other than the activity for which the insured institution has 
contracted. Under 12 U.S.C. 1813(u), independent contractors are 
institution-affiliated parties if they knowingly or recklessly 
participate in violations, unsafe or unsound practices or breaches of 
fiduciary duty which are likely to cause significant loss to, or a 
significant adverse effect on, an insured institution. In terms of 
participation, an independent contractor who influences or controls the 
management or affairs of the insured institution, would be covered by 
Section 19. Further, ``person'' for purposes of Section 19 means an 
individual, and does not include a corporation, firm or other business 
entity.
    Individuals who file an application with the FDIC under the 
provisions of Section 19 who are participating in the affairs of a bank 
or savings and loan holding company may also have to comply with any 
filing requirements of the Board of the Governors of the Federal 
Reserve System under 12 U.S.C. Sec.  1819(d) in the case of a bank 
holding company, and the Office of Thrift Supervision under 12 U.S.C. 
Sec.  1819(e), in the case of a savings and loan holding company until 
the Transfer Date as that term is used in the Dodd-Frank Wall Street 
Reform Act (Pub. L. 111-203, Sec.  311, July 21 2010). Upon the 
Transfer Date applications related to savings and loan holding 
companies should be filed with the Board of Governors of the Federal 
Reserve System.
    Section 19 specifically prohibits a person subject to its coverage 
from owning or controlling an insured institution. For purposes of 
defining ``control'' and ``ownership'' under Section 19, the FDIC has 
adopted the definition of ``control set forth in the Change in Bank 
Control Act (12 U.S.C. 1817(j)(8)(B)). A person will be deemed to 
exercise ``control'' if that person has the power to vote 25 percent or 
more of the voting shares of an insured

[[Page 74850]]

institution (or 10 percent of the voting shares if no other person has 
more shares) or the ability to direct the management or policies of the 
insured institution. Under the same standards, person will be deemed to 
``own'' an insured institution if that person owns 25 percent or more 
of the insured institution's voting stock, or 10 percent of the voting 
shares if no other person owns more. These standards would also apply 
to an individual acting in concert with others so as to have such 
ownership or control. Absent the FDIC's consent, persons subject to the 
prohibitions of section 19 will be required to divest their ownership 
of shares above the foregoing limits.

B. Standards for Determining Whether an Application Is Required

    Except as indicated in paragraph (5), below, an application must be 
filed where there is present a conviction by a court of competent 
jurisdiction for a covered offense by any adult or minor treated as an 
adult, or where such person has entered a pretrial diversion or similar 
program regarding that offense.
    (1) Convictions. There must be present a conviction of record. 
Section 19 does not cover arrests, pending cases not brought to trial, 
acquittals, or any conviction that has been reversed on appeal. A 
conviction with regard to which an appeal is pending will require an 
application until or unless reversed. A conviction for which a pardon 
has been granted will require an application. A conviction that has 
been completely expunged is not considered a conviction of record and 
will not require an application. For an expungement to be considered 
complete, no one, including law enforcement, can be permitted access to 
the record even by court order under the state or federal law that was 
the basis of the expungement.
    (2) Pretrial Diversion or Similar Program. Program entry, whether 
formal or informal, is characterized by a suspension or eventual 
dismissal of charges or criminal prosecution upon agreement by the 
accused to treatment, rehabilitation, restitution, or other noncriminal 
or nonpunitive alternatives. Whether a program constitutes a pretrial 
diversion is determined by relevant federal, state or local law, and 
will be considered by the FDIC on a case-by-case basis. Program entries 
prior to November 29, 1990, are not covered by Section 19.
    (3) Dishonesty or Breach of Trust. The conviction or program entry 
must be for a criminal offense involving dishonesty, breach of trust or 
money laundering. ``Dishonesty'' means directly or indirectly to cheat 
or defraud; to cheat or defraud for monetary gain or its equivalent; or 
wrongfully to take property belonging to another in violation of any 
criminal statute. Dishonesty includes acts involving want of integrity, 
lack of probity, or a disposition to distort, cheat, or act deceitfully 
or fraudulently, and may include crimes which federal, state or local 
laws define as dishonest. ``Breach of trust'' means a wrongful act, 
use, misappropriation or omission with respect to any property or fund 
that has been committed to a person in a fiduciary or official 
capacity, or the misuse of one's official or fiduciary position to 
engage in a wrongful act, use, misappropriation or omission.
    Whether a crime involves dishonesty or breach of trust will be 
determined from the statutory elements of the crime itself. All 
convictions for offenses concerning the illegal manufacture, sale, 
distribution of or trafficking in controlled substances shall require 
an application.
    (4) Youthful Offender Adjudgments. An adjudgment by a court against 
a person as a ``youthful offender'' under any youth offender law, or 
any adjudgment as a ``juvenile delinquent'' by any court having 
jurisdiction over minors as defined by state law does not require an 
application. Such adjudications are not considered convictions for 
criminal offenses.
    (5) De minimis Offenses. Approval is automatically granted and an 
application will not be required where the covered offense is 
considered de minimis, because it meets all of the following criteria:
     There is only one conviction or program entry of record 
for a covered offense;
     The offense was punishable by imprisonment for a term of 
one year or less and/or a fine of $2,500 or less, and the individual 
served three (3) days or less of actual jail time;
     The conviction or program was entered at least five years 
prior to the date an application would otherwise be required; and
     The offense did not involve an insured depository 
institution or insured credit union.
    A conviction or program entry of record based on the writing of a 
``bad'' or insufficient funds check(s) shall be considered a de minimis 
offense under this provision even if it involved an insured depository 
institution or insured credit union if the following applies:
     All other requirements of the de minimis offense 
provisions are met;
     The aggregate total face value of the bad or insufficient 
funds check(s) cited in the conviction was $1000 or less; and
     No insured depository institution or insured credit union 
was a payee on any of the bad or insufficient funds checks that were 
the basis of the conviction.
    Any person who meets the foregoing criteria shall be covered by a 
fidelity bond to the same extent as others in similar positions, and 
shall disclose the presence of the conviction or program entry to all 
insured institutions in the affairs of which he or she intends to 
participate.

C. Procedures

    When an application is required, forms and instructions should be 
obtained from, and the application filed with, the appropriate FDIC 
Regional Director. The application must be filed by an insured 
institution on behalf of a person unless the FDIC grants a waiver of 
that requirement. Such waivers will be considered on a case-by-case 
basis where substantial good cause for granting a waiver is shown.

D. Evaluation of Section 19 Applications

    The essential criteria in assessing an application are whether the 
person has demonstrated his or her fitness to participate in the 
conduct of the affairs of an insured institution, and whether the 
affiliation, ownership, control or participation by the person in the 
conduct of the affairs of the insured institution may constitute a 
threat to the safety and soundness of the insured institution or the 
interests of its depositors or threaten to impair public confidence in 
the insured institution. In determining the degree of risk, the FDIC 
will consider:
    (1) The conviction or program entry and the specific nature and 
circumstances of the covered offense;
    (2) Evidence of rehabilitation including the person's reputation 
since the conviction or program entry, the person's age at the time of 
conviction or program entry, and the time that has elapsed since the 
conviction or program entry;
    (3) The position to be held or the level of participation by the 
person at an insured institution;
    (4) The amount of influence and control the person will be able to 
exercise over the management or affairs of an insured institution;
    (5) The ability of management of the insured institution to 
supervise and control the person's activities;
    (6) The degree of ownership the person will have of the insured 
institution;

[[Page 74851]]

    (7) The applicability of the insured institution's fidelity bond 
coverage to the person;
    (8) The opinion or position of the primary Federal and/or state 
regulator; and
    (9) Any additional factors in the specific case that appear 
relevant.
    The foregoing criteria will also be applied by the FDIC to 
determine whether the interests of justice are served in seeking an 
exception in the appropriate court when an application is made to 
terminate the ten-year ban prior to its expiration date.
    Some applications can be approved without an extensive review 
because the person will not be in a position to constitute any 
substantial risk to the safety and soundness of the insured 
institution. Persons who will occupy clerical, maintenance, service or 
purely administrative positions, generally fall into this category. A 
more detailed analysis will be performed in the case of persons who 
will be in a position to influence or control the management or affairs 
of the insured institution. Approval orders will be subject to the 
condition that the person shall be covered by a fidelity bond to the 
same extent as others in similar positions. In cases in which a waiver 
of the institution filing requirement has been granted to an 
individual, approval of the application will be conditioned upon that 
person disclosing the presence of the conviction to all insured 
institutions in the affairs of which he or she wishes to participate. 
When deemed appropriate, approval orders may also be subject to the 
condition that the prior consent of the FDIC will be required for any 
proposed significant changes in the person's duties and/or 
responsibilities. Such proposed changes may, in the discretion of the 
Regional Director, require a new application. In situations in which an 
approval has been granted for a person to participate in the affairs of 
a particular insured institution and subsequently seeks to participate 
at another insured institution, approval does not automatically follow. 
In such cases, another application must be submitted.

    By Order of the Board of Directors.

    Dated at Washington, DC, this 11th day of December, 2012.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012-30351 Filed 12-17-12; 8:45 am]
BILLING CODE 6714-01-P