Modifications to the Statement of Policy Pursuant to Section 19 of the Federal Deposit Insurance Act Concerning Participation in the Conduct of the Affairs of an Insured Institution by Persons Who Have Been Convicted of Crimes Involving Dishonesty, Breach of Trust or Money Laundering or Who Have Entered Pretrial Diversion Programs for Such Offenses, 38143-38149 [2018-16634]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 83, Number 150 (Friday, August 3, 2018)]
[Notices]
[Pages 38143-38149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16634]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Modifications to the Statement of Policy Pursuant to Section 19 
of the Federal Deposit Insurance Act Concerning Participation in the 
Conduct of the Affairs of an Insured Institution by Persons Who Have 
Been Convicted of Crimes Involving Dishonesty, Breach of Trust or Money 
Laundering or Who Have Entered Pretrial Diversion Programs for Such 
Offenses

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final policy statement.

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SUMMARY: On January 8, 2018, the FDIC published in the Federal Register 
notice of proposed changes to its statement of policy (SOP) concerning 
participation in banking of a person convicted of a crime of dishonesty 
or breach of trust or money laundering or who has entered a pretrial 
diversion or similar program in connection with the prosecution for 
such offense pursuant to Section 19 of the Federal Deposit Insurance 
Act, 12 U.S.C. 1829 and sought comments on the proposed changes. After 
the closing of the comment period, the FDIC reviewed the comments 
received and has made some changes and clarifications to the proposed 
statement. The FDIC is now publishing the SOP in its final form. After 
publication the statement of policy will also be available on the 
FDIC's website.

DATES: Applicable Date: July 19, 2018.

FOR FURTHER INFORMATION CONTACT: Brian Zeller, Review Examiner (319) 
395-7394 ext. 4125, or Larisa Collado, Section Chief (202) 898 8509, in 
the Division of Risk Management Supervision, or Michael P. Condon, 
Counsel (202) 898-6536 or Andrea Winkler, Supervisory Counsel (202) 898 
3727 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 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. 
Section 19 provides a criminal penalty for the knowing violation of its 
provisions of a fine of not more than $1,000,000 for each day of the 
violation or imprisonment for not more than five years. The FDIC's 
current SOP was published in December 1998 (63 FR 66177) to provide the 
public with guidance relating to Section 19, and the application 
thereof.

II. Revisions to the Statement of Policy Based on Comments Received

    Following the close of the comment period the FDIC reviewed the 
comments received. All of the comments were, in general, supportive of 
the changes the FDIC had proposed but several of the comments suggested 
additional changes, modifications or clarifications of both existing 
provisions of the statement of policy and in response to the changes

[[Page 38144]]

on which the FDIC had requested comment. Having reviewed the comments 
the FDIC has accepted some of those comments, in whole or in part, as 
well as making some additional technical revisions to the SOP.

III. Review of Comments Received

    The FDIC received seven comment letters or emails on its proposed 
revision of the SOP. The comments came from a number of different 
entities--one from an individual; one on behalf of an insured 
depository institution; two from different depository institution trade 
groups; two from different components of an umbrella advocacy group; 
and one from an organization that provides legal aid assistance. Of the 
seven commenters, three (from the individual and the two depository 
institution trade groups) were supportive of the proposed changes in 
the SOP and did not suggest any additional changes or modifications. 
While the remaining four commenters were, in general, supportive of the 
FDIC's proposed changes, they suggested additional new changes, 
clarifications or modifications, which are discussed below.

Conditional Offers of Employment

    Two comments addressed proposed changes to the SOP that would allow 
institutions to make conditional offers of employment prior to 
conducting a background check into the applicant's prior arrests, 
convictions or entries into a pre-trial diversion or similar program 
(program entry). Both comments suggested that the FDIC actually 
instruct all FDIC-insured institutions to adopt the practice of making 
such conditional offers of employment. The FDIC declines to make this 
change for a number of reasons.
    The FDIC's statutory authority under Section 19 is focused upon the 
requirement that the FDIC provide prior written consent before an 
individual covered by the statute may participate in the affairs of an 
insured depository institution. It does not grant the FDIC any rule-
making authority to impose conditions or requirements on an insured 
depository institution other than to note that an institution may face 
a criminal penalty for acting in violation of the statute. The FDIC 
takes the position that insured depository institutions should be free 
to develop the policies and procedures best suited to them to ensure 
compliance with Section 19. In addition, the FDIC does not have direct 
supervisory authority over insured depository institutions that are 
subject to the supervisory authority of other Federal banking agencies 
(FBAs). Therefore, it is within the supervisory authority of the other 
FBAs to determine what is satisfactory to them in reviewing the 
policies and procedures their respective supervised institutions adopt 
to ensure compliance with Section 19. Insofar as the SOP constitutes 
policy guidance rather than an enforceable regulation, it is an 
inappropriate means for the FDIC to impose such a mandatory requirement 
even on its own supervised insured depository institutions.

Expungements

    Three comments opined that the language proposed by the FDIC 
regarding expungements should be clarified or expanded. One suggested 
that the FDIC accept all expungements as complete expungements 
regardless of whether the records could be accessible for any other 
purpose. In considering the comments, the FDIC agrees that the proposed 
language in the SOP should be altered to clarify when an expungement is 
considered complete for Section 19 purposes, while providing the FDIC's 
rationale for allowing at least some expungements to remove a 
conviction or program entry from Section 19's coverage.
    The FDIC has determined that expungements that reflect the complete 
destruction of the records and the jurisdiction's goal to completely 
remove the conviction or program entry from a person's past, justified 
the interpretation that the intent was to, as a matter of law and fact, 
place the person in the position as if conviction or program entry had 
never happened. However, in cases where the FDIC has considered whether 
an expungement was complete it found that in the majority of cases 
either the records were still in existence or the expungement was 
limited and allowed the use of the conviction or program entry records 
in subsequent matters including, but not limited to, questions 
associated with character and fitness depending on the jurisdiction's 
public policies.
    After reviewing the comments the FDIC agrees that the language in 
the proposed changes to the SOP should be altered to clarify and more 
carefully focus on the type of expungement that it believes should 
exclude a conviction or program entry from the bar in Section 19. 
First, as noted in the proposed notice and comment, the existence of 
records of convictions and program entries may be found in multiple 
places even if the originals are destroyed in a timely manner. Second, 
in considering the issue of whether the expungement is one that should 
be outside the scope of Section 19 the more fundamental question is 
whether the jurisdiction, by statute or court order, intended that the 
conviction or program entry be no longer in existence and, essentially, 
gone from the individual's history. Preservation in an expungement 
statute or in a court order of the ability to subsequently use the 
conviction or program entry for another purpose, consistent with the 
jurisdiction's public policy, means that the conviction or program 
entry has not been completely expunged. In such a circumstance, the 
FDIC will also review the conviction or program entry to determine if 
it should grant consent for the person to work in, or otherwise 
participate in the affairs of, an insured depository institution. The 
FDIC is amending the language in the SOP to read:

    If an order of expungement has been issued in regard to a 
conviction or program entry and is intended by the language in the 
order itself, or in the legislative provisions under which the order 
was issued, to be a complete expungement, then the jurisdiction, 
either in the order or the underlying legislative provisions, cannot 
allow the conviction or program entry to be used for any subsequent 
purpose including, but not limited to, an evaluation of a person's 
fitness or character. The failure to destroy or seal the records 
will not prevent the expungement from being considered complete for 
the purposes of Section 19 in such a case.

    One comment suggested that successful completion of a pretrial 
diversion or similar program should be considered a complete 
expungement. The FDIC declines to make the suggested change for two 
reasons. First, the statutory language in Section 19 applies in the 
same manner to convictions and program entries. Second, consistent with 
the treatment of expungements discussed, in the context of a 
conviction, to the extent a program entry is still subject to 
subsequent use by the jurisdiction where it was entered, then the FDIC 
will treat it the same as a conviction. One comment also suggested that 
sealed records should be excluded from the coverage of Section 19. If 
the order sealing the records is one that would be the same as an order 
of complete expungement as set out in the SOP, then the FDIC will treat 
it in the same manner as a complete order of expungement.

Conviction of Record

    Two comments focused on the proposed language in the SOP that 
states that convictions that are set aside or reversed after sentencing 
requirements have been completed remain convictions of record for 
purposes of Section 19. As noted by one of the comments, there are 
jurisdictions

[[Page 38145]]

in which after an individual has completed all of the sentencing 
requirements, the court has set aside the conviction based upon the 
completion of sentencing alone. The FDIC is aware that such 
jurisdictions have used the foregoing process to create what is 
essentially a ``pretrial diversion or similar program.'' In contrast, 
courts may set aside or reverse a conviction on appeal based upon a 
procedural or substantive error in the case. The vast majority of such 
cases will have a finding that addresses the error.
    The FDIC believes that where a conviction has been set aside 
because of the completion of a sentence, such a procedure is, in 
essence, a pretrial diversion or similar program, covered by Section 
19. On the other hand, in cases in which there has been a procedural or 
substantive error that results in the conviction being set aside, the 
FDIC will not consider such convictions as a conviction of record for 
Section 19 purposes. In order to clarify the different treatment, the 
FDIC has adjusted the language in the SOP to clearly recognize that 
convictions set aside or reversed on appeal that are based on a finding 
that there has been a procedural or substantive error should not be 
considered convictions for the purposes of Section 19.
    Three of the comments focused on the state of New York's 
adjournments in contemplation of dismissal (ACD) program (and in 
general seemingly to other similar programs), and recommended that the 
FDIC explicitly find that ACDs are not pretrial diversion or similar 
programs. As the comments recognize, however, one or more of the 
elements of rehabilitation addressed in the SOP as a factor for 
determining whether something is a pretrial diversion or similar 
program can apply to ACDs. Therefore, it is difficult to treat ACDs as 
anything other than a pretrial diversion or similar program. To the 
extent that the FDIC may have previously issued a letter determining 
that a particular individual who had an ACD was not covered by Section 
19, the FDIC will not retroactively change its response in that case.

De Miminis Exception

    Three of the comments focused on various aspects of the FDIC's de 
minimis exception to filing, as it currently exists, or as proposed, 
and sought additional clarifications or modifications. One comment 
criticized the definition of ``jail time'' in the proposed SOP, and 
suggested that the definition should remain the traditional definition 
of that term, i.e., actual time in jail. The existing SOP does not 
include any definition of jail time; however, the FDIC, based on its 
experience, is aware that jurisdictions apply various approaches to 
confinement based upon the nature and circumstances of the crime. 
Therefore, the FDIC seeks to provide a definition of the term ``jail 
time'' that is consistent with its efforts to apply the de minimis 
exception to lesser crimes. In reviewing the comments, however, the 
FDIC determined that the definition, as proposed, may be too broad 
given the interpretations reflected in the comments, which suggest that 
such items as parole may appear to be included. Therefore, the FDIC has 
adjusted the language in the SOP to define ``jail time'' as ``the 
confinement to a specific facility or building on a continuous basis . 
. .'' The definition is not intended to include those on probation or 
parole who may be restricted to a particular jurisdiction, or who must 
report occasionally to an individual or to a specified location.
    Another comment sought to change the unlimited time to which 
Section 19's coverage applies to criminal convictions or program 
entries to only those occurring within the prior 7 to 10 years. Because 
the statutory language contains no limits on the period of time to 
which its prohibitions apply, the FDIC does not have the authority to 
change that time. In fact, the FDIC notes that there is a ten-year 
restriction on its ability to grant consent for certain serious crimes 
that requires the FDIC to obtain the sentencing court's permission 
prior to its granting consent to permit a covered individual to 
participate in the affairs of an insured depository institution. 
Further, while the passage of time is a factor in the FDIC's review of 
an application under Section 19, it is not, by itself, dispositive.
    One comment proposed that the SOP should contain a short list of 
crimes that would never require an application or that would be 
included within a de minimis exception to filing once a limited period 
of time has passed. The FDIC believes that a sufficient period of time 
should pass after a crime has occurred to allow the FDIC to determine 
if the individual has engaged in similar behaviors, which would 
potentially put an insured financial institution at risk. The FDIC 
considers this to be an important element of the de minimis exception 
to filing and is not prepared to eliminate the time requirement.
    One comment appears to suggest that all crimes committed by a 
person under the age of 21 should be covered by the de minimis 
exception to filing, provided that there is at least 30 months between 
the conviction and the potential employment. Again, the FDIC has 
determined that if there is a pattern of covered crimes before the age 
of 21, it should look at an individual's application to determine the 
degree of risk to any insured depository institutions as proposed in 
the SOP. However, one aspect of the comment addressed the use of false, 
fake or altered forms of identification. Although the FDIC is not 
prepared to extend de minimis as far as the comment suggested, the FDIC 
has decided that the use of a fake, false or altered form of 
identification by a person under the legal age to obtain or purchase 
alcohol, or to enter a premises where alcohol is served but for which 
an age appropriate identification is required, is an acceptable 
category for the use of the de minimis exception to filing, provided 
that the person has no other conviction or program entry for a crime 
covered under Section 19.
    Additionally, one comment suggested that the proposed de minimis 
exception to filing for crimes or program entries that occurred when 
the individual was 21 or younger be expanded to include cases in which 
the actions that led to the conviction or program entry occurred before 
age 21, but the conviction or program entry did not occur until after 
the age of 21. The FDIC has determined that this change is consistent 
with the reasons for this exception to the filing requirements and has 
included a specific exception to include such cases.
    Two comments focused on the requirement that drug crimes that do 
not fit the de minimis exception to filing should not be covered by 
Section 19. The FDIC maintains that an application is required for it 
to determine the nature of the offense and elements of the crime, and 
therefore it will continue the current requirement that an application 
be filed. Alternatively, it was suggested that the FDIC create a 
specific category of de minimis exceptions to filing to cover minor 
drug offenses. The FDIC in its proposed changes has already noted that, 
if the drug crime fits the de minimis exception to filing, then no 
application is required, and no separate de minimis category for drug 
offenses is necessary.
    One other issue of note is that, after careful review, the FDIC has 
recognized that all of the categories falling within the de minimis 
exceptions to filing should be consistent, and that no category should 
be included in the exception if the covered crime was committed against 
an insured depository institution or insured credit union. This 
requirement is contained in the general de minimis exception to

[[Page 38146]]

filing, as well as the exception pertaining to insufficient funds 
checks and the exception regarding those under 21. Therefore, the FDIC 
is making clear that the proposed small theft exception is treated 
similarly and is subject to the same restriction. As with any crime 
that does not fit a de minimis category, an application can still be 
filed.

Application Processing

    Two of the comments raised a number of suggestions related to the 
processing of applications. One suggestion was to clarify the process 
for job applicants on the FDIC website. Similarly, two other comments 
also focused on the FDIC's website and application, suggesting that 
both should explain the process and relevant law in a plainer, more 
accessible language. Although these suggestions are beyond the language 
of the proposed changes to the SOP, the FDIC will update its website 
and application form and will develop a brochure that will provide 
guidance to the public on the application process.
    Another suggestion was to require financial institutions to provide 
notice to job applicants if the institution will not file a waiver on 
the person's behalf, and to make the forms easily available to the 
applicant. Such a requirement is beyond the reach of the SOP insofar as 
it would require a formal rulemaking. A third suggested change was to 
shorten the period of time for the processing of an application by 
permitting the FDIC to verify documents in the applicant's possession. 
The FDIC already relies on the verification of documents provided by 
the applicant, but must also undertake an independent review to 
determine that the information is complete and accurate. A fourth 
suggestion was to include a link in the SOP to the application form. 
The FDIC agrees that this change is related to the SOP and has added a 
link in the final version.
    Two comments relate to the evaluation of applications by the FDIC. 
Essentially these comments focused on instructions to application 
evaluators as to how to weigh and apply the factors set out in the SOP 
and as set out in the FDIC's regulations (12 CFR 308.157). The 
suggestions were that the FDIC should provide instructions on how to 
evaluate the age of the applicant at the time of the conviction, the 
passage of time since the conviction, and the relevance of prior 
offenses. Although these are just some of the factors used by the FDIC 
to evaluate an application, the FDIC does not agree that further 
instruction to application reviewers is necessary or appropriate. The 
weight given to the various factors is often based on the totality of 
the circumstances and the factors are often interwoven in their 
application to a specific case. Each application undergoes review in 
the region by both experienced safety and soundness examiners and 
attorneys in the legal division, as well as several layers of 
management review, before a final determination is made. In the case of 
individuals seeking a waiver of the institution filings requirement, in 
addition to the review at the regional office, the application 
undergoes a similar review in the Washington Office. Further, such 
instruction would be one of internal policy and would not come within 
the purpose or intent of the SOP.
    One comment suggested that the FDIC instruct individuals who are 
filing for themselves and requesting a waiver of the institution filing 
requirement to fill out the application form and include information 
identifying the position sought by the applicant. The FDIC does not 
agree that this would be appropriate for such applications which, if 
approved, result in blanket approval to participate in banking. One 
comment also suggested that the FDIC process applications in fewer than 
60 days. While the FDIC does work to process applications quickly, the 
establishment of such a timeline would be a matter of internal controls 
and does not fall within the purpose or intent of the SOP.

Technical and Clarifying Changes

    In addition to the foregoing, the FDIC, upon review of the proposed 
SOP, has made the following technical and clarifying changes.
    The FDIC has corrected an incorrect citation in Subsection A of the 
SOP that identifies the provisions of Section 19 that apply to bank and 
savings and loan holding companies. The correct citation is to 12 
U.S.C. 1829(d) and (e). Also, the FDIC believes that the example in 
Subsection A that describes Section 19 as not applying to employees of 
bank and savings and loan holding companies is misleading, and the FDIC 
has simplified the example to focus on the circumstances in which 
Section 19 may apply in the case of an insured depository institution. 
Therefore, that example has been adjusted to read ``For example, in the 
context of the FDIC's application of Section 19, it would apply to an 
insured depository institution's holding company's directors and 
officers to the extent that they have the power to define and direct 
the management or affairs of insured depository institution.''
    The FDIC also made a slight change in Subsection D(1) to remove the 
word ``covered'' from the language in that subsection since it would 
appear to be conclusory, and its removal brings this factor in line 
with the language in the FDIC's regulations (12 CFR 308.157(a)(1)).
    Furthermore, the FDIC is adding language stating that Section 19 
applications submitted by depository institutions are to be filed with 
the FDIC Regional Office covering the state in which the institution's 
home office is located.

IV. 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 SOP 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 where approval has been 
granted by virtue of the de minimis offenses exceptions to filing in 
the policy statement. In its last submission with OMB, the FDIC 
indicated that it will receive approximately 75 applications per year. 
The FDIC estimates that the revised SOP would reduce the number of 
applications filed each year by approximately 28 percent bringing the 
number of applications each year down to approximately 54. This change 
in burden will be submitted to OMB as a non-significant, nonmaterial 
change to an existing information collection. The estimated new 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: 54.
    Frequency of Response: On occasion.
    Average Time per Response: 16 hours.

[[Page 38147]]

    Estimated Annual Burden: 864 hours.

V. Text of FDIC Statement of Policy for Section 19 of the FDI Act

    For the reasons set forth above, the entire text of the proposed 
FDIC Statement of Policy for Section 19 is stated as follows:

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 (program entry) 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 an 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. In the alternative, for 
the purposes of Section 19, an FDIC-supervised institution may extend a 
conditional offer of employment contingent on the completion of a 
background check satisfactory to the institution and to determine if 
the applicant is barred by Section 19. In such a case, the job 
applicant may not work for or be employed by the insured institution 
until such time that the applicant is determined to not be barred under 
Section 19. The FDIC will look to the circumstances of each situation 
for FDIC-supervised institutions to determine whether the inquiry is 
reasonable.
    Section 19 applies, by operation of law, as a statutory bar to 
participation absent the written consent of the FDIC. Upon notice of a 
conviction or program entry, an application must be filed seeking the 
FDIC's consent prior to the person's participation. 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, in the 
context of the FDIC's application of Section 19, it would apply to an 
insured depository institution's holding company's directors and 
officers to the extent that they have the power to define and direct 
the management or affairs of insured depository institution. Similarly, 
directors and officers of affiliates, subsidiaries or joint ventures of 
an insured institution or its holding company will be covered if they 
participate in the affairs of the insured institution or are in a 
position to influence or control the management or affairs of the 
insured institution. Typically, an independent contractor does not have 
a relationship with the insured institution other than the activity for 
which the insured institution has contracted. 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 also seek to participate in the affairs of 
a bank or savings and loan holding company may have to comply with any 
filing requirements of the Board of the Governors of the Federal 
Reserve System under 12 U.S.C. 1829(d) & (e).
    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 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 control or 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. Before an application is considered by 
the FDIC, all of the sentencing requirements associated with a 
conviction or conditions imposed by the pretrial diversion, or similar 
program, including but not limited to, imprisonment, fines, condition 
of rehabilitation, and probation requirements, must be completed, and 
the case must be considered final by the procedures of the applicable 
jurisdiction. The FDIC's application

[[Page 38148]]

forms as well as additional information concerning Section 19 can be 
accessed at the FDIC website. The link is: https://www.fdic.gov/regulations/laws/forms/section19.html.
(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 requires an application. 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. If an order 
of expungement has been issued in regard to a conviction or program 
entry and is intended by the language in the order itself, or in the 
legislative provisions under which the order was issued, to be a 
complete expungement, then the jurisdiction, either in the order or the 
underlying legislative provisions, cannot allow the conviction or 
program entry to be used for any subsequent purpose including, but not 
limited to, an evaluation of a person's fitness or character. The 
failure to destroy or seal the records will not prevent the expungement 
from being considered complete for the purposes of Section 19 in such a 
case. Expungements of pretrial diversion or similar program entries 
will be treated the same as those for convictions. Convictions that are 
set aside or reversed after the applicant has completed sentencing will 
be treated consistent with pretrial diversions or similar programs 
unless the court records reflect that the underlying conviction was set 
aside based on a finding on the merits that such conviction was 
wrongful.
(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 
often upon agreement by the accused to treatment, rehabilitation, 
restitution, or other noncriminal or non-punitive alternatives. Whether 
a program constitutes a pretrial diversion or similar program is 
determined by relevant Federal, state or local law, and, if not so 
designated under applicable law then the determination of whether it is 
a pretrial diversion or similar program will be made 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 or program entries for offenses concerning the illegal 
manufacture, sale, distribution of, or trafficking in controlled 
substances shall require an application unless they fall within the 
provisions for de minimis offenses set out in (5) below.
(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. 
Such adjudications do not constitute a matter covered under Section 19 
and is not an offense or program entry for determining the 
applicability of the de minimis offenses exception to the filing of an 
application.
(5) De minimis Offenses
(a) In General
    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 jail time. The FDIC considers jail 
time to include any significant restraint on an individual's freedom of 
movement which includes, as part of the restriction, confinement to a 
specific facility or building on a continuous basis where the person 
may leave temporarily only to perform specific functions or during 
specified times periods or both. The definition is not intended to 
include those on probation or parole who may be restricted to a 
particular jurisdiction, or who must report occasionally to an 
individual or to a specified location.
     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.
(b) Additional Applications of the De Minimis Offenses Exception to 
Filing
    Age at time of covered offense:
     If the actions that resulted in a covered conviction or 
program entry of record all occur when the individual was 21 years of 
age or younger, then the subsequent conviction or program entry, that 
otherwise meets the general de minimis criteria in (a) above, will be 
considered de minimis if the conviction or program entry was entered at 
least 30 months prior to the date an application would otherwise be 
required and all sentencing or program requirements have been met.
    Convictions or program entries for insufficient funds checks:
     Convictions or program entries of record based on the 
writing of ``bad'' or insufficient funds check(s) shall be considered a 
de minimis offense under this provision and will not be considered as 
having involved an insured depository institution if the following 
applies:
     There is no other conviction or program entry subject to 
Section 19, and the aggregate total face value of all ``bad'' or 
insufficient funds check(s) cited across all the conviction(s) or 
program entry(ies) for bad or insufficient funds checks is $1,000 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(s) or program entry(ies).
    Convictions or program entries for small-dollar, simple theft:
     A conviction or program entry based on a simple theft of 
goods, services and/or currency (or other monetary instrument) where 
the aggregate value of the currency, goods and/or services taken was 
$500 or less at the time of conviction or program

[[Page 38149]]

entry, where the person has no other conviction or program entry under 
Section 19, where it has been five years since the conviction or 
program entry (30 months in the case of a person 21 or younger as 
described above) and which does not involve an insured financial 
institution or insured credit union is considered de minimis. Simple 
theft excludes burglary, forgery, robbery, identity theft, and fraud.
    Convictions or program entries for the use of a fake, false or 
altered identification card:
    The use of a fake, false or altered identification card used by 
person under the legal age for the purpose of obtaining or purchasing 
alcohol, or used for the purpose of entering a premise where alcohol is 
served but for which age appropriate identification is required, 
provided that there is no other conviction or program entry for a 
covered offense, will be considered de minimis.
    Any person who meets the criteria under (5) above 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.
    Further, no conviction or program entry for a violation of the 
Title 18 sections set out in 12 U.S.C. 1829(a)(2) can qualify under any 
of the de minimis exceptions to filing set out in 5 above.

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 (bank-sponsored) unless the FDIC 
grants a waiver of that requirement (individual waiver). Such waivers 
will be considered on a case-by-case basis where substantial good cause 
for granting a waiver is shown. The appropriate Regional Office for a 
bank-sponsored application is the office covering the state where the 
bank's home office is located. The appropriate Regional Office for an 
individual filing for a waiver of the institution filing requirement is 
the office covering the state where the person resides.

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, in conjunction with the factors set out in 12 CFR 
308.157:
    (1) Whether the conviction or program entry and the specific nature 
and circumstances of the offense are a criminal offense under Section 
19;
    (2) Whether the participation directly or indirectly by the person 
in any manner in the conduct of the affairs of the insured institution 
constitutes a threat to the safety and soundness of the insured 
institution or the interests of its depositors or threatens to impair 
public confidence in the insured institution;
    (3) 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;
    (4) The position to be held or the level of participation by the 
person at an insured institution;
    (5) The amount of influence and control the person will be able to 
exercise over the management or affairs of an insured institution;
    (6) The ability of management of the insured institution to 
supervise and control the person's activities;
    (7) The level of ownership the person will have of the insured 
institution;
    (8) The applicability of the insured institution's fidelity bond 
coverage to the person; and
    (9) Any additional factors in the specific case that appear 
relevant including but not limited to the opinion or position of the 
primary Federal and/or state regulator.
    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 under 12 U.S.C. 1829(a)(2) for certain 
Federal offenses, 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. All approvals and 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 also be conditioned upon 
that person disclosing the presence of the conviction(s) or program 
entry(ies) to all insured institutions in the affairs of which he or 
she wishes to participate. When deemed appropriate, bank sponsored 
applications are to allow the person to work in a specific job at a 
specific bank and 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. In the case of 
bank applications 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 who subsequently seeks to 
participate at another insured depository institution, another 
application must be submitted.
    By order of the Board of Directors, July 19, 2018.

    Dated at Washington, DC, on July 19, 2018.

    By order of the Board of Directors.
Valerie Best,
Assistant Executive Secretary.
[FR Doc. 2018-16634 Filed 8-2-18; 8:45 am]
 BILLING CODE 6714-01-P