Incorporation of Existing Statement of Policy Regarding Requests for Participation in the Affairs of an Insured Depository Institution by Convicted Individuals, 51312-51324 [2020-16464]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 85, Number 162 (Thursday, August 20, 2020)]
[Rules and Regulations]
[Pages 51312-51324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16464]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 303 and 308

RIN 3064-AF19


Incorporation of Existing Statement of Policy Regarding Requests 
for Participation in the Affairs of an Insured Depository Institution 
by Convicted Individuals

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

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SUMMARY: Section 19 of the Federal Deposit Insurance Act requires 
persons convicted of certain criminal offenses to obtain prior written 
consent before participating in the conduct of the affairs of any 
depository institution. The Federal Deposit Insurance Corporation 
(FDIC) is revising its existing regulations relating to section 19 to 
revise the FDIC's procedures and standards relating to applications for 
the FDIC's written consent, and to incorporate and revise the FDIC's 
existing Statement of Policy for Section 19 of the Federal Deposit 
Insurance Act (SOP). Incorporating the SOP into the FDIC's regulations 
will make application of the SOP more transparent, increase certainty 
concerning the FDIC's application process, afford regulatory relief, 
and help both insured depository institutions and affected individuals 
to understand the impact of section 19 and to potentially seek relief 
from it. The FDIC's existing SOP will be rescinded on the date this 
final rule (rule) becomes effective.

DATES: This rule is effective September 21, 2020.

FOR FURTHER INFORMATION CONTACT: Timothy Schuett, Review Examiner (763) 
614-9473; Brian Zeller, Review Examiner (571) 345-8170; or Larisa 
Collado, Section Chief (202) 898-8509, [email protected], in the 
Division of Risk Management Supervision; or Graham Rehrig, Senior 
Attorney, (202) 898-3829; John Dorsey, Acting Supervisory Counsel, 
(202) 898-3807; Anne DeSimone, Deputy Regional Counsel, (781) 794-5541; 
or Andrea Winkler, Acting Assistant General Counsel, (202) 898-3727, in 
the Legal Division.

SUPPLEMENTARY INFORMATION:

I. Policy Objectives

    The policy objective of the rule is to clarify how the FDIC 
interprets and applies section 19 of the Federal Deposit Insurance Act 
(section 19),\1\ clarify the application process for insured depository 
institutions and individuals who seek relief from section 19, and 
expand the scope of relief available for certain offenses. The FDIC SOP 
provides the public with guidance relating to section 19 and the FDIC's 
application of this statute. The current SOP, with modifications over 
time, has been published and a resource for the public for over twenty 
years. However, the terms and procedures outlined in the SOP have not 
been adopted as formal regulations by the FDIC. To remove potential 
ambiguities about the FDIC's approach to section 19 or the application 
process, the rule incorporates much of the current SOP, while adopting 
certain changes suggested by commenters.
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    \1\ 12 U.S.C. 1829.
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II. Background and Public Comments

    Section 19 prohibits, without the prior written consent of the 
FDIC, the participation in banking by any person who has been convicted 
of a crime of dishonesty or breach of trust or money laundering, or who 
has agreed to enter into a pretrial diversion or similar program in 
connection with the prosecution for such an offense. Further, this law 
forbids an insured depository institution (IDI) from permitting such a 
person to engage in any conduct or to continue any relationship 
prohibited by section 19. Section 19 also imposes a ten-year ban for a 
person convicted of certain crimes enumerated in Title 18 of the United 
States Code, which can be removed only upon a motion by the FDIC and 
approval by the sentencing court.
    On December 16, 2019, the FDIC published a notice of proposed 
rulemaking (proposal) to incorporate the SOP into the FDIC's existing 
Procedure and Rules of Practice.\2\ In the proposal, the FDIC provided 
a history of the SOP from its issuance in December 1998, through 
clarifications in 2007 and 2011, modification in 2012, and through its 
most-recent revision in August 2018.\3\ The FDIC proposed to 
incorporate the current provisions of the SOP into its rules and 
procedures in order to provide greater transparency into the FDIC's 
interpretation and application of section 19, to provide greater 
certainty concerning the FDIC's application process, and to aid both 
IDIs and individuals who may be affected by section 19 to understand 
its impact and potentially seek relief from its provisions. The FDIC 
proposed to rescind such sections of 12 CFR 308, subpart M, that would 
be duplicative of the changes proposed for part 303, subpart L, and to 
revise the remaining sections to ensure conformity for any request for 
a hearing when an application under section 19 has been denied.
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    \2\ See 84 FR 68353.
    \3\ See 84 FR 68353-54.
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    The FDIC, in the proposal, requested comments on all aspects of its 
approach to section 19. The FDIC also requested comments, in 
particular, on the following topics:

[[Page 51313]]

     The de minimis criteria for offenses that represent low 
risk to the Deposit Insurance Fund;
     expansion of the de minimis category for use of fake 
identification;
     modification of the five-year post-conviction cooling-off 
period for certain offenses; and
     the application of section 19 to expungements.
    The comment period closed on March 16, 2020. The FDIC received 
multiple comments from nine different commenters, consisting of three 
policy institutes, a reentry employment provider, a depository 
institution trade group, two financial institutions, an advocacy group 
on behalf of 28 additional organizations, and an individual. All of the 
comments generally supported the proposal. The comment received from 
the individual did not offer specific changes to the proposal, but the 
other eight commenters suggested a variety of changes. The comments and 
the FDIC's responses are discussed below in Sections III and IV.

III. Description and Expected Effects of the Rule

    The rule addresses, among other topics, who is covered by section 
19, the types of offenses covered by section 19, the effect of the 
completion of sentencing or pretrial-diversion program requirements in 
the context of section 19, and the FDIC's procedures for reviewing 
applications filed under section 19. The rule makes several significant 
changes to the SOP, partly in response to the public comments. These 
revisions include the following:
     Expungements. The rule excludes all covered offenses that 
have been expunged or sealed by a court of competent jurisdiction or by 
operation of law.
     De minimis offenses (offenses for which a person will be 
deemed automatically approved and no application will be required). 
Increases the small-dollar theft threshold to $1,000. Expands the de 
minimis exception to include the use of a fake or false identification 
by a person under the age of 21 to circumvent age based restrictions on 
purchases, activities, or entry (not just alcohol-related purposes). 
Allows for two covered de minimis offenses on a person's criminal 
record to still qualify for the de minimis exception. (Note, no offense 
committed against an IDI or insured credit union can qualify as ``de 
minimis.'') If an individual has two covered offenses on their record, 
the rule decreases the amount of time that must elapse, following the 
date of conviction or entry into a pre-trial diversion program, before 
the covered offenses may be deemed de minimis.\4\ The rule also 
eliminates this waiting period when there is only one covered, de 
minimis offense on a person's record.
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    \4\ The FDIC notes that, during the de minimis waiting period, 
individuals retain the option of filing an application for 
consideration by the FDIC.
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     Application procedures. Clarifies when and how an 
application must be filed, the application types available, and how the 
FDIC will evaluate an application. In addition, the rule addresses 
denials of applications.
    Specifically, the rule does the following:

A. Revised Provisions of 12 CFR Part 303, Subpart L

1. Section 303.220 What is section 19 of the FDI Act?
    This section combines portions of the ``scope'' section in the 
existing 12 CFR 303.220 and the introduction part of the SOP. Paragraph 
(a) reflects the scope provisions. Paragraph (b) sets out the 
application of section 19 to insured depository institutions, including 
the conditional offers of employment that FDIC-supervised institutions 
may make. The substance of this paragraph comes from the SOP. Paragraph 
(c) also comes from the SOP and addresses the need for an application.
2. Section 303.221 Who is covered by section 19?
    This section describes who is covered by section 19 and comes 
mainly from the existing SOP. Paragraph (a) defines ``institution-
affiliated parties'' and others who may fall within section 19. 
Paragraph (b) defines the term ``person'' under section 19 as an 
individual, not a legal entity. Paragraph (c) concerns individuals who 
file an application with the FDIC under section 19 and who also seek to 
participate in the affairs of a bank or savings and loan holding 
company, noting that such individuals 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) and (e). Paragraph (d) defines 
when ``ownership'' or ``control'' results in the application of section 
19 to an individual or individuals who may be deemed in control of, or 
be deemed to be an owner of, an IDI.
3. Section 303.222 What offenses are covered under section 19?
    This section addresses covered criminal offenses under section 19. 
It comes mainly from the SOP. Paragraph (a) notes that section 19 
applies to any person who has been convicted of any criminal offense 
involving dishonesty, breach of trust, or money laundering, or who has 
agreed to enter into a pretrial diversion or similar program in 
connection with a prosecution for any such offense. This paragraph also 
describes the restrictions that section 19 places upon such 
individuals. Paragraph (b) requires that, to determine whether the 
criminal offense is one of dishonesty, breach of trust, or money 
laundering, the FDIC will look to the statutory elements of the 
criminal offense or to court decisions in the relevant jurisdiction.
    Paragraph (c) requires an application for all drug offenses, except 
for simple possession, unless the criminal offense meets the criteria 
in Sec.  303.227 for not filing an application. The FDIC has declined 
to adopt a commenter's proposal that the FDIC eliminate all drug-
related convictions from being considered covered offenses under 
section 19, or significantly narrow the scope of covered drug offenses. 
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, 
unless the offense is de minimis.
4. Section 303.223 What constitutes a conviction under section 19?
    This section comes mainly from the SOP, but clarifies the status of 
convictions reversed on appeal and expands and simplifies the exclusion 
for expungements. The current SOP notes that a conviction or program 
entry that has been completely expunged is not subject to section 19 
and does not require an application. For the expungement to be 
considered ``complete'' under the current SOP, the jurisdiction 
granting the expungement must not 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. This constraint has been 
a source of confusion for the industry and individual applicants, and 
the FDIC has twice undertaken to clarify this term in prior SOP 
revisions. The public comments to the NPR make it clear that the 
confusion remains.
    Paragraph (a) states that there must have been a conviction of 
record for section 19 to apply, and that section 19 does not apply to 
arrests, pending cases not brought to trial (unless the person has a 
program entry as set out in Sec.  303.224), or any conviction reversed 
on appeal unless the reversal was for the purpose of re-sentencing. 
This revised

[[Page 51314]]

language is in response to one commenter's request that the FDIC 
clarify its position on appellate decisions as they pertain to the 
scope of section 19. The FDIC notes, however, that covered offenses 
that have been pardoned--and which are not otherwise excluded by the 
SOP--will still require an application.
    Paragraph (b) clarifies that, absent a program entry, when an 
individual is charged with a covered offense but is subsequently 
convicted of an offense that is not a covered offense, that conviction 
is not subject to section 19.
    Paragraph (c) excludes covered offenses that have been expunged or 
sealed by a court of competent jurisdiction or by operation of law. Six 
commenters asked that the FDIC significantly revise its policy on the 
expungement of criminal records, including proposals to eliminate the 
requirement of complete expungement. To support this view, commenters 
highlighted the variance in expungement practices between jurisdictions 
and the significant ambiguity for applicants and banks that are tasked 
with interpreting unfamiliar state law. In fact, only a few states and 
jurisdictions have expungement processes that result in a ``complete 
expungement'' under the standards set forth in the current SOP. After 
considering these comments, the FDIC has agreed to expand the scope of 
the SOP's expungement language. The FDIC believes that these revisions 
will reduce regulatory burden upon banks and potential applicants by 
decreasing the number of required applications and reducing the time 
spent interpreting the expungement laws of various jurisdictions.
    Paragraph (d) excludes ``youthful offender'' judgments for minors 
from the scope of section 19.
5. Section 303.224 What constitutes a pretrial diversion or similar 
program under section 19?
    This section comes mainly from the SOP. Paragraph (a) defines what 
constitutes a pretrial diversion or similar program (a program entry), 
and excludes program entries that occurred prior to November 29, 1990.
    Paragraph (b) clarifies that when a covered offense either is 
reduced by a program entry to an offense that would otherwise not be 
covered by section 19 or is dismissed upon successful completion of a 
program entry, the offense remains a covered offense for purposes of 
section 19. The covered offense will require an application unless it 
is de minimis as provided by Sec.  303.227.
    Paragraph (c) states that expungements or sealings of program entry 
records will be treated the same as expungements or sealings of 
convictions.
6. Section 303.225 What are the types of applications that can be 
filed?
    This section is a combination of the existing Sec. Sec.  303.221 
and 308.158 and the SOP. Paragraph (a) establishes the institution-
filing requirement (bank-sponsored applications). Paragraph (b) 
establishes the procedure to apply when an IDI will not file an 
application for an individual (individual waiver applications).
7. Section 303.226 When is an application to be filed?
    This section states when an application is to be filed, excepting 
from its requirement those covered offenses which are considered de 
minimis under subpart L. An application will not be considered by the 
FDIC until all sentencing requirements associated with a conviction 
have been met or all requirements of the program entry have been 
completed.
8. Section 303.227 When is an application not required for a covered 
conviction or program entry (de minimis offenses)?
    This section comes mainly from the SOP but has been expanded. Under 
the current SOP, certain minor offenses are deemed to present low risk 
to insured institutions. Currently, an individual's covered offense may 
be considered de minimis only when there is one conviction or program 
entry, and the conviction or program entry occurred at least five years 
before the date on which an application would be required. For 
applicants whose underlying misconduct occurred when they were 21 years 
of age or younger, the waiting period is reduced to 30 months. Certain 
individuals may also be required to complete all sentencing or program 
requirements before qualifying for the de minimis exception.
    Eight commenters supported the expansion of the de minimis 
exception to filing as it currently exists, and seven of the commenters 
provided specific proposals for the expansion, clarification, or 
modification, of this exception. Three commenters proposed that the 
FDIC reduce the waiting period to qualify under the de minimis 
framework. Three commenters also proposed that the FDIC increase the 
simple-theft threshold to $1,000 to align with the ``bad-check'' or 
insufficient-funds threshold under the de minimis framework. Moreover, 
three commenters proposed that the FDIC include additional minor crimes 
under the de minimis exception, regardless of the maximum punishment 
for those crimes.
    Paragraph (a) establishes the general criteria for convictions or 
program entries to be considered de minimis, if the criteria are met. 
If the de minimis conditions are satisfied, the person is deemed 
automatically approved and no application will be required. The general 
criteria have been expanded, in response to comments, in two 
significant ways: (1) An individual with two convictions or program 
entries for covered offenses may be eligible for the de minimis 
exception, provided the other criteria are satisfied with respect to 
both convictions or program entries; and (2) the five-year waiting 
period has been eliminated when the individual has only one de minimis 
offense, and the waiting period has been reduced to three years when 
the individual has two de minimis offenses (or 18 months if the actions 
that resulted in both convictions or program entries all occurred when 
the individual was 21 years of age or younger).
    The FDIC continues to process a number of applications from 
individuals who are low risk, and these applications are generally 
approved. FDIC review of these applications revealed that many include 
multiple convictions or program entries for minor offenses, or 
convictions or program entries that occurred less than 5 years (or 30 
months) ago. Because these applications are considered low risk and are 
generally approved, the FDIC is expanding the de minimis criteria to 
include individuals with up to two convictions or program entries, each 
of which offenses would, by themselves, qualify under the de minimis 
exception.
    Paragraph (b) establishes certain other specific exceptions to the 
filing requirement, which exceptions, if met, will result in a 
potential application being deemed automatically approved. Partly in 
response to the comments, the FDIC has made substantive changes to 
paragraphs (b)(1), (3), and (4). Paragraph (b)(1) shortens the 30-month 
waiting period under the general criteria to 18 months when all the 
elements of the offense(s) occurred when the person was age 21 or 
younger. Paragraph (b)(2) establishes the criteria for when certain 
convictions or program entries for bad or insufficient-funds checks 
will not require an application. Paragraph (b)(3) establishes the 
criteria for when certain small-dollar simple theft convictions or 
program entries of $1,000 or less will not require an application. The 
small-dollar, simple theft de minimis criteria was added to the SOP by 
the FDIC

[[Page 51315]]

Board in July 2018. The FDIC continues to process section 19 
applications for convictions or program entries involving small-dollar, 
simple theft. These covered offenses are relatively low-risk and 
generally result in approval of an application following a reasonable 
period of rehabilitation. The rule increases the dollar limit to 
$1,000--from the current $500--based on some commenters' suggestions to 
better align this threshold with the limit for ``bad'' or insufficient 
funds check(s), and to reduce the number of low-risk applications that 
have historically been approved. Excluded from this exception to filing 
are convictions or program entries for burglary, forgery, identity 
theft, and fraud. Paragraph (b)(4) establishes the criteria for when 
the creation or possession of a fake or false identification by a 
person under the age of 21, or the use of a fake or false 
identification by a person to circumvent age-based restrictions on 
purchases, activities, or entry will not require an application. This 
exception was expanded beyond the use of a fake or false identification 
to purchase alcohol or to enter a premises where alcohol is served. The 
FDIC believes that this provision can be expanded to provide additional 
regulatory relief without significantly increasing risk to the 
financial system.
    Paragraph (c) requires that, for any case where the person is able 
to avail themselves of the de minimis exception to filing, she or he 
must disclose the conviction(s) or program entry(ies) to an IDI and 
must qualify for a fidelity bond to the same extent as others in a 
similar position.
    Paragraph (d) states that any conviction or program entry for 
criminal offenses under Title 18 of the U.S. Code, as set out in 12 
U.S.C. 1829(a)(2), cannot qualify under the de minimis exception to 
filing an application.
9. Section 303.228 How To File an Application
    This section comes from the SOP and requires that an IDI is 
required to file an application on behalf of an individual under 
section 19 to participate in its affairs unless the FDIC grants the 
individual a waiver for good cause shown to file on her or his own 
behalf. IDIs should file with the FDIC's regional office where the 
institution's home office is located, and any individual waiver and 
application should be filed with the FDIC's regional office where the 
person lives.
10. Section 303.229 How an Application is Evaluated
    This section comes from a combination of Sec.  308.157 and the SOP. 
Paragraph (a) sets out the ultimate determination the FDIC will make as 
to the level of risk the applicant poses to an IDI and whether it will 
consent to allow the person to participate in an IDI's affairs. In 
evaluating the risk posed by the person's participation, the FDIC has 
established nine factors that it will consider, including other factors 
that might be relevant to a particular application. Paragraph (b) 
states that the question of whether a person was guilty of the offense 
for which the person was convicted, or had a program entry for, is not 
an issue for part 303, subpart L or for part 308, subpart M. Paragraph 
(c) states that the FDIC will apply the factors and determination used 
in paragraph (a) when evaluating an application that is made to 
terminate the ten-year ban under 12 U.S.C. 1829(a)(2). Paragraph (d) 
provides that a person must be bonded the same as others in that 
position, and the person must disclose the covered conviction or 
program entry to any IDI in which she or he intends to participate.
    Paragraphs (e) and (f) pertain to bank-sponsored applications. 
Paragraph (e) provides that FDIC approval to work pertains to a 
specific job at a specific IDI. The IDI may be required to seek 
permission from the FDIC before there may be a significant change in a 
person's duties or responsibilities, and the FDIC regional director may 
request a new application. Paragraph (f) states that approval to work 
at a specific IDI is limited to that institution--or to a successor 
institution (for instance, as a result of the IDI's merger with or 
acquisition by another IDI)--and a new application is required to work 
at another IDI.
11. Section 303.230 What will the FDIC do if the application is denied?
    This section is a combination of current Sec. Sec.  303.223, 
308.157, and 308.159. Paragraph (a) provides that the FDIC will provide 
a written denial of an application, which will summarize or cite the 
relevant factors from Sec.  303.229. Paragraph (b) provides that the 
applicant can file a written request for a hearing under part 308, 
subpart M within 60 days of the denial.
12. Section 303.231 Waiting Time for a Subsequent Application if an 
Application is Denied
    This section comes mainly from Sec.  308.158 and was clarified so 
that an applicant will need to wait one year from the date of the 
denial or decision of the FDIC Board or its designee.

B. Revised Provisions of 12 CFR Part 308, Subpart M

1. Section 308.156 Scope
    This section has been revised to reflect its application to denials 
that are issued under 12 CFR part 303, subpart L.
2. Section 308.157 Relevant Considerations
    This section will be rescinded.
3. Section 308.158 Filing Papers and Effective Date
    This section will be rescinded.
4. Section 308.159 Denial of Application
    This section has been revised to reflect the outcome of the 
application process in part 303, subpart L and to clarify the procedure 
by which a hearing may be requested. It will be renumbered as Sec.  
308.157.
5. Section 308.160 Hearings
    This section will remain as it currently exists, but will be 
renumbered as Sec.  308.158.
    After renumbering, Sec. Sec.  308.159 and 309.160 will be reserved.

C. Expected Effects

    The changes adopted will provide immediate relief to IDIs, as well 
as to individuals who represent a low risk to the Deposit Insurance 
Fund and who would otherwise be required under section 19 to file 
waiver applications, if they wish to be employed by an IDI. Moreover, 
these applications would very likely be approved under existing 
practices. Based on the FDIC's analysis of applications submitted 
between January 1, 2017, through April 30, 2020, the changes would not 
have altered the outcome of any applications that were controversial or 
ultimately denied.
    Overall, the FDIC expects the rule to have relatively small 
effects, in the aggregate, on the public and insured institutions. The 
FDIC currently insures 5,186 depository institutions, which could be 
affected by the rule.\5\ Additionally, as discussed previously, the 
rule will apply to certain persons covered by the provisions of section 
19 who are or wish to become employees, officers, directors or 
shareholders of an IDI. In the period from 2014 through 2019, the FDIC 
received 69 bank-sponsored section 19 applications, an average of about 
12 per year. Additionally, the FDIC received 654

[[Page 51316]]

individual section 19 applications during the same period, an average 
of 109 per year.\6\ Therefore, the FDIC estimates that the rule would 
affect at least 12 FDIC-insured depository institutions, and 109 
individuals per year. The FDIC acknowledges that these estimates do not 
fully capture the full effect of the rule; most notably, the estimates 
do not take into account any individuals or institutions who choose not 
to apply rather than go through the application process.
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    \5\ FDIC Call Report Data, December 31, 2019.
    \6\ Application Tracking System.
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    One commenter made this point, suggesting that the FDIC is likely 
underestimating the number of ex-offenders affected by the rule. 
Specifically, this commenter suggested that the number of section 19 
applications received does not take into account the number of 
individuals or institutions who choose not to apply because of the 
complexity of the application process. The FDIC agrees that this is one 
reason the estimates chosen do not fully reflect the impact of the 
rule.
    As described previously, the rule incorporates and revises the 
current content of the SOP into the FDIC's regulations. The FDIC 
believes the codification is unlikely to have substantive effects on 
most covered entities and individuals. The FDIC already considers 
individuals who have been convicted of a crime of dishonesty, breach of 
trust, or money laundering, who participate in the affairs of an IDI 
without the prior written consent of the FDIC, to be subject to section 
19, and will continue to do after the SOP becomes codified.
    To the extent that the revised consideration of expungements, 
reduction in waiting periods, increase in the threshold for certain 
small-dollar simple-theft convictions, or other items provide relief to 
certain institutions or individuals, the FDIC believes that such 
effects are likely to be relatively small. As discussed previously, 
some of these changes are being adopted to establish better alignment 
with other regulatory limits or more-consistent treatment of 
individuals. Other revisions are intended to reduce regulatory burden 
on individuals and IDIs by decreasing the number of applications that 
would otherwise be required under section 19. The FDIC believes that 
such changes more accurately reflect the risk of dishonesty and breach 
of trust posed by the potential employment of certain individuals to 
institutions. As noted earlier, the FDIC has received on average about 
109 section 19 applications per year since 2014, relative to a 
population of insured institutions of over 5,000, suggesting that the 
effects of the rule are likely to be relatively small.
    In short, the rule will benefit covered entities and individuals by 
further clarifying the FDIC's interpretation of section 19 and the 
application process, expanding regulatory relief, and reducing the 
number of applications required under section 19.

IV. Alternatives Considered

    The FDIC considered the other proposals that were submitted by the 
commenters but believes that the final amendments represent the most 
appropriate option for covered entities and individuals.

A. Application Process

    Two commenters requested that the FDIC reduce the section 19 
application burden. One commenter provided this recommendation without 
specifying the proposed changes. The other commenter asked that the 
FDIC continually streamline and simplify the application process and 
not require court documentation from an applicant because the FDIC 
already has access to criminal ``rap sheets.'' The FDIC notes that it 
has periodically revised the SOP over the past several decades, and it 
anticipates that it will revise its section 19 regulations, as needed, 
in the future. The FDIC revises its application instructions as 
warranted to improve clarity--such as by noting that bank-sponsored 
applications and individual-waiver applications are distinct 
application processes, rather than a two-step process--but a regulation 
is not the appropriate method to amend the application form. The FDIC 
declines to adopt the proposal concerning court records. Rap sheets 
generally do not contain the level of detail needed to adequately 
assess the circumstances surrounding a crime and sentencing, especially 
with regard to pretrial diversions. Moreover, the court documentation 
is used to confirm the information provided by the applicant.
    Two commenters made recommendations concerning the FDIC's approval 
rate of section 19 applications. The two commenters asked that the FDIC 
simplify the application process to encourage a higher number of 
applicants, and one commenter asked that the FDIC commit to 
significantly increasing its application approval-rate. The FDIC does 
clarify aspects of the application instructions, as noted above. The 
FDIC anticipates that the expansion of the de minimis framework and the 
exclusion of all expungements and sealed-records orders from the scope 
of section 19 will reduce the number of applications required. The 
FDIC, however, declines to commit to an increase in approval rates, 
since doing so would be arbitrary, and applications are reviewed on a 
case-by-case basis.
    One commenter asked that the FDIC relax approval conditions for 
bank-sponsored applications. The FDIC declines to adopt this proposal, 
because the approval conditions are meant to address the specific 
position being sought at a particular IDI.
    One commenter proposed that the FDIC not require the repayment of 
fees or fines before the submission of an application. The FDIC 
declines to adopt this proposal in full. Rehabilitation is a 
significant factor that is evaluated during the application process, 
and completion of all sentencing requirements is an integral part of 
rehabilitation. As such, the case must be considered final by the 
procedures of the applicable jurisdiction. The FDIC notes, however, 
that an individual is not required to have completed all sentencing 
requirements in order to qualify for the de minimis exceptions 
pertaining to convictions or program entries for (i) ``bad'' or 
insufficient funds checks, and (ii) the creation, possession, or use of 
a fake, false, or altered identification to circumvent age-based 
restrictions.
    One commenter asked that the FDIC delegate more authority to 
process section 19 applications to FDIC regional offices. The FDIC 
believes that the current delegations are appropriate and provide more 
consistency and uniformity in decision-making. Moreover, the FDIC 
anticipates that the expansion of the de minimis framework will result 
in more decision-making at the regional-office level, as regional 
office staff typically respond to inquiries as to whether the de 
minimis exception applies to particular offenses.
    Two commenters requested that the FDIC commit to reducing 
application-processing times by certain amounts. In response, the FDIC 
notes that while the agency tries to process applications quickly, the 
establishment of such a timeline would be an internal-processing matter 
and would not fall within the purpose or intent of the rule. Moreover, 
application processing is dependent upon receipt of background 
investigation materials from other agencies, whose timeframes for 
action the FDIC does not control.
    One commenter made several proposals concerning an applicant's 
rehabilitation, requesting that the FDIC do the following: provide a 
checklist of rehabilitation factors, assess rehabilitation relative to 
the position

[[Page 51317]]

sought by the applicant, set maximum limits on rehabilitation time, and 
relax rehabilitation standards. The FDIC may provide additional 
information in the application instructions and in the publication Your 
Complete Guide to Section 19, but the rule is not the appropriate forum 
to provide this information. The FDIC declines to adopt the other 
proposals. For bank-sponsored applications, the FDIC already considers 
rehabilitation relative to the position sought by the applicant. 
However, individual waivers allow a person to work in any position, so 
this proposal is not feasible for such applications. Rehabilitation, in 
the context of individual waivers, is not assessed relative to any 
potential position but rather to the nature of the covered offense. The 
FDIC does not adopt the proposal concerning setting maximum limits on 
rehabilitation time because the agency believes that such limits would 
be arbitrary. Nor does the FDIC adopt the proposal concerning the 
relaxation of rehabilitation standards. Rehabilitation in relation to 
the nature of the offense is one of the standards that is assessed when 
the FDIC processes applications, and the de minimis exception, as 
amended, provides sufficient flexibility.
    Three commenters made proposals concerning transparency, asking 
that the FDIC improve its web resources, issue written denials (rather 
than ask an applicant to withdraw an application), and publicize more 
application data. The FDIC believes that its website, www.fdic.gov, 
specifically the brochure Your Complete Guide to Section 19, available 
at https://www.fdic.gov/regulations/applications/resources/brochure-section-19.pdf, provides sufficient and convenient resources in a 
single location. The FDIC also notes that a regulation is not the 
appropriate mechanism to apply such a requirement on the FDIC. As for 
the request concerning written denials, the FDIC cannot issue a denial 
if an individual chooses not to proceed with an application. The FDIC 
already publishes the orders for approvals and denials of section 19 
applications on its website--specifically, on the FDIC Enforcement 
Decisions and Orders page (https://orders.fdic.gov/s/searchform), which 
is searchable--and aggregates numbers of all section 19 applications 
processed in its annual report. A regulation is not the appropriate 
method to apply such a requirement on the FDIC.

B. Bank Hiring Practices

    Four commenters suggested that the FDIC revise policies concerning 
bank hiring practices. Two commenters asked that the FDIC clarify that 
banks are allowed to delay inquiry into an applicant's criminal history 
until after a job offer is extended. The FDIC notes that this approach 
is already stated as permissible in the SOP for FDIC-supervised banks. 
To the extent that the commenters request that the FDIC direct IDIs to 
follow this practice, the FDIC declines to make this change for several 
reasons. First, the FDIC does not have primary supervisory authority 
over IDIs 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 which policies and procedures their 
respective institutions adopt to ensure compliance with section 19. 
Second, the FDIC's authority under section 19 focuses on the review 
needed to provide consent to remove the bar imposed by section 19 and 
allow an individual to participate in the affairs of an IDI. It does 
not grant the FDIC rulemaking authority to impose conditions or 
requirements on an IDI other than to note that the IDI faces a criminal 
penalty for acting in violation of the statute.
    Two commenters asked that the FDIC clarify what constitutes a 
``reasonable inquiry'' for a bank background check. The FDIC declines 
to adopt this proposal. The procedures that constitute a reasonable 
inquiry will vary from bank to bank, and the FDIC believes that this 
determination is best left to the business judgments of these 
institutions.

C. Coverage of Section 19

    Five commenters requested that the FDIC change its interpretation 
of the coverage of section 19. One commenter asked that the SOP note 
that Federal law preempts state and local law concerning section 19. 
The FDIC believes that it is inappropriate to include such a statement 
in this regulation but notes that section 19 applies to all IDIs, as 
defined under Title 12 of the U.S. Code.
    One commenter asked that the FDIC further clarify whether 
independent contractors and other individuals are considered 
institution-affiliated parties (IAPs), for section 19 purposes. The 
FDIC believes that additional clarification is unnecessary because the 
FDIC's revised section 19 regulations, 12 U.S.C. 1813(u) and its 
related caselaw, as well as other statutory and regulatory provisions, 
provide ample clarification as to who qualifies as an IAP under Title 
12 of the U.S. Code.
    Two commenters asked that the FDIC recommend changes to section 19 
to Congress. This request is outside the scope of this rulemaking.
    Four commenters requested that the FDIC establish a time limit on 
covered offenses, whereby offenses would be ``washed out,'' for section 
19 purposes, after a certain period of time has passed. The FDIC notes 
that certain covered offenses--such as money laundering--have a 
mandatory 10-year prohibition period, absent court approval, under 12 
U.S.C. 1829(a)(2). Therefore, the FDIC could not grant a section 19 
waiver for an applicant convicted under a crime listed in section 
1829(a)(2) without Congress amending section 19. For covered offenses 
that are not specifically listed under section 1829(a)(2), the FDIC 
declines to provide a blanket washout rule. Section 19 has no maximum 
time limit for how long an individual is prohibited from participation 
at an IDI. Congress would have to change section 19 for the FDIC to 
implement such a proposal. However, the FDIC notes that the expanded de 
minimis framework provides significant regulatory relief.

D. Covered Offenses

    One commenter requested that the FDIC narrow the definition of 
``pretrial diversion'' in the SOP. The FDIC declines to adopt this 
proposal and believes that the existing SOP language adequately and 
fairly describes pretrial diversion program entries.
    Two commenters proposed that the FDIC reduce the type of offenses 
covered by the SOP. The FDIC declines to adopt these proposals. The 
types of offenses covered by section 19 are broadly defined in the 
statute as those involving dishonesty, breach of trust, or money 
laundering. The FDIC determines whether certain crimes involve such 
elements under section 19 when the FDIC processes applications. A 
change to the text of section 19 would require legislation. Moreover, 
the regulation will codify certain minor crimes as de minimis, which 
will exclude such crimes from requiring an application.

E. De minimis Exception

    Two commenters asked that the time actually served in jail 
component of the de minimis exception be amended to exclude instances 
where the applicant only served pretrial detention. The FDIC declines 
to adopt this proposal because pretrial detention is typically 
incorporated into the ultimate sentence as time served.
    One commenter proposed that the maximum time served be increased to 
three years, and that other restrictions on the freedom of movement 
(such as probation), be excluded from being considered actual time 
served. The FDIC notes that the ``time served'' factor does

[[Page 51318]]

not apply to individuals 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 FDIC further notes that the 
``time served'' factor does not apply to individuals who are restricted 
to a substance abuse treatment program facility for part or all of the 
day. The ``time served'' factor applies to individuals confined to a 
psychiatric treatment center in lieu of a jail, prison, or house of 
correction on mental-competency grounds, but not to individuals ordered 
to attend outpatient psychiatric treatment. The FDIC declines to 
further expand the time-served component, because the FDIC believes 
that this proposal is too expansive.
    Two commenters asked that the FDIC expand the de minimis exception 
for offenses committed by persons aged 21 or younger. One proposal 
called for the elimination of the maximum-punishment factor. The FDIC 
declines to expand the de minimis framework beyond the significant 
revisions outlined in Section III, which revisions pertain, in part, to 
offenses committed by persons 21 years of age or younger.
    One commenter asked that the FDIC exclude entirely from 
consideration all offenses that occurred before a certain, relatively 
young age. The FDIC believes that this request is too expansive and 
declines to adopt the proposal.
    Three commenters recommended that the FDIC increase the actual 
jail-time-served factor. The FDIC declines to further expand the de 
minimis framework beyond the significant revisions outlined in Section 
III.
    One commenter suggested that the FDIC increase the ``bad'' or 
insufficient funds check(s) threshold from $1,000 to $2,500. The FDIC 
declines to expand the de minimis framework as proposed, because the 
FDIC considers the current threshold appropriate.
    One commenter asked that the FDIC expand the maximum potential 
incarceration period for a covered offense from one year to three 
years, under the de minimis framework. The FDIC declines to further 
expand the de minimis exception beyond the significant revisions 
outlined in Section III and believes that the current threshold is 
appropriate.

F. Status Quo, or Issuing the Rule as Originally Proposed

    The FDIC also considered the status quo alternative of retaining 
the existing section 19 SOP and regulations, as well as issuing the 
rule as originally proposed.\7\ The FDIC, however, believes that the 
rule further clarifies the FDIC's application of section 19 and the 
application process for IDIs and individuals who seek relief from its 
provisions, while posing no substantive costs, relative to the status 
quo alternative. Additionally, the FDIC believes that the changes 
adopted more accurately reflect the risk of dishonesty, breach of 
trust, and money laundering posed by the potential employment of 
certain individuals to institutions. None of the commenters advocated 
for the status quo alternative. Moreover, the revisions made between 
the proposal and the final rule should result in significant regulatory 
relief for IDIs and individuals.
---------------------------------------------------------------------------

    \7\ 12 CFR part 303, subpart L and 12 CFR part 308, subpart M.
---------------------------------------------------------------------------

V. Regulatory Analysis

The Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
(PRA),\8\ the FDIC may not conduct or sponsor, and the respondent is 
not required to respond to, an information collection unless it 
displays a currently valid Office of Management and Budget (OMB) 
control number.
---------------------------------------------------------------------------

    \8\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The rule includes 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. However, the 
FDIC does not currently have access to data that would enable it to 
accurately estimate what the actual decrease may be. As such, the FDIC 
does not believe that a change to the number of respondents or the PRA 
burden in its existing information collection is necessary at this 
time. The FDIC will continue to monitor the number of applications 
received going forward, and will incorporate any changes in future 
submissions, including the next information-collection renewal. 
Therefore, no information collection request will be submitted to the 
OMB for review.

The Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires an agency, 
in connection with a proposed rule, to prepare and make available for 
public comment an initial regulatory flexibility analysis that 
describes the impact of a rule on small entities.\9\ However, a 
regulatory flexibility analysis is not required if the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities. The Small Business Administration 
(SBA) has defined ``small entities'' to include banking organizations 
with total assets of less than or equal to $600 million that are 
independently owned and operated or owned by a holding company with 
less than or equal to $600 million in total assets.\10\ Generally, the 
FDIC considers a significant effect to be a quantified effect in excess 
of 5 percent of total annual salaries and benefits per institution, or 
2.5 percent of total noninterest expenses. The FDIC believes that 
effects in excess of these thresholds typically represent significant 
effects for FDIC-supervised institutions. As discussed further below, 
the FDIC certifies that this rule will not have a significant economic 
impact on a substantial number of FDIC-supervised small entities.
---------------------------------------------------------------------------

    \9\ 5 U.S.C. 601 et seq.
    \10\ The SBA defines a small banking organization as having $600 
million or less in assets, where an organization's ``assets are 
determined by averaging the assets reported on its four quarterly 
financial statements for the preceding year.'' See 13 CFR 121.201 
(as amended by 84 FR 34261 (July 18, 2019), effective August 19, 
2019). In its determination, the ``SBA counts the receipts, 
employees, or other measure of size of the concern whose size is at 
issue and all of its domestic and foreign affiliates.'' See 13 CFR 
121.103. Following these regulations, the FDIC uses a covered 
entity's affiliated and acquired assets, averaged over the preceding 
four quarters, to determine whether the covered entity is ``small'' 
for the purposes of RFA.
---------------------------------------------------------------------------

    The FDIC insures 5,186 depository institutions, of which 3,815 are 
defined as small banking organizations according to the RFA.\11\ In the 
period from 2014 through 2019, the FDIC received 33 bank-sponsored 
section 19 applications from small, FDIC-insured institutions, an 
average of about 6 per year. Additionally, the FDIC received 654 
section 19 applications from individuals during the same period, an 
average of 109 per year.\12\ To determine the maximum number of small, 
FDIC-supervised institutions who could be affected by the rule, this 
analysis assumes that each applicant is seeking employment at a 
different bank; each bank is a small, FDIC-insured institution; and no 
FDIC-insured institutions or individuals are affected except those who 
have submitted section 19 applications. Based on these assumptions, 115 
(3.0 percent of) small, FDIC-insured institutions on average, annually, 
would be affected by the rule.\13\ However, in the FDIC's experience, 
section 19 applications from individuals are compelled by the 
applicant's intent to seek employment at

[[Page 51319]]

FDIC-insured institutions that are generally not small. Therefore, the 
FDIC believes that the number of small, FDIC-insured institutions 
affected by the rule could be less than 115.
---------------------------------------------------------------------------

    \11\ FDIC Call Report, December 31, 2019.
    \12\ Application Tracking System.
    \13\ (115/3,815) * 100 = 3.01 percent.
---------------------------------------------------------------------------

    As described previously, the rule incorporates and revises the 
current content of the SOP into the FDIC's regulations. The FDIC 
considers individuals who have been convicted of a crime of dishonesty, 
breach of trust, or money laundering, who participate in the affairs of 
an IDI without the prior written consent of the FDIC, to be subject to 
section 19, and will continue to do so under the rule. The rule will, 
however, expand the scope of the de minimis exception and, therefore, 
expand the number of offenses that will not require an application 
under section 19. Both of these changes will likely result in a 
reduction in section 19 applications.
    To the extent that the current content of the SOP conveys any 
ambiguity as to the FDIC's application of section 19 or the application 
process, the rule will benefit covered entities by further clarifying 
this topic and process. Based on the FDIC's estimate, mentioned 
earlier, that the rule could affect about 3 percent of small FDIC-
insured institutions per year, such effects are likely to be relatively 
small.
    To the extent that the revised consideration of expungements, 
reduction in waiting periods, increases in certain small-dollar simple-
theft convictions, or other items provide relief to certain small 
institutions or individuals, the FDIC believes that such effects are 
likely to be relatively small. As discussed previously, some of these 
changes are being adopted to establish better alignment with other 
regulatory limits or more-consistent treatment of individuals. Other 
revisions are intended to reduce regulatory burden on individuals and 
IDIs by decreasing the number of applications that would otherwise be 
required under section 19. The FDIC believes that such changes more 
accurately reflect the risk of dishonesty and breach of trust posed by 
the potential employment of certain individuals to small institutions. 
Again, based on the FDIC's estimate, mentioned earlier, that the rule 
could affect about 3 percent of small FDIC-insured institutions per 
year, such effects are likely to be relatively small.
    Based on the information above, the FDIC certifies that the rule 
will not have a significant economic impact on a substantial number of 
small entities.

Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \14\ requires each FBA to 
use plain language in all of its proposed and final rules published 
after January 1, 2000. The FDIC has sought to present the rule in a 
simple and straightforward manner. The FDIC did not receive any 
comments on the use of plain language.
---------------------------------------------------------------------------

    \14\ 12 U.S.C. 4809.
---------------------------------------------------------------------------

    Riegle Community Development and Regulatory Improvement Act of 1994
    Under section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\15\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
IDIs, each FBA must consider, consistent with principles of safety and 
soundness and the public interest, any administrative burdens that such 
regulations would place on depository institutions, including small 
depository institutions, and customers of depository institutions, as 
well as the benefits of such regulations. In addition, section 302(b) 
of the RCDRIA requires new regulations and amendments to regulations 
that impose additional reporting, disclosures, or other new 
requirements on IDIs generally to take effect on the first day of a 
calendar quarter that begins on or after the date on which the 
regulations are published in final form.\16\
---------------------------------------------------------------------------

    \15\ 12 U.S.C. 4802(a).
    \16\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    The FDIC has determined that the final rule would not impose 
additional reporting, disclosure, or other requirements on IDIs; 
therefore, the requirements of the RCDRIA do not apply. Therefore, in 
conjunction with the RCDRIA, the rule will be effective on September 
21, 2020.

The Congressional Review Act

    For purposes of Congressional Review Act, the OMB makes a 
determination as to whether a final rule constitutes a ``major'' 
rule.\17\ If a rule is deemed a ``major rule'' by the OMB, the 
Congressional Review Act generally provides that the rule may not take 
effect until at least 60 days following its publication.\18\
---------------------------------------------------------------------------

    \17\ 5 U.S.C. 801 et seq.
    \18\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    The Congressional Review Act defines a ``major rule'' as any rule 
that the Administrator of the Office of Information and Regulatory 
Affairs of the OMB finds has resulted in or is likely to result in: (A) 
An annual effect on the economy of $100,000,000 or more; (B) a major 
increase in costs or prices for consumers, individual industries, 
Federal, State, or local government agencies or geographic regions; or 
(C) significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic and 
export markets.\19\
---------------------------------------------------------------------------

    \19\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    The OMB has determined that the final rule is not a major rule for 
purposes of the Congressional Review Act, and the FDIC will submit the 
final rule and other appropriate reports to Congress and the Government 
Accountability Office for review.

List of Subjects

12 CFR Part 303

    Administrative practice and procedure.

12 CFR Part 308

    Rules of practice and procedure.

Authority and Issuance

    For the reasons stated in the preamble and under the authority of 
12 U.S.C. 1819 (Seventh and Tenth), the FDIC amends 12 CFR parts 303 
and 308 as follows:

PART 303--FILING PROCEDURES

0
1. The authority citation for part 303 continues to read as follows:

    Authority: 12 U.S.C. 378, 1464, 1813, 1815, 1817, 1818, 1819(a) 
(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1, 
1831w, 1835a, 1843(l), 3104, 3105, 3108, 3207, 5414, 5415, and 15 
U.S.C. 1601-1607.


0
2. Revise subpart L to read as follows:
Subpart L--Section 19 of the FDI Act (Consent to Service of Persons 
Convicted of, or Who Have Program Entries for, Certain Criminal 
Offenses)
Sec.
303.220 What is section 19 of the FDI Act?
303.221 Who is covered by section 19?
303.222 What offenses are covered under section 19?
303.223 What constitutes a conviction under section 19?
303.224 What constitutes a pretrial diversion or similar program 
(program entry) under section 19?
303.225 What are the types of applications that can be filed?
303.226 When must an application be filed?
303.227 When is an application not required for a covered offense or 
program entry (de minimis offenses)?
303.228 How to file an application.
303.229 How an application is evaluated.
303.230 What will the FDIC do if the application is denied?

[[Page 51320]]

303.231 Waiting time for a subsequent application if an application 
is denied.

Subpart L--Section 19 of the FDI Act (Consent to Service of Persons 
Convicted of, or Who Have Program Entries for, Certain Criminal 
Offenses)


Sec.  303.220  What is section 19 of the FDI Act?

    (a) This subpart covers applications under section 19 of the 
Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1829. Under section 
19, any person who has been convicted of any criminal offense involving 
dishonesty, breach of trust, or money laundering, or has agreed to 
enter into a pretrial diversion or similar program (program entry) in 
connection with a prosecution for such offense, may not become, or 
continue as, an institution-affiliated party (IAP) of an insured 
depository institution (IDI); own or control, directly or indirectly, 
any IDI; or otherwise participate, directly or indirectly, in the 
conduct of the affairs of any IDI without the prior written consent of 
the FDIC.
    (b) In addition, the law bars an IDI from permitting such a person 
to engage in any conduct or to continue any relationship prohibited by 
section 19. IDIs should therefore make a reasonable inquiry regarding 
an applicant's history to ensure that a person who has a conviction or 
program entry covered by the provisions of section 19 is not hired or 
permitted to participate in its affairs without the written consent of 
the FDIC issued under this subpart. FDIC-supervised IDIs 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 under section 19, but the job applicant may not 
work for, be employed by, or otherwise participate in the affairs of 
the IDI until the IDI has determined that the applicant is not barred 
under section 19.
    (c) If there is a conviction or program entry covered by the bar of 
section 19, an application under this subpart must be filed seeking the 
FDIC's consent to become, or to continue as, an IAP; to own or control, 
directly or indirectly, an IDI; or to otherwise participate, directly 
or indirectly, in the affairs of the IDI. The application must be 
filed, and consented to, prior to serving in any of the foregoing 
capacities unless such application is not required under the subsequent 
provisions of this subpart. 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 
IDI 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.


Sec.  303.221  Who is covered by section 19?

    (a) Section 19 covers IAPs, as defined by 12 U.S.C. 1813(u), and 
others who are participants in the conduct of the affairs of an IDI. 
Therefore, all employees of an IDI that fall within the scope of 
section 19, including 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 IAPs are 
covered depends upon their degree of influence or control over the 
management or affairs of an IDI. In the context of the FDIC's 
application of section 19, coverage would apply to an IDI's holding 
company's directors and officers to the extent that they have the power 
to define and direct the management or affairs of an IDI. Similarly, 
directors and officers of affiliates, subsidiaries or joint ventures of 
an IDI or its holding company will be covered if they participate in 
the affairs of the IDI 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 IDI other 
than the activity for which the institution has contracted. An 
independent contractor who influences or controls the management or 
affairs of the IDI would be covered by section 19.
    (b) The term ``person,'' for purposes of section 19, means an 
individual, and does not include a corporation, firm, or other business 
entity.
    (c) 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 holding company 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) and (e).
    (d) Section 19 specifically prohibits a person subject to its 
provisions from owning or controlling an IDI. The terms ``control'' and 
``ownership'' under section 19 shall have the meaning given to the term 
``control'' 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 IDI (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 
institution. Under the same standards, a person will be deemed to 
``own'' an IDI if that person owns 25 percent or more of the 
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.


Sec.  303.222  What offenses are covered under section 19?

    (a) 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 includes offenses that 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.
    (b) Whether a crime involves dishonesty, breach of trust, or money 
laundering will be determined from the statutory elements of the 
offense itself or from court determinations that the statutory 
provisions of the offense involve dishonesty, breach of trust, or money 
laundering.
    (c) All convictions or program entries for offenses concerning the 
illegal manufacture, sale, distribution of, or trafficking in 
controlled substances shall require an application unless no 
application is required under this subpart. Convictions or program 
entries for criminal offenses involving the simple possession of a 
controlled substance are not covered under section 19.


Sec.  303.223  What constitutes a conviction under section 19?

    (a) Convictions requiring an application. There must be a 
conviction of record. Section 19 does not cover arrests or pending 
cases not brought to trial, unless the person has a program entry as 
set out in Sec.  303.224. Section 19 does not cover acquittals or any 
conviction that has been reversed on

[[Page 51321]]

appeal, unless the reversal was for the purpose of re-sentencing. 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.
    (b) Convictions not requiring an application. When an individual is 
charged with a covered offense and, in the absence of a program entry 
as set out in Sec.  303.224, is subsequently convicted of an offense 
that is not a covered offense, the conviction is not subject to section 
19.
    (c) Expungements. If an order of expungement or an order to seal 
has been issued in regard to a conviction, or if a record has been 
otherwise expunged by operation of law, then the conviction shall not 
be considered a conviction of record and shall not require an 
application.
    (d) Youthful offenders. An adjudication by a court against a person 
as a ``youthful offender'' under any youth-offender law applicable to 
minors as defined by state law, or any judgment as a ``juvenile 
delinquent'' by any court having jurisdiction over minors as defined by 
state law, does not require an application. Such an adjudication does 
not constitute a matter covered under section 19 and is not a 
conviction or program entry for determining the applicability of Sec.  
303.227.


Sec.  303.224  What constitutes a pretrial diversion or similar program 
(program entry) under section 19?

    (a) A program entry is characterized by a suspension or eventual 
dismissal or reversal of charges or criminal prosecution upon 
agreement, whether formal or informal, by the accused to treatment, 
rehabilitation, restitution, or other non-criminal or non-punitive 
alternatives. Whether the outcome of a case constitutes a program entry 
is determined by relevant Federal, State, or local law, and, if not so 
designated under applicable law, then the determination of whether a 
disposition is a program entry 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.
    (b) When a covered offense either is reduced by a program entry to 
an offense that would otherwise not be covered by section 19 or is 
dismissed upon successful completion of a program entry, the covered 
offense remains a covered offense for purposes of section 19. The 
covered offense will require an application unless it is de minimis as 
provided by Sec.  303.227 of this subpart.
    (c) Expungements or sealings of program entries will be treated the 
same as those for convictions.


Sec.  303.225  What are the types of applications that can be filed?

    (a) Institution filing requirement (bank-sponsored applications). 
Applications are required to be filed by the IDI, which intends for a 
person covered by the provisions of section 19 to participate in its 
affairs. Bank-sponsored applications shall be filed with the 
appropriate FDIC Regional Office, as required by this subpart.
    (b) Waiver applications. If an IDI does not file an application 
regarding an individual, the individual may file a request for a waiver 
of the institution filing requirement. Such a waiver application shall 
be filed with the appropriate FDIC Regional Office and shall set forth 
substantial good cause why the application should be granted.


Sec.  303.226  When must an application be filed?

    Except for situations in which no application is required under 
this subpart, an application must be filed when 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 when such person has a 
program entry 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 program entry, 
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 forms as well as additional 
information concerning section 19 can be accessed at the FDIC's 
regional offices or on the FDIC's website.


Sec.  303.227  When is an application not required for a covered 
offense or program entry (de minimis offenses)?

    (a) In general. Approval is automatically granted and an 
application will not be required where all of the following de minimis 
criteria are met.
    (1) The individual has been convicted of, or has program entries 
for, no more than two covered offenses, including those subject to 
paragraph (b) of this section; and for each covered offense, all of the 
sentencing requirements associated with the conviction, or conditions 
imposed by the program entry, have been completed (the sentence- or 
program-completion requirement does not apply under paragraphs (b)(2) 
and (4) of this section);
    (2) Each covered 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 days or less of jail time for each covered offense. 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. Jail time 
includes confinement to a psychiatric treatment center in lieu of a 
jail, prison, or house of correction on mental-competency grounds. The 
definition is not intended to include any of the following:
    (i) Persons 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;
    (ii) Persons who are restricted to a substance-abuse treatment 
program facility for part or all of the day; and
    (iii) Persons who are ordered to attend outpatient psychiatric 
treatment;
    (3) If there are two convictions or program entries for a covered 
offense, each conviction or program entry was entered at least three 
years prior to the date an application would otherwise be required, 
except as provided in paragraph (b)(1) of this section; and
    (4) Each covered offense was not committed against an IDI or 
insured credit union.
    (b) Other types of offenses for which the de minimis exception 
applies and no application is required--(1) Age of person at time of 
covered offense. If there are two convictions or program entries for a 
covered offense, and the actions that resulted in both convictions or 
program entries all occurred when the individual was 21 years of age or 
younger, then the de minimis criteria in paragraph (a)(3) of this 
section shall be met if the convictions or program entries were entered 
at least 18 months prior to the date an application would otherwise be 
required.
    (2) 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 de minimis 
offenses under this provision if the following conditions apply:
    (i) 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

[[Page 51322]]

insufficient funds checks is $1,000 or less;
    (ii) No IDI 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); and
    (iii) The individual has no more than one other de minimis offense 
under this section.
    (3) Convictions or program entries for small-dollar, simple theft. 
Convictions or program entries based on the simple theft of goods, 
services, or currency (or other monetary instrument) shall be 
considered de minimis offenses under this provision if the following 
conditions apply. Simple theft excludes burglary, forgery, robbery, 
identity theft, and fraud.
    (i) The value of the currency, goods, or services taken is $1,000 
or less;
    (ii) The theft was not committed against an IDI or insured credit 
union;
    (iii) The individual has no more than one other de minimis offense 
under this section; and
    (iv) If there are two de minimis offenses under this section, each 
conviction or program entry was entered at least three years prior to 
the date an application would otherwise be required, or at least 18 
months prior to the date an application would otherwise be required if 
the actions that resulted in the conviction or program entry all 
occurred when the individual was 21 years of age or younger.
    (4) Convictions or program entries for the use of a fake, false, or 
altered identification. A conviction or program entry for the creation 
or possession of a fake, false, or altered form of identification by a 
person under the age of 21, or the use of a fake, false, or altered 
form of identification by such a person to circumvent age-based 
restrictions on purchases, activities, or premises entry, shall be 
considered a de minimis offense under this provision if the following 
conditions apply.
    (i) The individual has no more than one other de minimis offense 
under this section; and
    (ii) If there are two de minimis offenses under this section, each 
conviction or program entry was entered at least three years prior to 
the date an application would otherwise be required; or at least 18 
months prior to the date an application would otherwise be required if 
the actions that resulted in the conviction or program entry all 
occurred when the individual was 21 years of age or younger.
    (c) Fidelity bond coverage and disclosure to institutions. Any 
person who meets the criteria under this section shall be covered by a 
fidelity bond to the same extent as others in similar positions, and 
shall disclose the presence of the conviction(s) or program entry(ies) 
to all IDIs in the affairs of which he or she intends to participate.
    (d) Non-qualifying convictions or program entries. 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 
set out in this section.


Sec.  303.228  How to file an application.

    Forms and instructions should be obtained from the FDIC's website 
(www.fdic.gov), and the application must be filed with the appropriate 
FDIC Regional Director. The application must be filed by an IDI on 
behalf of a person (bank-sponsored) unless the FDIC grants a waiver of 
that requirement (individual waiver). Individual waivers will be 
considered on a case-by-case basis where substantial good cause for 
granting a waiver is shown. A person may request an individual waiver 
and file an application on her or his own behalf within the same 
application. The appropriate Regional Office for a bank-sponsored 
application is the office covering the state where the IDI'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. States covered by each 
FDIC Regional Office can be located on the FDIC's website.


Sec.  303.229  How an application is evaluated.

    (a) The ultimate determinations in assessing an application are 
whether the person has demonstrated his or her fitness to participate 
in the conduct of the affairs of an IDI, and whether the affiliation, 
ownership, control, or participation by the person in the conduct of 
the affairs of the institution may constitute a threat to the safety 
and soundness of the institution or the interests of its depositors or 
threaten to impair public confidence in the institution. In determining 
the degree of risk, the FDIC will consider:
    (1) Whether the conviction or program entry is for a criminal 
offense involving dishonesty, breach of trust, or money laundering and 
the specific nature and circumstances of the offense;
    (2) Whether the participation directly or indirectly by the person 
in any manner in the conduct of the affairs of the IDI constitutes a 
threat to the safety and soundness of the institution or the interests 
of its depositors or threatens to impair public confidence in the 
institution;
    (3) Evidence of rehabilitation including the person's age at the 
time of the covered offense, the amount of time that has elapsed since 
the occurrence of the conviction or program entry, and the person's 
employment history and full legal history;
    (4) The position to be held or the level of participation by the 
person at an IDI;
    (5) The amount of influence the person will be able to exercise 
over the operation, management, or affairs of an IDI;
    (6) The ability of management of the IDI to supervise and control 
the person's activities;
    (7) The level of ownership or control the person will have at an 
insured depository institution;
    (8) The applicability of the IDI's fidelity bond coverage to the 
person; and
    (9) Any additional factors in the specific case that appear 
relevant to the application or the applicant including, but not limited 
to, the opinion or position of the primary Federal or State regulator.
    (b) The question of whether a person, who was convicted of a crime 
or who agreed to a program entry, was guilty of that crime shall not be 
at issue in a proceeding under this subpart or under 12 CFR part 308, 
subpart M.
    (c) The foregoing factors 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 under 12 U.S.C. 
1829(a)(2) for certain Federal offenses.
    (d) All approvals and orders will be subject to the condition that 
the person 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 IDIs in the 
affairs of which he or she wishes to participate.
    (e) 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 additional conditions, including that the prior 
consent of the FDIC will be required for any proposed significant 
changes in the person's duties or responsibilities. In the case of 
bank-sponsored applications, such proposed changes may, in the 
discretion of the Regional Director, require a new application.

[[Page 51323]]

    (f) In situations in which an approval has been granted for a 
person to participate in the affairs of a particular IDI and the person 
subsequently seeks to participate at another IDI, another application 
must be submitted and approved by the FDIC prior to the person 
participating in the affairs of the other IDI.


Sec.  303.230  What will the FDIC do if the application is denied?

    (a) The FDIC will inform the applicant in writing that the 
application has been denied and summarize or cite the relevant 
considerations specified in Sec.  303.229 of this subpart.
    (b) The denial will also notify the applicant that a written 
request for a hearing under 12 CFR part 308, subpart M, may be filed 
with the Executive Secretary within 60 days after the denial. The 
request for a hearing must include the relief desired, the grounds 
supporting the request for relief, and any supporting evidence.


Sec.  303.231  Waiting time for a subsequent application if an 
application is denied.

    An application under section 19 may be made in writing at any time 
more than one year after the issuance of a decision denying an 
application under section 19. If the original denial is subject to a 
request for a hearing, then the subsequent application may be filed at 
any time more than one year after the decision of the Board of 
Directors, or its designee, denying the application. The prohibition 
against participating in the affairs of an IDI under section 19 shall 
continue until the individual has been granted consent in writing to 
participate in the affairs of an IDI by the Board of Directors or its 
designee.

PART 308--RULES OF PRACTICE AND PROCEDURE

0
3. The authority citation for part 308 continues to read as follows:

    Authority: 5 U.S.C. 504, 554-557; 12 U.S.C. 93(b), 164, 505, 
1464, 1467(d), 1467a, 1468, 1815(e), 1817, 1818, 1819, 1820, 1828, 
1829, 1829(b), 1831i, 1831m(g)(4), 1831o, 1831p-1, 1832(c), 1884(b), 
1972, 3102, 3108(a), 3349, 3909, 4717, 5412(b)(2)(C), 5414(b)(3); 15 
U.S.C. 78(h) and (i), 78o(c)(4), 78o-4(c), 78o-5, 78q-1, 78s, 78u, 
78u-2, 78u-3, 78w, 6801(b), 6805(b)(1); 28 U.S.C. 2461 note; 31 
U.S.C. 330, 5321; 42 U.S.C. 4012a; Pub. L. 104-134, sec. 31001(s), 
110 Stat. 1321; Pub. L. 109-351, 120 Stat. 1966; Pub. L. 111-203, 
124 Stat. 1376; Pub. L. 114-74, sec. 701, 129 Stat. 584.


0
4. Revise subpart M to read as follows:
Subpart M--Procedures Applicable to the Request for and Conduct of a 
Hearing after Denial of an Application Under Section 19 of the FDI Act
Sec.
308.156 Scope.
308.157 Denial of applications.
308.158 Hearings.
308.159-308.160 [Reserved]

Subpart M--Procedures Applicable to the Request for and Conduct of 
a Hearing after Denial of an Application under Section 19 of the 
FDI Act


Sec.  308.156  Scope.

    The rules and procedures set forth in this subpart shall apply to 
an application filed under section 19 of the FDI Act, 12 U.S.C. 1829 
(section 19), and 12 CFR part 303, subpart L, by an insured depository 
institution (IDI) or an individual, which individual has been convicted 
of any criminal offense involving dishonesty, a breach of trust, or 
money laundering, or who has agreed to enter into a pretrial diversion 
or similar program in connection with the prosecution of such offense, 
to seek the prior written consent of the FDIC for the individual to 
become or continue as an institution-affiliated party (IAP) with 
respect to an IDI; to own or control directly or indirectly an IDI; or 
to participate directly or indirectly in any manner in the conduct of 
the affairs of an IDI; and shall apply only after such application has 
been denied under part 12 CFR part 303, subpart L.


Sec.  308.157  Denial of applications.

    If an application is denied under 12 CFR part 303, subpart L, then 
the applicant may request a hearing under this subpart. The applicant 
will have 60 days after the date of the denial to file a written 
request with the Executive Secretary. In the request, the applicant 
shall state the relief desired, the grounds supporting the request for 
relief, and provide any supporting evidence that the applicant believes 
is responsive to the grounds for the denial.


Sec.  308.158  Hearings.

    (a) Hearing dates. The Executive Secretary shall order a hearing to 
be commenced within 60 days after receipt of a request for hearing on 
an application filed under Sec.  308.157. Upon the request of the 
applicant or FDIC enforcement counsel, the presiding officer or the 
Executive Secretary may order a later hearing date.
    (b) Burden of proof. The burden of going forward with a prima facie 
case shall be upon the FDIC. The ultimate burden of proof shall be upon 
the person proposing to become or continue as an IAP with respect to an 
IDI; to own or control directly or indirectly an IDI; or to participate 
directly or indirectly in any manner in the conduct of the affairs of 
an IDI.
    (c) Hearing procedure. (1) The hearing shall be held in Washington, 
DC, or at another designated place, before a presiding officer 
designated by the Executive Secretary.
    (2) The provisions of Sec. Sec.  308.6 through 308.12, 308.16, and 
308.21 of the Uniform Rules (subpart A of this part) and Sec. Sec.  
308.101, 308.102, and 308.104 through 308.106 the Local Rules (subpart 
B of this part) shall apply to hearings held under this subpart.
    (3) The applicant may appear at the hearing and shall have the 
right to introduce relevant and material documents and oral argument. 
Members of the FDIC enforcement staff may attend the hearing and 
participate as a party.
    (4) There shall be no discovery in proceedings under this subpart.
    (5) At the discretion of the presiding officer, witnesses may be 
presented within specified time limits, provided that a list of 
witnesses is furnished to the presiding officer and to all other 
parties prior to the hearing. Witnesses shall be sworn, unless 
otherwise directed by the presiding officer. The presiding officer may 
ask questions of any witness. Each party shall have the opportunity to 
cross-examine any witness presented by an opposing party. The 
transcript of the proceedings shall be furnished, upon request and 
payment of the cost thereof, to the applicant afforded the hearing.
    (6) In the course of or in connection with any hearing under this 
paragraph, the presiding officer shall have the power to administer 
oaths and affirmations; to take or cause to be taken depositions of 
unavailable witnesses; and to issue, revoke, quash, or modify subpoenas 
and subpoenas duces tecum. Where the presentation of witnesses is 
permitted, the presiding officer may require the attendance of 
witnesses from any state, territory, or other place subject to the 
jurisdiction of the United States at any location where the proceeding 
is being conducted. Witness fees shall be paid in accordance with Sec.  
308.14 of the Uniform Rules (subpart A of this part).
    (7) Upon the request of the applicant afforded the hearing, or FDIC 
enforcement staff, the record shall remain open for five business days 
following the hearing for the parties to make additional submissions to 
the record.
    (8) The presiding officer shall make recommendations to the Board 
of Directors, where possible, within 20

[[Page 51324]]

days after the last day for the parties to submit additions to the 
record.
    (9) The presiding officer shall forward his or her recommendation 
to the Executive Secretary who shall promptly certify the entire 
record, including the recommendation to the Board of Directors or its 
designee. The Executive Secretary's certification shall close the 
record.
    (d) Written submissions in lieu of hearing. The applicant or the 
IDI may in writing waive a hearing and elect to have the matter 
determined on the basis of written submissions.
    (e) Failure to request or appear at hearing. Failure to request a 
hearing shall constitute a waiver of the opportunity for a hearing. 
Failure to appear at a hearing in person or through an authorized 
representative shall constitute a waiver of a hearing. If a hearing is 
waived, the person shall remain barred under section 19.
    (f) Decision by Board of Directors or its designee. Within 60 days 
following the Executive Secretary's certification of the record to the 
Board of Directors or its designee, the Board of Directors or its 
designee shall notify the affected person whether the person shall 
remain barred under section 19. The notification shall state the basis 
for any decision of the Board of Directors or its designee that is 
adverse to the applicant.


Sec.  Sec.  308.159-308.160  [Reserved]

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on July 24, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.
[FR Doc. 2020-16464 Filed 8-19-20; 8:45 am]
BILLING CODE 6714-01-P