[Federal Register: December 1, 1998 (Volume 63, Number 230)]
[Notices]               
[Page 66177-66185]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01de98-98]

=======================================================================
-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION

 
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.

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

SUMMARY: The FDIC is updating its statement of policy (SOP), which is 
issued pursuant to section 19 of the Federal Deposit Insurance Act (12 
U.S.C. 1829). Section 19 prohibits, without the prior written consent 
of the FDIC, any person from participating in banking who has been 
convicted of a crime of dishonesty or breach of trust or money 
laundering, or who has entered a pretrial diversion in connection with 
such an offense. Section 19 was significantly expanded by the Financial 
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), 
Pub. L. No. 101-73, 103 Stat.183 (1989) and the Comprehensive Thrift 
and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 (Crime 
Control Act), Pub. L. No. 101-647, 104 Stat. 4789 (1990). As a result, 
the two existing policy statements for section 19 are outdated, and the 
new SOP is intended to replace them and to supersede prior guidelines. 
While the SOP maintains the FDIC's current requirement that an 
application seeking the FDIC's consent must be filed by an insured 
depository institution (insured institution), it provides blanket 
approval for certain de minimis crimes, and allows for a waiver of the 
institution filing requirement where an individual can demonstrate 
substantial good cause for such a waiver. Other significant provisions 
include the exclusion from section 19's coverage of a conviction that 
has been completely expunged, pretrial diversion and similar programs 
entered before November 29, 1990, and youthful offender adjudgments. 
The SOP clarifies that the scope of section 19's coverage applies to 
employees of an insured institution, and also to other persons who are 
in a position to influence or control the management or affairs of an 
insured institution.

EFFECTIVE DATE: December 1, 1998.

FOR FURTHER INFORMATION CONTACT: James M. Orlowsky, Review Examiner, 
Division of Supervision (202) 898-6763

[[Page 66178]]

or Andrea Winkler, Counsel, Legal Division (202) 898-3727, Federal 
Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 
20429.

SUPPLEMENTARY INFORMATION:

I. Background

    As amended by FIRREA and the Crime Control Act, section 19 
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 entered into a 
pretrial diversion or similar program in connection with a prosecution 
for such offense, from becoming or continuing as an institution-
affiliated party, owning or controlling, directly or indirectly an 
insured institution, or otherwise participating, directly or 
indirectly, in the conduct of the affairs of an 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 a person convicted of certain crimes enumerated in Title 18 
of the United States Code, absent a motion by the FDIC and approval by 
the sentencing court.
    A proposed SOP was published in the Federal Register on July 24, 
1997 (62 FR 39840 (1997)). The FDIC invited comments on all aspects of 
the proposal, as well as on a number of specific aspects of the SOP. 
Comments were due by September 22, 1997. The FDIC received a total of 
19 comment letters: 12 from banks, savings associations or bank holding 
companies; two from law firms; one from a state banking department; and 
four from trade associations. Based upon the comments, as discussed 
below, the final SOP is a significant revision of the proposal.

II. Final Statement of Policy

A. Scope of Section 19

(1) Participation
    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 depository institution. Therefore, all employees 
of an insured institution fall within the scope of section 19. The 
proposed SOP indicated that, additionally, persons employed by an 
institution's holding company or an affiliate, subsidiary or joint 
venture of an insured institution or of its holding company may be 
within the scope of section 19 where such person is engaged in 
performing banking or banking-related activities on a regular and 
material basis. For independent contractors, the proposal indicated 
that participation by an independent contractor or an employee of an 
independent contractor would occur where either is performing banking 
or banking-related activities on behalf of, or for the benefit of, an 
insured institution on a regular and material basis so as to be 
involved in the ordinary course of operations or to be exercising 
control over such operations. The proposal did not define what 
constitutes such activities. The SOP stated that ``person,'' for 
purposes of section 19, means a natural person, and does not include a 
corporation, firm, or other business entity.
    The FDIC received fourteen comments relevant to what constitutes 
``participation'' and what classes of individuals should be considered 
``participants.'' Ten of the comments were received from banks, savings 
associations or bank holding companies; one from a law firm; one from a 
state banking department; and two from trade associations. In general, 
the commenters expressed the view that the FDIC's definition of 
participation was overly broad and ambiguous, particularly with regard 
to affiliates and independent contractors, and did not adequately 
consider the risk of particular positions to the safety and soundness 
of an insured institution or its depositors. For example, one commenter 
indicated that under the proposal, section 19 could cover a computer 
technician employed by the institution's holding company who 
periodically performs routine maintenance at the institution's 
facilities, despite the low level of risk associated with the position. 
Concern was expressed that the proposal might have a crippling effect 
on independent contractors who employ large numbers of employees. 
Commenters felt that although independent contractors engage in 
activities that are related to banking, many do not exercise any 
decision-making authority with regard to the activities of the insured 
institution, and thus should not be subject to section 19. For example, 
if having access to sensitive bank data is a banking-related activity, 
then providers of automated teller machines and securities systems 
firms might arguably be included within the scope of section 19. 
Commenters requested that the FDIC specifically define the positions or 
types of independent contractors and activities that are covered by 
section 19.
    After considering the comments, the FDIC believes that it is not 
the purpose of the SOP to define precisely what activities constitute 
``participation.'' Rather, agency and court decisions should provide 
the guide as to what standards should be applied. As a general 
proposition, participation will be determined by the degree of 
influence or control over the management or affairs of an insured 
institution. Furthermore, given the changes in banking, including 
financial modernization and the rapid pace of technology, a listing of 
activities in the SOP is neither practical nor advisable. The FDIC must 
maintain flexibility in such determinations, and in reaching such 
determinations, the FDIC will consider the facts and circumstances and 
the degree of involvement of the individual in the institution's 
affairs. Under this standard, persons who function as ``de facto'' 
employees regardless of their relationship to the institution, will be 
covered by section 19. Likewise, the SOP need not specifically define 
what activities constitute direct as distinguished from indirect 
participation. The relevant inquiry is whether the individual 
personally participates in an institution's affairs, or whether the 
individual does so through another person or entity, i.e., 
``indirectly.''
    The final SOP adopts the standard that whether persons, other than 
institution-affiliated parties of an insured institution, are 
participants covered by section 19 depends upon their degree of 
influence or control over the management or affairs of an insured 
institution. It retains the definition of ``person'' set forth in the 
proposed SOP as not including corporations, firms or other business 
entities. Thus, section 19 would not apply to persons who are simply 
employees of a bank holding company, but would apply if those persons 
were in a position to influence or control the management or affairs of 
the insured institution. To the extent that the holding company's 
officers and directors have the power to define and direct the policies 
of the subsidiary insured institution, such persons would be deemed to 
be participants in the affairs of those subsidiaries, and therefore 
covered by section 19.
    Similarly, directors and officers of affiliates, subsidiaries or 
joint ventures of an insured institution or its holding company will be 
covered if they are in a position to influence or control the 
management or affairs of the insured institution. In those cases in 
which such individuals exercise policymaking functions for the insured 
institution, they should be deemed ``participants.'' For example, 
officers of an electronic data processing (EDP) affiliate would not 
typically exercise a controlling

[[Page 66179]]

influence to the extent that the affiliate simply provides a processing 
service to the bank. On the other hand, if a mortgage banking affiliate 
sends loans to an insured institution that the institution is obligated 
to purchase, then the officers of the affiliate may be participants in 
the insured institution's affairs. Where an employee of an EDP service 
has access to sensitive bank records and the ability to manipulate data 
so as to influence or control the management or affairs of an insured 
institution, that person will be covered by section 19. The degree of 
such influence may be controlled by reliance upon the safeguards and 
internal controls put in place by the affiliate and the bank.
    Insured depository institutions continue to out source increasing 
numbers of banking tasks. To the extent that independent contractors 
are utilized, an analysis similar to that for affiliates may be 
applied. Typically an independent contractor does not have a 
relationship with the insured institution other than the activity 
contracted for by the depository institution. Independent contractors 
are not considered institution-affiliated parties unless they knowingly 
or recklessly participate in violations, unsafe or unsound practices or 
breaches of fiduciary duty which result in the consequences set forth 
in 12 U.S.C. 1813(u). Those who do so, and who have been convicted of 
or entered pretrial diversion programs for covered offenses would, of 
course, be covered by section 19. In terms of participation, however, 
the typical independent contractor does not influence or control the 
bank's management or affairs. This would also be true of consultants 
who perform a specific defined task for the insured institution. 
Additionally, it has been determined that ``person'' within the context 
of section 19 means individuals, but not companies. This approach may 
eliminate coverage for many independent contractors. It would 
eliminate, for example, marketers of special promotions and similar 
independent contractors whose activity is not commonly thought to pose 
a risk to the operation of a financial institution. To the extent that 
any officer of such a company or any individual contractor attempts to 
use their position to influence or control the management or affairs of 
a financial institution, they would be covered as participants.
    The FDIC is aware that an effort can be made to evade the coverage 
of section 19 by ``converting'' an employee to an independent 
contractor. In those cases, generally applicable standards of 
employment law will be used to identify such arrangements, and to find 
that the person is a ``de facto'' employee. This same analysis will be 
used where an individual is employed by the holding company simply to 
avoid section 19 coverage.
    The FDIC believes that the approach adopted in the final SOP 
preserves the distinction between employees and independent contractors 
for contractual, regulatory and tax purposes, and avoids the criticism 
that the FDIC is imposing an excessive regulatory burden upon 
institutions without commensurate benefit. Furthermore, the FDIC 
expects that the relationship between an independent contractor and an 
insured institution is to be governed by a written contract, through 
which the insured institution may require typical safeguards such as 
warranties and bond coverage.
(2) ``Ownership'' and ``Control''
    Section 19 specifically prohibits a person subject to its coverage 
from owning or controlling an insured institution. The proposed SOP did 
not specifically define ``own'' or ``control,'' although the 
accompanying Preamble indicated that the FDIC was using the definition 
of ``control'' set forth in Regulation Y (12 CFR Part 225) which the 
Board of Governors of the Federal Reserve System (Federal Reserve 
Board) uses to implement the Change in Bank Control Act (CBCA) (12 
U.S.C. 1817(j)). The proposal stated that a controlling shareholder or 
a member of a control group subject to section 19 could not, without 
the prior written consent of the FDIC engage in the following conduct: 
(i) exercise any voting rights in any shares of stock of an insured 
institution or its holding company; (ii) own or control such shares of 
stock so as to result in controlling the management or policies of an 
insured institution; (iii) control such shares of stock so as to result 
in controlling the management or policies of an insured institution; 
(iv) solicit, procure, transfer, or attempt to transfer, vote, or 
attempt to vote any proxy, consent or authorization with respect to any 
voting rights in any insured institution; or (v) modify or set aside 
any voting agreement previously approved by the appropriate federal 
banking agency.
    The FDIC received six comments regarding the issue of ownership and 
control-three from depository institutions; one from a state banking 
department; and two from trade associations. Most commenters supported 
the conclusion that ``control'' should have the same meaning as set 
forth in the CBCA. Generally, the commenters indicated that absent an 
influence on the operations of an insured operation, mere ownership 
should not impose a section 19 obligation, nor should the ownership of 
a de minimis interest in the outstanding shares of an institution.
    As a general rule, since the 1990 Crime Control Act amendments, the 
FDIC has followed the interpretation found in the CBCA regarding 
``control.'' ``Control'' under the CBCA occurs where the person has the 
power to direct the management or policies of an institution (12 U.S.C. 
1817(j)(8)(B)). The statute and the FDIC's implementing regulation (12 
CFR Part 303) deem the power to vote 25 percent or more of a class of 
voting securities to constitute such control. In addition, the FDIC's 
regulation creates a presumption of control, i.e., that the person can 
direct management or policies of the institution, where the person 
owns, controls, or has the power to vote ten percent or more of the 
institution's voting securities if that person is the largest 
shareholder.
    The FDIC agrees with the commenters that ``own'' must mean more 
than simply owning a few shares. In order to give meaning to the 
ownership prohibition contained in section 19, the FDIC will apply the 
25 percent limitation regarding the power to vote shares to include an 
ownership limitation of 25 percent. The FDIC will also apply the ten 
percent limitation to ownership of voting shares where that person is 
the largest shareholder. Consequently, a person would be prohibited 
from owning or having the power to vote 25 percent or more of an 
institution's voting shares, or ten percent of those shares where that 
person is the largest shareholder. These standards would also apply to 
an individual acting in concert with others so as to have such 
ownership or control. The FDIC believes that this approach will avoid 
the absurd result of requiring a convicted person who owns one share or 
ten shares of stock in a large publicly traded insured depository 
institution from having to divest his or her ownership interest.
    Absent the FDIC's consent, persons subject to the prohibitions of 
section 19 will be required to divest their ownership of shares above 
the foregoing limits. Section 19 does not contain specific statutory 
prohibitions regarding specific activities relating to the voting of 
stock. Therefore, the FDIC has decided not to incorporate into the 
final SOP any prohibitions on specific voting activities other than the 
aforementioned limitations regarding ownership, control, and 
participation.
    It should be noted that while the Preamble accompanying the 
proposed

[[Page 66180]]

SOP referred to the Federal Reserve Board's Regulation Y (12 CFR Part 
225) as enunciating the standards for ``own'' and ``control,'' the FDIC 
has decided that use of its own regulations in this area would be more 
appropriate. Regulation Y has wide reaching attribution rules for stock 
ownership among family members. An attempt to restrict ownership or 
control of shares by family members simply because of a person's 
conviction raises significant due process issues that are best avoided, 
however, control of a convicted person's shares by family members may 
be precluded where such control is detrimental to the bank, based upon 
the facts in a particular case.

B. Standards for Determining Whether an Application Is Required

    The Proposed SOP contained the requirement that an application 
seeking the consent of the FDIC prior to engaging in banking activities 
be submitted in all cases in which any adult or minor treated as an 
adult was convicted or entered into a pretrial diversion program with 
regard to a covered offense. As discussed more fully in section (5), 
below, based upon its experience in processing section 19 applications, 
and in light of comments received, the final SOP reflects the FDIC's 
determination that it will provide automatic approval and dispense with 
the application requirement in certain cases involving de minimis 
crimes.
(1) Convictions
    The proposal required that there be a conviction of record, and 
excluded arrests, pending cases not brought to trial, acquittals, or 
any conviction which has been reversed on appeal. Under the proposed 
SOP, a conviction with regard to which an appeal is pending required an 
application until or unless reversed. The proposal stated that a 
conviction which has been expunged, or for which a pardon has been 
granted, required an application.
    The FDIC received seven comments regarding the issue of expunged 
convictions--five from depository institutions; one from a law firm; 
and one from a trade association. The commenters overwhelmingly favored 
excluding expunged convictions from section 19's coverage. As the 
commenters pointed out, under most state laws, an expunged conviction 
is deemed not to have occurred, and is not a conviction ``of record.'' 
Further problems arise regarding the ability of an institution to 
discover whether someone has an expunged criminal record, and in some 
states, laws prohibit and punish disclosure of information regarding 
expunged records.
    Historically, the FDIC has taken the position that convictions 
which have been completely expunged are not covered by section 19. The 
FDIC proposed a change in that position in the proposed SOP based upon 
the rationale that the Crime Control Act amendments require a person 
who has entered into a pre-trial diversion or similar program to file a 
section 19 application. This requirement appears to create an anomalous 
result when compared with the FDIC policy that those with expunged 
convictions need not file.
    Based upon the comments, however, and because it appears that 
expunged convictions do not constitute convictions of record, the final 
SOP excludes expunged convictions from the coverage of section 19. 
Furthermore, institutions have been advised in the past that expunged 
convictions were not covered by section 19. Excluding expunged 
convictions would avoid the significant practical problems of a change 
in policy which would require those previously allowed to work at 
institutions to now file section 19 applications. Therefore, the final 
SOP adopts the FDIC's current interpretation that persons with 
completely expunged convictions are not required to file section 19 
applications.
(2) Pretrial Diversions
    The proposed SOP defined a pretrial diversion as a program entry, 
as determined by relevant federal, state or local law, whether formal 
or informal, which is characterized by a suspension or eventual 
dismissal of charges or criminal prosecution upon agreement by the 
accused to treatment, rehabilitation, restitution, or other noncriminal 
or nonpunitive alternatives. The FDIC received two comments on the 
issue of what should constitute a ``pretrial diversion program,'' one 
from a law firm and one from a trade association. Each made suggestions 
as to whether certain specific programs ought to be included in the 
definition.
    The FDIC believes that it would be impractical to attempt to 
identify in the SOP all of the specific programs which might constitute 
pretrial diversion programs. As is the current practice, the final SOP 
states that the FDIC will continue to determine whether a program 
constitutes a pretrial diversion on a case-by-case basis. In addition, 
in 1990, the Crime Control Act amendments made pretrial diversion 
programs subject to section 19 for the first time. Persons working in 
financial institutions at the time of the 1990 amendments who had 
previously entered into a pre-trial diversion program would be unaware 
that they were suddenly prohibited from working in banking. In order to 
avoid the issue of retroactive application, and to provide a ``bright 
line'' test, the FDIC has decided to except pre-trial diversions 
entered before November 29, 1990, from section 19's coverage. In 
addition, since most offenses eligible for pre-trial diversion are 
relatively minor, and since only those offenses more than seven and a 
half years old would be excluded from coverage, the risk to financial 
institutions from this proposal is slight.
(3) Covered Offenses Involving Dishonesty or Breach of Trust
    The proposed SOP indicated that for section 19 to apply, the 
conviction or program entry must be for a criminal offense involving 
dishonesty, breach of trust or money laundering. Under the proposal, 
``dishonesty'' was defined as 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 
which 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.
    The proposed SOP made clear that all convictions for offenses 
concerning the illegal manufacture, sale, distribution of or 
trafficking in controlled substances required an application (drug 
offenses). The proposal indicated that a ``controlled substance'' shall 
mean those so defined by federal law. While the proposal acknowledged 
that use of a controlled substance does not per se constitute a covered 
offense, the circumstances of the offense may contain elements of 
dishonesty or breach of trust or money laundering, and that the FDIC 
would determine on a case-by-case basis whether to approve an 
application regarding a person convicted of such an offense.
    The FDIC received three comments regarding the definitions of 
``dishonesty'' and ``breach of trust''--two from insured institutions 
and one from a law firm. The commenters requested clarification of what

[[Page 66181]]

constitutes a conviction involving ``dishonesty'' and ``breach of 
trust,'' and requested that the SOP contain a specific list of crimes 
to which section 19 will apply, or safe harbors to which it will not 
apply. Concern was expressed that crimes of violence may not be 
covered, while one expressed the view that all crimes are dishonest.
    With regard to drug offenses, the FDIC received four comments-three 
from insured institutions and one from a bank holding company-all of 
which were generally unfavorable regarding the approach the proposal 
took regarding drug offenses. The commenters felt that no application 
should be required of those convicted of using or possessing drugs, 
citing concerns regarding laws pertaining to disabilities and 
rehabilitation. In addition, concern was expressed regarding the 
proposed case-by-case method of reviewing the underlying circumstances 
of each drug offense to determine whether an application should be 
approved.
    After considering the comments, the FDIC has altered its approach 
in the final SOP. The FDIC has generally acknowledged that not all 
crimes are covered by section 19, and that many crimes involving 
violence do not have dishonesty and breach of trust as elements. The 
FDIC believes that whether a crime involves ``dishonesty'' or ``breach 
of trust'' must be determined from the statutory elements of the crime 
itself, rather than the factual circumstances surrounding a crime, and 
the final SOP adopts this approach. To do otherwise would require 
insured institutions and the FDIC to analyze the factual background of 
every conviction, including such offenses as disturbing the peace. For 
many convictions, records of a factual background are not available. 
All convictions for offenses concerning the illegal manufacture, sale, 
distribution of or trafficking in controlled substances shall require 
an application. A ``controlled substance'' shall mean those so defined 
by federal law.
(4) Youthful Offender Adjudgments
    The proposed SOP indicated that 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.
    The FDIC received three comments-all from insured institutions, 
which strongly favored the stated approach. Historically, the FDIC has 
followed the approach of exempting youthful offender adjudgments from 
the coverage of section 19, with no perceived ill effects upon 
institutions. Furthermore, it is questionable whether the institution 
or the FDIC would be able to obtain records regarding such adjudgments. 
Therefore, the final SOP adopts, without change, the position set forth 
in the proposed SOP.
(5) De minimis Offense
    The proposed SOP required any person with a conviction or program 
entry concerning a covered offense to submit an application. The FDIC 
received six comments--four from insured institutions or holding 
companies, one from a law firm and one from a trade association--
regarding whether there should be an exemption for a de minimis crime. 
All commenters favored an approach whereby a de minimis crime would not 
require an application, although there was no general consensus as to 
the precise definition of such offenses.
    Suggestions were made that a de minimis offense should include any 
misdemeanor committed by a juvenile, any one-time crime of dishonesty 
or breach of trust where the amount of loss was small, and a single 
misdemeanor committed by an adult. Further, commenters suggested that 
there should be a distinction between felonies and misdemeanors, and 
consideration of the time that has elapsed since the conviction, a 
person's present integrity and the risk associated with the position 
sought. A list of the specific crimes or the factors which should be 
taken into account in determining whether an offense is de minimis was 
requested. An alternative suggestion was a streamlined approach with a 
shortened approval period based upon the level of risk the person's 
position presents to the institution.
    Section 19 applies, without exception, to convictions for crimes 
involving dishonesty or breach of trust. The FDIC, therefore, must 
provide prior written consent before covered persons may participate in 
banking. However, based upon the comments, and in light of its 
experience in processing and approving many applications involving 
minimal offenses, the FDIC has determined to grant blanket approval, 
through the final SOP, to certain defined categories of offenses. Such 
offenses are considered to be of such a minimal nature and of such low 
risk that the affected person may be employed at any institution, in 
any position. The foregoing approach would have the advantage of 
addressing a large number of pretrial diversion applicants, since in 
most cases, the crimes involved in such programs are not serious ones 
which would involve risk to an insured institution.
    The final SOP provides that approval is automatically granted and 
application will not be required where the covered offense is 
considered de minimis, because it meets 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 less 
than one year and/or a fine of less than $1000, and the individual did 
not serve time in jail; the conviction or program was entered at least 
five years prior to the application; and the offense did not involve an 
insured institution or insured credit union. The above factors 
generally encompass offenses that are less than felonies. This 
exception represents the FDIC's view that an individual should 
generally not be prohibited from participating in banking because of a 
singular offense of lesser consequence. The basic underlying premise of 
section 19 is to prevent risk to the safety and soundness of an insured 
institution or the interests of its depositors, and to prevent 
impairment of public confidence in the insured institution. We find it 
incongruous to accord blanket approval to individuals who have 
previously committed an offense against an insured institution or 
insured credit union, and an application therefore will be required in 
such cases. Any person who meets the foregoing criteria shall be 
covered by a fidelity bond to the same extent as others in similar 
positions, and shall disclose the presence of the conviction or program 
entry to all insured institutions in the affairs of which he or she 
wishes to participate.

C. Procedures

    The proposed SOP indicated in the section regarding procedures that 
section 19 imposes a duty upon the insured institution to make a 
reasonable inquiry regarding an applicant's history, which consists of 
taking steps appropriate under the circumstances, consistent with 
applicable law, to avoid hiring or permitting participation in its 
affairs by a person who has a conviction or program entry for a covered 
offense. It stated that an institution might believe that undertaking a 
minimal inquiry might not be necessary in certain circumstances, 
however, the FDIC believes that at a minimum, each insured institution 
should establish a screening process which provides the insured 
institution with information concerning any conviction or program entry 
pertaining to a job applicant. The

[[Page 66182]]

proposed SOP provided examples of what would constitute a reasonable 
inquiry, including, the completion of a written employment application 
which requires a listing of all convictions and program entries; (2) 
fingerprinting and (3) periodic inquiries to determine whether a person 
has a conviction or program entry. The proposed SOP indicated that the 
foregoing were not requirements, and that the FDIC would look to the 
circumstances of each situation to determine whether the inquiry is 
reasonable.
    The procedures set forth in the proposed SOP were that upon notice 
of a conviction or program entry, an application seeking the FDIC's 
consent prior to the person's participation must be filed. When an 
application is required, forms and instructions should be obtained 
from, and the application filed with, the appropriate FDIC Regional 
Director.
    The proposed SOP stated that the application must be filed by an 
insured institution on behalf of a person, but contained an exception 
to this requirement for a shareholder seeking to exercise voting rights 
if the insured institution has refused to file an application on that 
person's behalf. Where a person currently employed by an insured 
institution is discovered to have a conviction or program entry, the 
proposed SOP allowed that, upon request, the Regional Director could 
grant a conditional approval pending the processing of the application.
    Fourteen comments were received pertaining to whether the screening 
process, including the idea of fingerprinting, was burdensome--nine 
from depository institutions, one from a bank holding company, one from 
a law firm and three from trade associations. The comments were 
generally not favorable, or found the proposed SOP confusing about what 
was being required. One commenter took exception to the FDIC imposing 
any duty upon insured depository institutions for making a reasonable 
inquiry into whether a person has a conviction or program entry based 
upon the argument that section 19 imposes no duty to discover such 
offenses, it only demands action once the presence of a conviction 
becomes known. The FDIC believes that the commenter's approach does not 
comport with the intent of the law which is designed as a preventive 
measure to protect against risk to the safety and soundness of insured 
institutions and their depositors.
(1) Fingerprinting
    The issue of fingerprinting generated more discussion than any 
other. It is apparent that fingerprinting as a recommended practice, 
even though explicitly not required in the SOP, is not welcomed by the 
banking community. The smaller banks, especially, appear to be opposed 
to the practice. They maintain that because of the smaller communities 
they serve, they are familiar with their applicants and view 
fingerprinting as an unnecessary burden. Many commenters expressed 
concern that a recommendation or guideline that fingerprinting is 
advocated would be interpreted as an industry standard, and by field 
examiners as mandatory.
    Others feared that bankers would deem fingerprinting a requirement 
and feared liability for any loss which could have been prevented by 
fingerprinting. Others suggested that a written application listing 
previous convictions or program entries would suffice, but that the 
screening process must be coordinated with the standards in the 
institution's fidelity bond to avoid any loss of insurance. One 
commenter stated that the SOP should only contain minimum standards, 
and that institutions should be encouraged to develop even stricter 
standards. Others suggested restricting fingerprinting to high-risk 
positions, or using bonding or other companies to perform such 
screening. The remainder of the comments addressed the difficulty of 
obtaining criminal background information and fingerprints, the delay 
and cost inherent in fingerprinting, the burdensome impact of the 
process would have upon small institutions, and the need to ensure that 
requirement of criminal background checks was consistent with other 
laws which protect against disclosure of criminal or arrest 
information.
    After considering the comments, the FDIC has decided not to address 
fingerprinting in the final SOP. Instead, the FDIC will allow each 
insured institution to determine what screening methods it will use, 
and will look to the circumstances of each situation to determine 
whether an inquiry was reasonable. The FDIC believes that at a minimum, 
each institution should have a screening process to uncover information 
regarding a job applicant's convictions and program entries, which 
would include, for example, a written application listing such 
convictions and program entries, although other alternatives may be 
appropriate. The final SOP reflects this guidance.
(2) Periodic Inquiries
    Seven commenters addressed the issue of periodic inquiries. The 
majority of comments were not favorable, and indicated that using 
periodic inquiry to determine whether current employees were subject to 
recent convictions would be burdensome on institutions and that such an 
inquiry was not mandated by section 19. Others stated that periodic 
inquires on recent convictions were not useful because employees would 
be afraid of losing their jobs. Others stated that there are regular 
channels by which institutions learn about recent convictions or 
program entries by their employees other than having routine inquires. 
Alternatively it was suggested that periodic inquiries should be 
optional or limited to high-risk positions, only required at the 
beginning of employment or only conducted at lengthy intervals such as 
every ten years.
    Similar to the analysis regarding fingerprinting, after considering 
the comments, the FDIC believes that whether periodic background checks 
are used should be optional, and that the major responsibility should 
be upon the individual to bring to the institution's attention any 
change in ``conviction'' status for purposes of section 19.
(3) Who May Be an Applicant?
    The proposed SOP requires that an application be filed by an 
institution rather than an individual. This policy is based upon the 
rationale that in determining whether to approve a section 19 
application, the FDIC must assess whether the person's participation in 
an insured institution constitutes a risk to the safety and soundness 
of the insured institution or its depositors or impairs public 
confidence in the institution. In making this determination, the FDIC 
has traditionally considered the position the person will occupy at the 
institution, the extent of the supervision of the person that the 
institution will provide, the size and condition of the institution and 
the fidelity bond coverage by the institution's bonding company. Where 
an individual is filing an application without institution sponsorship, 
the FDIC may not have the foregoing information available to it. 
Furthermore, an application may be filed by an individual who has no 
prospect of employment by an insured institution, and is merely seeking 
agency certification for potential employment. On the other hand, the 
FDIC is mindful that such a requirement may be unfair to an individual 
in certain circumstances. Therefore, the notice accompanying the 
proposed SOP sought comments whether the FDIC should change this 
longstanding policy.

[[Page 66183]]

    There were ten comments on this issue-seven from depository 
institutions, one from a bank holding company and two from trade 
associations. Only one commenter believed that individuals should be 
permitted to file a section 19 application, although one indicated that 
independent contractors, if covered by section 19, might be allowed to 
file applications without bank sponsorship since the FDIC would be able 
to assess from the application what services the independent contractor 
provides for the financial institution.
    The remaining comments were opposed to permitting an individual to 
file a section 19 application without institution sponsorship. The 
reasons generally were that insured institutions should maintain 
control over the process because they are in the best position to have 
available information to determine when section 19 applications should 
be submitted on behalf of an individual based upon the person's 
position and the risk to the institution. Further, the FDIC's resources 
should be available to handle section 19 applications filed by 
institutions on an expedited basis, and such handling should not be 
delayed because the FDIC is reviewing applications by individuals who 
may or may not have a legitimate interest in working for an insured 
institution. Another concern expressed was that if an individual filed 
an application without institution sponsorship and received approval 
for a particular position, the individual could later be employed in 
that position at another institution without the prior notice or 
consent of the FDIC.
    After considering the comments, the FDIC has decided to maintain 
its requirement that an institution file a section 19 application on 
behalf of an individual. However, the FDIC is aware that many 
institutions will not file applications on behalf of a convicted 
individual under any circumstance. For those with relatively minor 
convictions this appears to be a harsh result, and the FDIC has 
attempted to lessen this harsh effect by adopting the de minimis 
exception discussed above. In addition, the FDIC is mindful that others 
may not fall within the de minimis exception, yet the institution 
filing requirement may result in a harsh result. Therefore, while the 
final SOP retains the institution filing requirement, it provides that 
an individual may seek a waiver of this requirement where substantial 
good cause for granting a waiver is shown. For example, a waiver is 
likely to be granted where the person requesting consent is a 
shareholder seeking to exercise voting rights and the insured 
institution has refused to file an application on his or her behalf. 
The FDIC expects that waivers will be granted on an infrequent basis, 
and only in truly meritorious cases.
(4) Conditional Approvals
    The proposed SOP provided for a conditional approval by the 
Regional Director upon request, pending the processing of an 
application. Two comments received from depository institutions 
strongly supported this approach. At the time the proposed SOP was 
issued, the FDIC had not proposed a de minimis exception to filing. In 
light of the fact that under this new approach, the number of 
applications will decrease, the FDIC believes it will be able to act in 
an expedited manner on an application where necessary. Therefore, there 
is no provision for conditional approval in the final SOP.

D. Evaluation of Section 19 Applications

    The proposed SOP stated that 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. Factors listed as 
relevant to this determination were the conviction or program entry and 
the specific nature and circumstances of the covered offense; 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 which has elapsed since the conviction 
or program entry; the position to be held or the level of participation 
by the person at an insured institution; the amount of influence and 
control the person will be able to exercise over the management or 
affairs of an insured institution; the ability of management of the 
insured institution to supervise and control the person's activities; 
the degree of ownership the person will have of the insured 
institution; the applicability of the insured institution's fidelity 
bond coverage to the person; the opinion or position of the primary 
Federal and/or state regulator; and any additional factors in the 
specific case that appear relevant.
    The proposed SOP indicated that the foregoing criteria will also be 
applied by the FDIC to determine whether the interests of justice are 
served in seeking an exception in the appropriate court when an 
application is made to terminate the ten-year ban prior to its 
expiration date. The proposal stated that approval orders will be 
subject to the condition that the person shall be covered by a fidelity 
bond to the same extent as others in similar positions, and that when 
deemed appropriate, approval orders may also be subject to the 
condition that the prior consent of the FDIC will be required for any 
proposed significant changes in the person's duties and/or 
responsibilities. Such proposed changes may, in the discretion of the 
Regional Director, require a new application. In situations in which an 
approval has been granted for a person to participate in the affairs of 
a particular insured institution and that person subsequently seeks to 
participate at another insured institution, approval does not 
automatically follow. In such cases, another application must be 
submitted. The proposed SOP also indicated in its introduction that 
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.
    Only one comment was received, which requested that the FDIC define 
what constitutes a substantial change in duties so as to require a new 
application. The FDIC believes, however, that an institution should 
itself be aware whether a person's duties have changed to the extent 
that their influence and risk upon the institution would require a 
section 19 application.
    The final SOP incorporates all of the standards and factors set 
forth in the proposed SOP. In addition, it addresses the policy 
regarding a waiver by stating that in cases in which a waiver of the 
institution filing requirement has been granted to an individual, 
approval of the application will be conditioned upon that person 
disclosing the presence of the conviction to all insured institutions 
in the affairs of which he or she wishes to participate. The FDIC 
believes this is essential to ensuring that institutions are aware of 
the potential risks to safety and soundness posed by their employees 
and participants, and are

[[Page 66184]]

able to fully apprise their fidelity insurers of such risks.
    The Board of Directors of the FDIC has rescinded two earlier policy 
statements regarding section 19--Consent to Service of Persons 
Convicted of Offenses Involving Dishonesty or Breach of Trust as 
Directors, Officers or Employees of Insured Banks (41 FR 42699 (Sept. 
22, 1976)) and Applications Under Section 19 of the Federal Deposit 
Insurance Act (March 31, 1980), and adopted the following Statement of 
Policy for Section 19 of the FDI Act:

FDIC Statement of Policy for Section 19 of the FDI Act

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

A. Scope of Section 19

    Section 19 covers institution-affiliated parties, as defined by 12 
U.S.C. 1813(u), and others who are participants in the conduct of the 
affairs of an insured institution. Therefore, all employees of an 
insured institution fall within the scope of section 19. In addition, 
those deemed to be de facto employees as determined by the FDIC based 
upon generally applicable standards of employment law, will also be 
subject to section 19. Whether other persons who are not institution-
affiliated parties are covered depends upon their degree of influence 
or control over the management or affairs of an insured institution. 
For example, section 19 would not apply to persons who are merely 
employees of an insured institution's holding company, but would apply 
to its directors and officers to the extent that they have the power to 
define and direct the policies of the insured institution. Similarly, 
directors and officers of affiliates, subsidiaries or joint ventures of 
an insured institution or its holding company will be covered if they 
are in a position to influence or control the management or affairs of 
the insured institution. Those who exercise major policymaking 
functions of an insured institution would be deemed participants in the 
affairs of that institution and covered by section 19. Typically, an 
independent contractor does not have a relationship with the insured 
institution other than the activity for which the insured institution 
has contracted. Under 12 U.S.C. 1813(u), independent contractors are 
institution-affiliated parties if they knowingly or recklessly 
participate in violations, unsafe or unsound practices or breaches of 
fiduciary duty which are likely to cause significant loss to, or a 
significant adverse effect on, an insured institution. In terms of 
participation, an independent contractor who influences or controls the 
management or affairs of the insured institution, would be covered by 
section 19. In addition, ``person'' for purposes of section 19 means an 
individual, and does not include a corporation, firm or other business 
entity.
    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 ten 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 ten percent of the voting shares if no other person 
owns more. These standards would also apply to an individual acting in 
concert with others so as to have such ownership or control. Absent the 
FDIC's consent, persons subject to the prohibitions of section 19 will 
be required to divest their ownership of shares above the foregoing 
limits.

B. Standards for Determining Whether an Application Is Required

    Except as indicated in paragraph (5), below, an application must be 
filed where there is present a conviction by a court of competent 
jurisdiction for a covered offense by any adult or minor treated as an 
adult, or where such person has entered a pretrial diversion or similar 
program regarding that offense.
    (1) Convictions. There must be present a conviction of record. 
Section 19 does not cover arrests, pending cases not brought to trial, 
acquittals, or any conviction which has been reversed on appeal. A 
conviction with regard to which an appeal is pending will require an 
application until or unless reversed. A conviction for which a pardon 
has been granted will require an application. A conviction which has 
been completely expunged is not considered a conviction of record and 
will not require an application.
    (2) Pretrial Diversion or Similar Program. Program entry, whether 
formal or informal, is characterized by a suspension or eventual 
dismissal of charges or criminal prosecution upon agreement by the 
accused to treatment, rehabilitation, restitution, or other noncriminal 
or nonpunitive

[[Page 66185]]

alternatives. Whether a program constitutes a pretrial diversion is 
determined by relevant federal, state or local law, and will be 
considered by the FDIC on a case-by-case basis. Program entries prior 
to November 29, 1990, are not covered by section 19.
    (3) Dishonesty or Breach of Trust. The conviction or program entry 
must be for a criminal offense involving dishonesty, breach of trust or 
money laundering. ``Dishonesty'' means directly or indirectly to cheat 
or defraud; to cheat or defraud for monetary gain or its equivalent; or 
wrongfully to take property belonging to another in violation of any 
criminal statute. Dishonesty includes acts involving want of integrity, 
lack of probity, or a disposition to distort, cheat, or act deceitfully 
or fraudulently, and may include crimes which federal, state or local 
laws define as dishonest. ``Breach of trust'' means a wrongful act, 
use, misappropriation or omission with respect to any property or fund 
which has been committed to a person in a fiduciary or official 
capacity, or the misuse of one's official or fiduciary position to 
engage in a wrongful act, use, misappropriation or omission.
    Whether a crime involves dishonesty or breach of trust will be 
determined from the statutory elements of the crime itself. All 
convictions for offenses concerning the illegal manufacture, sale, 
distribution of or trafficking in controlled substances shall require 
an application.
    (4) Youthful Offender Adjudgments. An adjudgment by a court against 
a person as a ``youthful offender'' under any youth offender law, or 
any adjudgment as a ``juvenile delinquent'' by any court having 
jurisdiction over minors as defined by state law does not require an 
application. Such adjudications are not considered convictions for 
criminal offenses.
    (5) De minimis Offenses. Approval is automatically granted and an 
application will not be required where the covered offense is 
considered de minimis, because it meets all of the following criteria:
    <bullet> There is only one conviction or program entry of record 
for a covered offense;
    <bullet> The offense was punishable by imprisonment for a term of 
less than one year and/or a fine of less than $1000, and the individual 
did not serve time in jail;
    <bullet> The conviction or program was entered at least five years 
prior to the date an application would otherwise be required; and
    <bullet> The offense did not involve an insured depository 
institution or insured credit union.
    Any person who meets the foregoing criteria shall be covered by a 
fidelity bond to the same extent as others in similar positions, and 
shall disclose the presence of the conviction or program entry to all 
insured institutions in the affairs of which he or she intends to 
participate.

C. Procedures

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

D. Evaluation of Section 19 Applications

    The essential criteria in assessing an application are whether the 
person has demonstrated his or her fitness to participate in the 
conduct of the affairs of an insured institution, and whether the 
affiliation, ownership, control or participation by the person in the 
conduct of the affairs of the insured institution may constitute a 
threat to the safety and soundness of the insured institution or the 
interests of its depositors or threaten to impair public confidence in 
the insured institution. In determining the degree of risk, the FDIC 
will consider:
    (1) The conviction or program entry and the specific nature and 
circumstances of the covered offense;
    (2) Evidence of rehabilitation including the person's reputation 
since the conviction or program entry, the person's age at the time of 
conviction or program entry, and the time which has elapsed since the 
conviction or program entry;
    (3) The position to be held or the level of participation by the 
person at an insured institution;
    (4) The amount of influence and control the person will be able to 
exercise over the management or affairs of an insured institution;
    (5) The ability of management of the insured institution to 
supervise and control the person's activities;
    (6) The degree of ownership the person will have of the insured 
institution
    (7) The applicability of the insured institution's fidelity bond 
coverage to the person;
    (8) The opinion or position of the primary Federal and/or state 
regulator; and (9) Any additional factors in the specific case that 
appear relevant.
    The foregoing criteria will also be applied by the FDIC to 
determine whether the interests of justice are served in seeking an 
exception in the appropriate court when an application is made to 
terminate the ten-year ban prior to its expiration date.
    Some applications can be approved without an extensive review 
because the person will not be in a position to constitute any 
substantial risk to the safety and soundness of the insured 
institution. Persons who will occupy clerical, maintenance, service or 
purely administrative positions, generally fall into this category. A 
more detailed analysis will be performed in the case of persons who 
will be in a position to influence or control the management or affairs 
of the insured institution. Approval orders will be subject to the 
condition that the person shall be covered by a fidelity bond to the 
same extent as others in similar positions. In cases in which a waiver 
of the institution filing requirement has been granted to an 
individual, approval of the application will be conditioned upon that 
person disclosing the presence of the conviction to all insured 
institutions in the affairs of which he or she wishes to participate. 
When deemed appropriate, approval orders may also be subject to the 
condition that the prior consent of the FDIC will be required for any 
proposed significant changes in the person's duties and/or 
responsibilities. Such proposed changes may, in the discretion of the 
Regional Director, require a new application. In situations in which an 
approval has been granted for a person to participate in the affairs of 
a particular insured institution and subsequently seeks to participate 
at another insured institution, approval does not automatically follow. 
In such cases, another application must be submitted.

    By order of the Board of Directors.

    Dated at Washington, DC, this 17th day of November, 1998.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-31915 Filed 11-30-98; 8:45 am]
BILLING CODE 6714-01-P