Title 12—Banks and Banking--Volume 1
PART 1231—GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS
§ 1231.1   Purpose.
The purpose of this part is to implement section 1318(e) of the Safety and Soundness Act (12 U.S.C. 4518(e)) by setting forth the factors that the Director will take into consideration in determining whether to limit or prohibit golden parachute payments and agreements and by setting forth conditions for prohibited and permissible indemnification payments that regulated entities and the Office of Finance (OF) may make to affiliated parties.
§ 1231.2   Definitions.
The following definitions apply to the terms used in this part:
Affiliated party means:
(1) With respect to a golden parachute payment:
(i) Any director, officer, or employee of a regulated entity or the OF; and
(ii) Any other person as determined by the Director (by regulation or on a case-by-case basis) who participates or participated in the conduct of the affairs of the regulated entity or the OF, provided that a member of a Federal Home Loan Bank shall not be deemed to have participated in the affairs of that Federal Home Loan Bank solely by virtue of being a shareholder of, and obtaining advances from, that Federal Home Loan Bank; and
(2) With respect to an indemnification payment:
(i) By the OF, any director, officer, or manager of the OF; and
(ii) By a regulated entity:
(A) Any director, officer, employee, or controlling stockholder of, or agent for, a regulated entity;
(B) Any shareholder, affiliate, consultant, or joint venture partner of a regulated entity, and any other person as determined by the Director (by regulation or on a case-by-case basis) that participates in the conduct of the affairs of a regulated entity, provided that a member of a Federal Home Loan Bank shall not be deemed to have participated in the affairs of that Federal Home Loan Bank solely by virtue of being a shareholder of, and obtaining advances from, that Federal Home Loan Bank;
(C) Any independent contractor for a regulated entity (including any attorney, appraiser, or accountant) if:
( 1 ) The independent contractor knowingly or recklessly participates in any violation of any law or regulation, any breach of fiduciary duty, or any unsafe or unsound practice; and
( 2 ) Such violation, breach, or practice caused, or is likely to cause, more than a minimal financial loss to, or a significant adverse effect on, the regulated entity; or
(D) Any not-for-profit corporation that receives its principal funding, on an ongoing basis, from any regulated entity.
Agreement means, with respect to a golden parachute payment, any plan, contract, arrangement, or other statement setting forth conditions for any payment by a regulated entity or the OF to an affiliated party.
Bona fide deferred compensation plan or arrangement means any plan, contract, agreement, or other arrangement:
(1) Whereby an affiliated party voluntarily elects to defer all or a portion of the reasonable compensation, wages, or fees paid for services rendered which otherwise would have been paid to such party at the time the services were rendered (including a plan that provides for the crediting of a reasonable investment return on such elective deferrals); or
(2) That is established as a nonqualified deferred compensation or supplemental retirement plan, other than an elective deferral plan described in paragraph (1) of this definition:
(i) Primarily for the purpose of providing benefits for certain affiliated parties in excess of the limitations on contributions and benefits imposed by sections 401(a)(17), 402(g), 415, or any other applicable provision of the Internal Revenue Code of 1986 (26 U.S.C. 401(a)(17), 402(g), 415); or
(ii) Primarily for the purpose of providing supplemental retirement benefits or other deferred compensation for a select group of directors, management, or highly compensated employees; and
(3) In the case of any plans as described in paragraphs (1) and (2) of this definition, the following requirements shall apply:
(i) The affiliated party has a vested right, as defined under the applicable plan document, at the time of termination of employment to payments under such plan;
(ii) Benefits under such plan are accrued each period only for current or prior service rendered to the employer (except that an allowance may be made for service with a predecessor employer);
(iii) Any payment made pursuant to such plan is not based on any discretionary acceleration of vesting or accrual of benefits which occurs at any time later than one year prior to the regulated entity or the OF becoming a troubled institution;
(iv) The regulated entity or the OF has previously recognized compensation expense and accrued a liability for the benefit payments according to GAAP, or segregated or otherwise set aside assets in a trust which may only be used to pay plan benefits and related expenses, except that the assets of such trust may be available to satisfy claims of the troubled institution's creditors in the case of insolvency; and
(v) Payments pursuant to such plans shall not be in excess of the accrued liability computed in accordance with GAAP.
Executive officer means an “executive officer” as defined in 12 CFR 1230.2, and includes any director, officer, employee or other affiliated party whose participation in the conduct of the business of the regulated entity or the OF has been determined by the Director to be so substantial as to justify treatment as an “executive officer.”
Golden parachute payment means any payment in the nature of compensation made by a troubled institution for the benefit of any current or former affiliated party that is contingent on or provided in connection with the termination of such party's primary employment or affiliation with the troubled institution.
Indemnification payment means any payment (or any agreement to make any payment) by any regulated entity or the OF for the benefit of any current or former affiliated party, to pay or reimburse such person for any liability or legal expense.
Individually negotiated settlement agreement means an agreement that settles a claim, or avoids a claim reasonably anticipated to be brought, against a troubled institution by an affiliated party and involves a payment in association with termination to, and a release of claims by, the affiliated party.
Liability or legal expense means—
(1) Any legal or other professional expense incurred in connection with any claim, proceeding, or action;
(2) The amount of, and any cost incurred in connection with, any settlement of any claim, proceeding, or action; and
(3) The amount of, and any cost incurred in connection with, any judgment or penalty imposed with respect to any claim, proceeding, or action.
Payment means:
(1) Any direct or indirect transfer of any funds or any asset;
(2) Any forgiveness of any debt or other obligation;
(3) The conferring of any benefit, including but not limited to stock options and stock appreciation rights; and
(4) Any segregation of any funds or assets, the establishment or funding of any trust or the purchase of or arrangement for any letter of credit or other instrument, for the purpose of making, or pursuant to any agreement to make, any payment on or after the date on which such funds or assets are segregated, or at the time of or after such trust is established or letter of credit or other instrument is made available, without regard to whether the obligation to make such payment is contingent on:
(i) The determination, after such date, of the liability for the payment of such amount; or
(ii) The liquidation, after such date, of the amount of such payment.
Permitted means, with regard to any agreement, that the agreement either does not require the Director's consent under this part or has received the Director's consent in accordance with this part.
Troubled institution means a regulated entity or the OF that is:
(1) Insolvent;
(2) In conservatorship or receivership;
(3) Subject to a cease-and-desist order or written agreement issued by FHFA that requires action to improve its financial condition or is subject to a proceeding initiated by the Director, which contemplates the issuance of an order that requires action to improve its financial condition, unless otherwise informed in writing by FHFA;
(4) Assigned a composite rating of 4 or 5 by FHFA under its CAMELSO examination rating system as it may be revised from time to time;
(5) Informed in writing by the Director that it is a troubled institution for purposes of the requirements of this part on the basis of the most recent report of examination or other information available to FHFA, on account of its financial condition, risk profile, or management deficiencies; or
(6) In contemplation of the occurrence of an event described in paragraphs (1) through (5) of this definition. A regulated entity or the OF is subject to a rebuttable presumption that it is in contemplation of the occurrence of such an event during the 90 day period preceding such occurrence.
§ 1231.3   Golden parachute payments and agreements.
(a) In general, FHFA consent is required. No troubled institution shall make or agree to make any golden parachute payment without the Director's consent, except as provided in this part.
(b) Exempt agreements and payments. The following agreements and payments, including payments associated with an agreement, are not golden parachute agreements or payments for purposes of this part and, for that reason, may be made without the Director's consent:
(1) Any pension or retirement plan that is qualified (or is intended to be qualified) under section 401 of the Internal Revenue Code of 1986 (26 U.S.C. 401);
(2) Any “employee welfare benefit plan” as that term is defined in section 3(1) of the Employee Retirement Income Security Act of 1974, as amended (29 U.S.C. 1002(1)), other than:
(i) Any deferred compensation plan or arrangement; and
(ii) Any severance pay plan or agreement;
(3) Any benefit plan that:
(i) Is a “nondiscriminatory employee plan or program” for the purposes of section 280G of the Internal Revenue Code of 1986 (26 U.S.C. 280G) and applicable regulations; or
(ii) Has been submitted to the Director for review in accordance with this part and that the Director has determined to be nondiscriminatory, unless such a plan is otherwise specifically addressed by this part;
(4) Any “bona fide deferred compensation plan or arrangement” as defined in this part provided that the plan:
(i) Was in effect for, and not materially amended to increase benefits payable thereunder (except for changes required by law) within, the one-year period prior to the regulated entity or the OF becoming a troubled institution; or
(ii) Has been determined to be permissible by the Director;
(5) Any payment made by reason of:
(i) Death; or
(ii) Termination caused by disability of the affiliated party; and
(6) Any severance or similar payment that is required to be made pursuant to a state statute that is applicable to all employers within the appropriate jurisdiction (with the exception of employers that are exempt due to their small number of employees or other similar criteria).
(c) Golden parachute payment agreements for which FHFA consent is not required. A troubled institution may enter into the following agreements to make a golden parachute payment without the Director's consent:
(1) With any affiliated party where the agreement is expressly directed or established by the Director exercising authority conferred by 12 U.S.C. 4617.
(2) With an affiliated party who is not an executive officer where the agreement:
(i) Is an individually negotiated settlement agreement, and the conditions of paragraph (e)(2) of this section are met; or
(ii) Provides for a golden parachute payment that, when aggregated with all other golden parachute payments to the affiliated party, does not exceed $5,000 (subject to any adjustment for inflation pursuant to paragraph (g) of this section).
(d) Golden parachute payments for which FHFA consent is not required. A troubled institution may make the following golden parachute payments without the Director's consent:
(1) To any affiliated party where:
(i) The payment is required to be made pursuant to a permitted individually negotiated settlement agreement; or
(ii) The Director previously consented to such payment in a written notice to the troubled institution (which may be included in the Director's consent to the agreement), the payment is made in accordance with a permitted agreement, and the troubled institution has met any conditions established by the Director for making the payment.
(2) To an executive officer where the payment recognizes a significant life event and does not exceed $500 in value (subject to any adjustment for inflation pursuant to paragraph (g) of this section).
(3) To an affiliated party who is not an executive officer, where:
(i) The payment is made in accordance with a permitted agreement and the conditions of paragraph (e)(2) of this section are met; or
(ii) The payment when aggregated with other golden parachute payments to the affiliated party does not exceed $5,000 (subject to any adjustment for inflation pursuant to paragraph (g) of this section).
(e) Required due diligence review; due diligence standard —(1) Agreements and payments where consent is requested. A troubled institution making a request for consent to enter into a golden parachute payment agreement with, or to make a golden parachute payment to, an individual affiliated party shall conduct due diligence appropriate to the level and responsibility of the affiliated party covered by the agreement or to whom payment would be made, to determine whether there is information, evidence, documents, or other materials that indicate there is a reasonable basis to believe, at the time the request is submitted, that the affiliated party:
(i) Has committed any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the regulated entity or the OF that is likely to have a material adverse effect on the regulated entity or the OF;
(ii) Is substantially responsible for the regulated entity or the OF being a troubled institution;
(iii) Has materially violated any applicable Federal or State law or regulation that has had or is likely to have a material effect on the regulated entity or the OF; or
(iv) Has violated or conspired to violate sections 215, 657, 1006, 1014, or 1344 of title 18 of the United States Code, or section 1341 or 1343 of such title affecting a “financial institution” as the term is defined in title 18 of the United States Code (18 U.S.C. 20).
(2) Agreements and payments permitted without the Director's consent. No troubled institution shall enter into an agreement pursuant to paragraph (c)(2)(i) of this section or make a payment pursuant to paragraph (d)(3)(i) of this section unless it is reasonably assured, following due diligence in accordance with paragraph (e)(1) of this section, that the affiliated party to whom payment would be made has not engaged in any of the actions listed in paragraphs (e)(1)(i) through (iv) of this section.
(3) Required notice to FHFA. If a troubled institution determines it is unable to enter into an agreement pursuant to paragraph (c)(2)(i) of this section or make a payment pursuant to (d)(3)(i) of this section without the Director's consent because it cannot meet the standard set forth in paragraph (e)(2) of this section, and thereafter does not request the Director's consent to make the payment, then the troubled institution shall provide notice to FHFA of each reason for which it cannot meet the standard set forth in paragraph (e)(2) of this section, within 15 business days of its determination.
(f) Factors for Director consideration. In making a determination under this section, the Director may consider:
(1) Whether, and to what degree, the affiliated party was in a position of managerial or fiduciary responsibility;
(2) The length of time the affiliated party was affiliated with the regulated entity or the OF, and the degree to which the proposed payment represents a reasonable payment for services rendered over the period of affiliation;
(3) Whether the golden parachute payment would be made pursuant to an employee benefit plan that is usual and customary;
(4) Whether the golden parachute payment or agreement is excessive or abusive or threatens the financial condition of the troubled institution; and
(5) Any other factor the Director determines relevant to the facts and circumstances surrounding the golden parachute payment or agreement, including any fraudulent act or omission, breach of fiduciary duty, violation of law, rule, regulation, order, or written agreement, and the level of willful misconduct, breach of fiduciary duty, and malfeasance on the part of the affiliated party.
(g) Adjustment for inflation. Monetary amounts set forth in this part may be adjusted for inflation by increasing the dollar amount set forth in this part by the percentage, if any, by which the Consumer Price Index for all-urban consumers published by the Department of Labor (“CPI-U”) for December of the calendar year preceding payment exceeds the CPI-U for the month of November 2018, with the resulting sum rounded up to the nearest whole dollar.
§ 1231.4   Indemnification payments.
(a) Prohibited indemnification payments. Except as permitted in paragraph (b) of this section, a regulated entity or the OF may not make indemnification payments with respect to an administrative proceeding or civil action that has been initiated by FHFA.
(b) Permissible indemnification payments. A regulated entity or the OF may pay:
(1) Premiums for any commercial insurance policy or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of FHFA or a civil money penalty imposed by FHFA.
(2) Expenses of defending an action, subject to the affiliated party's agreement to repay those expenses if the affiliated party either:
(i) When the proceeding results in a final and non-reviewable order, is found culpable for violating a law or regulation that is the basis for the charges to which the expenses specifically relate; or
(ii) Enters into a settlement of those charges in which the affiliated party admits culpability with respect to them; or
(iii) Is subject to a final and non-reviewable prohibition order under 12 U.S.C. 4636a.
(3) Amounts due under an indemnification agreement entered into with a named affiliated party on or prior to September 20, 2016.
(c) Process; factors. With respect to payments under paragraph (b)(2) of this section:
(1) The board of directors of the regulated entity or the OF must conduct a due investigation and make a written determination in good faith that:
(i) The affiliated party acted in good faith and in a manner that he or she reasonably believed to be in the best interests of the regulated entity or the OF; and
(ii) Such payments will not materially adversely affect the safety and soundness of the regulated entity or the OF.
(2) The affiliated party may not participate in the board's deliberations or decision.
(3) If a majority of the board are respondents in the action, the remaining board members may approve payment after obtaining a written opinion of outside counsel that the conditions of this regulation have been met.
(4) If all of the board members are respondents, they may approve payment after obtaining a written opinion of outside counsel that the conditions of this regulation have been met.
(d) Scope. This section does not apply to a regulated entity operating in conservatorship or receivership or to a limited-life regulated entity.
§ 1231.5   Applicability in the event of receivership.
The provisions of this part, or any consent or approval granted under the provisions of this part by FHFA, shall not in any way bind any receiver of a regulated entity. Any consent or approval granted under the provisions of this part by FHFA shall not in any way obligate FHFA as receiver to pay any claim or obligation pursuant to any golden parachute, severance, indemnification, or other agreement, or otherwise improve any claim of any affiliated party on or against FHFA as receiver. Nothing in this part may be construed to permit the payment of salary or any liability or legal expense of an affiliated party contrary to section 1318(e)(3) of the Safety and Soundness Act (12 U.S.C. 4518(e)(3)).
§ 1231.6   Filing instructions.
(a) Scope. This section contains procedures for requesting the consent of the Director and for filing any notice, where consent or notice is required by § 1231.3.
(b) Where to file. A troubled institution must submit any request for consent or notice required by § 1231.3 to the Manager, Executive Compensation Branch, or to such other person as FHFA may direct.
(c) Content of a request for FHFA consent. A request pursuant to § 1231.3 must:
(1) Be in writing;
(2) State the reasons why the troubled institution seeks to enter into the agreement or make the payment;
(3) Identify the affiliated party or describe of the class or group of affiliated parties who would receive or be eligible to receive payment;
(4) Include a copy of any agreement, including any plan document, contract, other agreement or policy regarding the subject matter of the request;
(5) State the cost of the proposed payment or payments, and the impact on the capital and earnings of the troubled institution;
(6) State the reasons why consent to the agreement or payment, or to both the agreement and payment, should be granted;
(7) For any plan that the troubled institution believes is a nondiscriminatory benefit plan, other than a plan covered by § 1231.3(b)(3)(i), state the basis for the conclusion that the plan is nondiscriminatory;
(8) For any bona fide deferred compensation plan or arrangement, state whether the plan would be exempt under this part but for the fact that it was either established or materially amended to increase benefits payable thereunder (except for changes required by law) within the one-year period prior to the regulated entity or the OF becoming a troubled institution;
(9) For any agreement with an individual affiliated party, or for any payment, either:
(i) State that the troubled institution is reasonably assured that the affiliated party has not engaged in any of the actions listed in § 1231.3(e)(1)(i) through (iv), or,
(ii) If the troubled institution is not reasonably assured that the affiliated party has not engaged in any of the actions listed in § 1231.3(e)(1)(i) through (iv) but nonetheless wishes to request consent, describe the results of its due diligence and, in light of those results, the reason why consent to the agreement or payment should be granted.
(d) FHFA decision on a request. FHFA shall provide the troubled institution with written notice of the decision on a request as soon as practicable after it is rendered.
(e) Content of notice to FHFA. A notice pursuant to § 1231.3(e)(3) must:
(1) Be in writing;
(2) Identify the affiliated party who would receive or be eligible to receive payment;
(3) Include a copy of any agreement or policy regarding the subject matter of the request; and
(4) State each reason why the troubled institution cannot meet the standard set forth in § 1231.3(e)(2).
(f) Waiver of form or content requirements. FHFA may waive or modify any requirement related to the form or content of a request or notice, in circumstances deemed appropriate by FHFA.
(g) Additional information. FHFA may request additional information at any time during the processing of the request or after receiving a notice.