Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules 16069

1 The Comprehensive Thrift and Bank Fraud

Prosecution and Taxpayer Recovery Act of 1990 is

title XXV of the Crime Control Act of 1990, S. 3266,

which was passed by Congress on October 27, 1990

and signed by the President on November 29, 1990.

2 The terms ‘‘golden parachute payment’’ and

‘‘golden parachute’’ are used interchangeably

throughout this discussion.

3 The use of the term ‘‘troubled’’ in this preamble

shall refer to an institution or holding company

which meets any of the criteria set forth in

§§ 359.1(f)(1)(ii) (A) through (E) of the Second

Proposal.

the word ‘‘Japan’’ and adding the phrase

‘‘the country of origin’’ in its place.

e. Paragraph (b)(4)(ii) would be

amended by removing the phrase

‘‘Japanese Plant Protection Service’’ and

adding the phrase ‘‘plant protection

service of the country of origin’’ in its

place.

f. Paragraph (b)(7) would be removed.

g. In paragraph (f), the word ‘‘Japan’’

would be removed and the phrase ‘‘the

country of origin of the Unshu oranges’’

would be added in its place.

Done in Washington, DC, this 22nd day of

March 1995.

Terry L. Medley,

Acting Administrator, Animal and Plant

Health Inspection Service.

[FR Doc. 95–7600 Filed 3–28–95; 8:45 am]

BILLING CODE 3410–34–P

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Parts 303 and 359

RIN 3064–AB11

Regulation of Golden Parachutes and

Other Benefits Which May Be Subject

to Misuse

AGENCY: Federal Deposit Insurance

Corporation (FDIC or Corporation).

ACTION: Notice of proposed rulemaking.

SUMMARY: The FDIC is proposing a rule

limiting golden parachute and

indemnification payments to

institution-affiliated parties by insured

depository institutions and depository

institution holding companies. The

purpose of this rule is to prevent the

improper disposition of institution

assets and to protect the financial

soundness of insured depository

institutions, depository institution

holding companies, and the federal

deposit insurance funds.

DATES: Comments must be received by

May 30, 1995.

ADDRESSES: Send comments to Robert E.

Feldman, Acting Executive Secretary,

Federal Deposit Insurance Corporation,

550 17th Street, N.W., Washington, D.C.

20429. Comments may be handdelivered to room 400, 1776 F Street,

N.W., Washington, D.C. 20429, on

business days between 8:30 a.m. and

5:00 p.m. [FAX number: (202) 898–

3838.]

FOR FURTHER INFORMATION CONTACT:

Robert F. Miailovich, Associate Director,

Division of Supervision, (202) 898–

6918, 550 17th Street, N.W.,

Washington, D.C.; Michael D. Jenkins,

Examination Specialist, Division of

Supervision, (202) 898–6896, 1776 F

Street, N.W., Washington, D.C. 20429;

Jeffrey M. Kopchik, Counsel, Legal

Division, (202) 898–3872; Federal

Deposit Insurance Corporation, 550 17th

Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

No collection of information pursuant

to section 3504(h) of the Paperwork

Reduction Act (44 U.S.C. 3501 et seq.)

is contained in the proposed rule.

Consequently, no information was

submitted to the Office of Management

and Budget for review.

Regulatory Flexibility Act

Pursuant to section 605(b) of the

Regulatory Flexibility Act (Pub. L. 96–

354, 5 U.S.C. 601 et seq.), it is certified

that the proposed rule will not have a

significant impact on a substantial

number of small entities.

Background

Section 2523 of the Comprehensive

Thrift and Bank Fraud Prosecution and

Taxpayer Recovery Act of 1990 1 (Fraud

Act) amended the Federal Deposit

Insurance Act (FDI Act) by adding a

new section 18(k). Pub. L. No. 101–647,

§ 2523 (1990). This section 18(k)(1)

provides that ‘‘[t]he Corporation may

prohibit or limit, by regulation or order,

any golden parachute payment or

indemnification payment’’. 12 U.S.C.

1828(k)(1). The terms ‘‘golden parachute

payment’’ and ‘‘indemnification

payment’’ are defined in sections

18(k)(4) and (5)(A) of the FDI Act,

respectively. Id. at 1828(k) (4) and

(5)(A). The statute’s proscriptions are

applicable to insured depository

institutions and depository institution

holding companies. Id.

On October 7, 1991, the FDIC

published a notice of proposed

rulemaking entitled ‘‘Regulation of

Golden Parachutes and Other Benefits

Which Are Subject to Misuse’’ to

implement this provision of the Fraud

Act. 56 FR 50529 (1991) (to be codified

at 12 CFR Part 359). By the end of the

sixty day comment period, the FDIC

received 186 letters commenting on the

proposed regulation. The majority of

these comment letters suggested that the

FDIC revise the proposed rule in order

to strike a more equitable balance

between the protection of the deposit

insurance funds and the needs of

depository institutions and depository

institution holding companies to attract

and retain qualified directors and

management. Many of the comment

letters also suggested certain technical

amendments to the proposed rule to

make it reflect more accurately the

FDIC’s intentions as stated in the

preamble. A few comment letters

requested that no regulation be

promulgated. These letters expressed

the opinion that abuses should be dealt

with on a case-by-case basis through the

use of enforcement proceedings. It

should be noted that the FDIC was

gratified to observe the exceptionally

high level of preparation and thought

which went into many of the comment

letters.

Due to the significant amount of time

which has passed since the publication

of the first proposed rule (the First

Proposal), the FDIC has decided to

publish a second proposal for public

comment (the Second Proposal). The

Second Proposal incorporates many of

the suggestions which were made by the

commenters to the First Proposal.

Summary of the Second Proposal

The golden parachute portion of the

Second Proposal affects insured

depository institutions seeking to make

the golden parachute payments 2 only if

the institution is in a ‘‘troubled’’

condition.3 The proposed regulation

would apply to affiliated depository

institution holding companies either if

the holding company itself is troubled

or if it seeks to make a golden parachute

payment to an institution-affiliated

party (IAP) of a troubled subsidiary

insured depository institution. The

indemnification portion of the Second

Proposal is applicable to all insured

depository institutions and their

holding companies regardless of their

financial condition.

Generally, the Second Proposal

prohibits institutions which are

insolvent, in conservatorship or

receivership, rated ‘‘4’’ or ‘‘5’’, in a

troubled condition as defined in the

regulations of the appropriate federal

banking agency, or which are subject to

a proceeding to terminate deposit

insurance from making any payment to

an institution-affiliated party which is

contingent on the termination of that

person’s affiliation with the institution,

except payments of death or disability

benefits, payments pursuant to qualified

retirement plans and employee welfare
16070 Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules

4 More precisely, only two of these are actual

exceptions to the prohibition in that they permit a

payment or agreement which is covered by the

statutory language. The others are definitions of

statutory terms which have been developed or

refined by the Corporation.

5 These criteria are that the institution or holding

company is insolvent, in conservatorship of

receivership, troubled, rated ‘‘4’’ or ‘‘5’’, or subject

to a proceeding to terminate deposit insurance.

benefit plans and two other exceptions

which are described in more detail

below. The Second Proposal also

prohibits institutions from paying or

reimbursing an institution-affiliated

party’s legal and other professional

expenses incurred in administrative or

civil proceedings instituted by any

federal banking agency unless certain

criteria are satisfied. Under no

circumstances does the Second Proposal

allow the reimbursement or payment of

fines or penalties assessed against an

institution-affiliated party as a result of

such a proceeding.

The Second Proposal recognizes

several ‘‘exceptions’’ to the prohibition

against golden parachute payments.4

First, § 359.4(b) of the Second Proposal

allows an insured depository institution

or its depository institution holding

company to make a golden parachute

payment to an institution-affiliated

party who is hired by an institution or

holding company with the written

consent of the appropriate federal

banking agency at a time when the

institution or holding company satisfies

or is expected to satisfy any of the

criteria set forth in § 359.1(f)(1)(ii) of the

Second Proposal,5 and whose golden

parachute agreement is approved by the

FDIC in its corporate capacity as the

regulator of operating state nonmember

banks. These criteria are taken from

section 18(k) of the FDI Act. (12 U.S.C

1828(k)(4)(A)(ii)).

Second, § 359.4(c) of the Second

Proposal permits a golden parachute

payment, not to exceed twelve months

salary, to an institution-affiliated party

in the event of an unassisted change in

control, with the prior consent of the

appropriate federal banking agency.

The third ‘‘exception’’ is contained in

§ 359.1(f) of the Second Proposal, which

defines a ‘‘golden parachute payment’’.

The FDIC recognizes that one important

tool in restoring an institution to

financial health may be institutional

downsizing through personnel

reductions in force. In such situations,

institutions may choose to employ an

existing severance pay plan or adopt a

new plan to assist employees whose

employment is terminated. In addition,

many corporations (in various

industries) maintain severance pay

plans which pay benefits to employees

who lose their jobs through no fault of

their own, for reasons such as an overall

reduction in force. Thus, § 359.1(f)(2)(v)

of the Second Proposal provides that the

term ‘‘golden parachute payment’’ does

not include any payment made pursuant

to a nondiscriminatory severance plan

or arrangement which provides for the

payment of severance benefits to all

eligible employees upon involuntary

termination for other than cause, or

early retirement, in conjunction with a

reduction in force. However, the Second

Proposal limits the maximum severance

benefit that any employee may receive

pursuant to such a plan to twelve

months’ base salary, although an

institution may request consent to make

larger payments. In the event that any

senior executive officer, as defined in

§ 303.14(a)(3) of these regulations, is

eligible for such severance benefits, the

depository institution or holding

company must provide 30 days prior

written notice to its primary regulator

and the FDIC before making such a

payment to those individuals.

The fourth ‘‘exception’’ to the golden

parachute payment prohibition is

contained in § 359.1(d) of the Second

Proposal which defines ‘‘bona fide

deferred compensation plan or

arrangement’’. Section 18(k) of the FDI

Act explicitly authorizes the FDIC to

define, by regulation or order,

permissible bona fide deferred

compensation plan[s] or arrangement[s].

(12 U.S.C. 1828(k)(4)(C)(ii)).

The definition of ‘‘golden parachute

payment’’ contained in § 359.1(f) of the

Second Proposal also sets forth several

other straightforward exceptions which

do not require further discussion here.

Section 18(k)(2) of the FDI Act

provides that the FDIC ‘‘shall prescribe,

by regulation, the factors to be

considered by the Corporation in taking

any action pursuant to paragraph (1) [its

authority to prohibit or limit golden

parachute payments and

indemnification payments]’’. The

section also sets forth a number of

illustrative factors that should be

considered. The Corporation has

carefully considered these factors in

arriving at the conclusion that golden

parachute payments generally should be

prohibited, except in the narrow

circumstances delineated in § 359.4 of

the Second Proposal. Section 359.4 of

the Second Proposal also sets forth a

procedure to allow an institution or

institution-affiliated party which desires

to make a payment or enter into an

agreement which it determines should

not be prohibited, but which is not

clearly covered by any of the express

‘‘exceptions’’ to the prohibition, to

solicit appropriate regulatory approvals.

In so doing, the institution or

institution-affiliated party will be

required to address certain of the factors

enumerated in section 18(k) of the FDI

Act, and the appropriate federal banking

agency and the Corporation may

consider the remaining factors and any

other circumstances which bear on the

issue of whether the proposed payment

would be contrary to the intent of the

prohibition.

Section 18(k) of the FDI Act also

authorizes the FDIC to prohibit or limit

indemnification payments. (12 U.S.C.

1828(k)(5).) A ‘‘prohibited

indemnification payment’’ is defined in

the Second Proposal as payment by an

insured depository institution or its

depository institution holding company

for the benefit of an IAP in order to pay

or reimburse such person for any

liability or legal expense sustained with

regard to an administrative or civil

enforcement action which results in a

final order or settlement pursuant to

which the IAP is assessed a civil money

penalty, removed from office, prohibited

from participating in the conduct of the

affairs of an insured depository

institution or required to cease and

desist from or take any affirmative

action described in section 8(b) of the

FDI Act. The legislative history of the

Fraud Act, which added section 18(k) to

the FDI Act, makes it clear that this

section is intended (i) to preserve the

deterrent effects of administrative

enforcement or civil actions by insuring

that institution-affiliated parties who are

found to have violated the law, engaged

in unsafe or unsound banking practices

or breached any fiduciary duty to the

institution, pay any civil money

penalties and associated legal expenses

out of their own pockets without

reimbursement from the institution or

its holding company and (ii) to

safeguard the assets of financial

institutions by prohibiting the

expenditure of funds to defend, pay

penalties imposed on or reimburse

institution-affiliated parties who have

been found to have violated the law. 136

Cong. Rec. E3687 (daily ed. November 2,

1990) (statement of Rep. Schumer).

The FDIC is of the opinion that it

would be inconsistent with the intent of

the Fraud Act categorically to prohibit

insured depository institutions and

holding companies from advancing

funds to pay or reimburse IAP’s for

reasonable legal or other professional

expenses incurred in defending against

an administrative or civil action brought

by a federal banking agency prior to the

entry of a final order. Therefore, § 359.5

of the Second Proposal sets forth the

circumstances under which such

indemnification payments may be
Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules 16071

6 The term ‘‘nonqualified’’ refers to a benefit plan

which is not qualified (or is not intended within a

reasonable period of time to be qualified) under

section 401 of the Internal Revenue Code of 1986

(26 U.S.C. 401).

made. The FDIC is of the opinion that

five criteria must be satisfied in order to

permit an institution to make or agree to

make any indemnification payment to

or for the benefit of any IAP prior to the

entry of a final order in the IAP’s favor.

However, an institution or its holding

company may purchase commercial

insurance policies or fidelity bonds, at

a reasonable cost, which may pay the

cost of defending an administrative

proceeding or civil action. Such

insurance cannot pay any penalty or

judgement. However, it may pay

restitution to the insured depository

institution, depository institution

holding company or the receiver.

Issues Raised By Commentators—

Golden Parachutes

The FDIC has carefully reviewed and

analyzed the substantial number of

comment letters which it received in

response to the First Proposal. With

regard to the golden parachute portion

of the First Proposal, the most

significant issues raised by the comment

letters are discussed below.

1. Bona Fide Deferred Compensation

Plans

A substantial number of commenters

raised the issue of whether the

requirement that bona fide deferred

compensation plans be ‘‘funded’’ in

order to be excluded from the

regulation’s proscriptions is

appropriate. Section 359.1(d)(2) of the

First Proposal established a requirement

that a nonqualified 6 deferred

compensation plan be ‘‘funded’’ in

order to be considered a ‘‘bona fide

deferred compensation plan or

arrangement’’ which is excluded from

the definition of golden parachute

payment. The term funded was defined

as meaning that ‘‘specific assets are

segregated or otherwise set aside so that

such assets are not available to the

institution or holding company for any

purpose other than distribution to the

participating employee(s) and are not

available to satisfy claims of the

institution’s or holding company’s

creditors’’. First Proposal § 359.1(d)(2).

The vast majority of comment letters

which the FDIC received raised the

issue of the appropriate definition of

bona fide deferred compensation plan

and virtually every letter which raised

this issue disagreed with the

Corporation’s imposition of the funding

requirement. The predominant

argument against such a requirement is

that when Congress drafted section

18(k)(4)(C)(ii) of the FDI Act to exclude

bona fide deferred compensation plans

from the definition of golden parachute,

it was aware and approved of the

established industry practice of utilizing

unfunded, nonqualified deferred

compensation plans (commonly referred

to as elective, excess or supplemental

plans) to supplement the traditional tax

qualified defined benefit or defined

contribution retirement plan. Many of

the comment letters also pointed out

that the Internal Revenue Code (26

U.S.C. 1 et seq.) (the ‘‘Code’’) recognizes

these types of nonqualified deferred

compensation plans and urged the FDIC

to look to the Code as being dispositive.

Almost all of the relevant comment

letters expressed grave concerns that the

FDIC’s imposition of the funding

requirement would upset established

deferred compensation plans and

prompt depository institutions and

holding companies to incur significant

unwanted expenses by terminating

these plans and making cash payments

to the beneficiaries. Nonetheless,

Congress chose not to define the term

‘‘bona fide deferred compensation

plan’’, but explicitly left that task to the

FDIC.

First, it should be pointed out that the

FDIC is not bound by the provisions of

the Internal Revenue Code, or any other

federal statute, in defining the term

bona fide deferred compensation plan

or arrangement. While the Code’s

explanation and treatment of such plans

may be instructive, it is not binding on

the Corporation in the context of this

rulemaking. Similarly, the fact that the

industry has utilized unfunded, nonqualified plans for a period of time and

would be inconvenienced by the

implementation of the proposed

regulation is insufficient to compel the

change that the majority of comments

advocate. The FDIC’s responsibility is to

ascertain the proper meaning of the term

bona fide deferred compensation plan,

while ensuring that such definition does

not permit depository institutions,

holding companies or institutionaffiliated parties to circumvent the

intent of the statute by exploiting an

imprecisely drafted definition. On the

other hand, if the Corporation can

accomplish its purposes in a manner

that is less disruptive but just as

effective as the scheme set forth in the

First Proposal, such an alternative bears

close scrutiny.

The FDIC has been persuaded by the

many comments it received with regard

to the definition of bona fide deferred

compensation plan that the funding

requirement which was contained in

§ 359.1(d)(2) of the First Proposal is not

necessary and should be deleted. Thus,

the definition of bona fide deferred

compensation plan or arrangement,

which appears in § 359.1(d) of the

Second Proposal, does not contain such

a requirement. This provision of the

Second Proposal permits unfunded,

nonqualified deferred compensation

plans provided the institution or

holding company utilizes either a rabbi

or a secular trust (which are properly

accounted for) or the benefits or

payments are expensed as an accrued

liability according to generally accepted

accounting principles (GAAP). Second

Proposal § 359.1(d). It is the FDIC’s

judgment that these requirements will

permit depository institutions and

holding companies to utilize deferred

compensation plans for legitimate

purposes, while ensuring that such

plans can not be used as a vehicle to

make what would otherwise be

considered a prohibited golden

parachute payment.

2. Severance Pay Plans

All the comment letters which raised

the issue expressed support for the

FDIC’s decision to except traditional

severance pay plans which cover

reductions in force from the definition

of golden parachute payment. However,

a substantial percentage of these letters

urged the Corporation to increase the

allowable amount of severance pay from

six to twelve months salary and to

expand the exception to include

payments pursuant to voluntary

resignations or early retirements which

occur in conjunction with a reduction in

force instituted by a depository

institution or holding company. After

careful consideration, the Corporation

has elected to increase the permissible

amount of severance pay from six to

twelve months’ salary. In addition, the

regulation has been amended to permit

institutions to request consent to pay

greater severance benefits. Second

Proposal § 359.1(f)(2)(v). The FDIC

requests public comment on this new

alternative. The inclusion in the

exception of voluntary resignations and

early retirements in conjunction with a

reduction in force provides depository

institutions and holding companies

with more flexibility in achieving an

optimum workforce size and cost

savings. Second Proposal

§ 359.1(f)(2)(v). The FDIC has also

decided to include a definition of the

term ‘‘nondiscriminatory’’ in § 359.1(j)

of the Second Proposal in an effort to

make it clear how this term should be

applied in the context of this regulation.

The Corporation emphasizes that this

exception is only applicable to

institution-affiliated parties who are
16072 Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules

terminated, resign or retire due to a

reduction in force and receive severance

benefits pursuant to a existing

nondiscriminatory severance pay plan.

3. White Knight Exception

Section 359.4 of the First Proposal

sets forth what is commonly referred to

as the ‘‘white knight’’ exception to the

golden parachute prohibition. This

provision permits a troubled depository

institution or holding company to hire

an individual and agree to pay him/her

a golden parachute payment upon

termination of employment, provided

that the amount and terms of the golden

parachute payment receive the prior

written consent of the appropriate

federal banking agency and the FDIC. As

we stated in the preamble to the First

Proposal:

The purpose of this exception is to permit

a troubled institution or holding company to

attempt to reverse its slide toward economic

failure by attracting competent, new

management which enjoys the confidence of

that institution’s primary federal regulator

and the FDIC. . . . [T]he FDIC is aware that

individuals who possess the experience and

expertise which qualify them for such a

position are highly sought after business

persons who, in most circumstances, already

have established successful careers with

other financial institutions. In order to

induce such an individual to leave an

established, stable career for a job in a

troubled institution which may not survive

regardless of that individual’s efforts, it is

generally necessary to agree to pay that

individual some sort of severance payment in

the event that the efforts of the individual for

the institution are not successful. It is the

FDIC’s view that . . . such agreements reflect

good business judgment, recognize the

realities of the marketplace and may benefit

both the institution and the deposit

insurance funds.

(56 FR 50531, October 7, 1991). While

every comment letter which addressed

this exception supported it, a significant

percentage of those letters urged the

FDIC to broaden the exception in certain

respects. First, it was recommended that

the Corporation revise § 359.4 of the

First Proposal to automatically

grandfather institution-affiliated parties

who were hired to assist troubled

depository institutions and holding

companies prior to the effective date of

the final regulation. The FDIC has

carefully considered this suggestion and

is of the opinion that such an across-theboard grandfathering would not be

prudent. Section 359.4 is structured so

that the appropriate federal banking

agency and the FDIC have an

opportunity to review the amount and

terms of any proposed severance

arrangement prior to it being entered

into. To grandfather all such existing

severance agreements would deny the

appropriate federal banking agency and

the FDIC the opportunity to conduct

this review. However, institutionaffiliated parties, insured depository

institutions and holding companies are

of course free to request review and

approval of existing agreements for

institution-affiliated parties who were

hired at a time when the depository

institution or holding company already

met any of the criteria listed in

§ 359.1(f)(1)(ii) of the Second Proposal.

Second, a significant number of

commentators also suggested that the

white knight exception be broadened to

encompass individuals who are hired

‘‘in contemplation of’’ the depository

institution or holding company

becoming troubled. These letters urged

this revision as a way to allow

depository institutions to address their

problems sooner and, thus, more

effectively. The FDIC concurs in this

line of reasoning. It makes good sense

that the value of this exception can be

enhanced by not restricting its coverage

to institutions which are already

categorized as troubled. If existing

management or a board of directors is of

the reasoned opinion that the institution

in question is sliding toward becoming

troubled and that new management is

needed to arrest that slide, then prudent

business practice would suggest that it

is better to hire such new management

sooner rather than later. Therefore, the

exception has been expanded to allow

applicants to apply for an exemption

prior to becoming troubled when they

are of the opinion that they are

approaching a troubled condition and

new management is needed. Second

Proposal § 359.4(b).

Third, several comment letters

suggested that the FDIC broaden the

§ 359.4 exception of the First Proposal

to include current officers and

employees of a depository institution

who are promoted to executive

positions at a time when the institution

is troubled. While the FDIC agrees that

‘‘it is not axiomatic that competent new

management can only be found outside

of an institution’’, the underlying reason

for allowing what would otherwise be a

prohibited golden parachute payment is

not present in the case of a current

employee who is promoted to an

executive position. As we stated earlier,

this type of severance payment will be

approved in limited circumstances as a

way to entice competent management to

sever established ties with their current

employer and take a calculated risk that

they can assist in bringing a troubled

institution back to financial health. This

rationale does not apply to the case of

a current employee of a troubled

institution since he/she does not need to

be enticed to give up an established,

stable career with another employer.

The FDIC’s experience since the

publication of the First Proposal has

made it clear that some confusion exists

concerning the proper procedure to

request and the effect of obtaining prior

written consent for a white knight

exception. Interested parties are referred

to new § 359.6 of the Second Proposal,

‘‘Filing Instructions’’. In terms of effect,

the FDIC would like to clarify that

approval of a white knight exception

does not improve the white knight’s

position in the event of the insolvency

of the institution as the FDIC (in its

corporate capacity) can neither bind a

receiver nor affect the provability of

receivership claims. In the event that

the insured depository institution is

placed into receivership or

conservatorship, the FDIC (in its

corporate capacity) would not be

obligated to pay the promised severance

benefit and the white knight would be

accorded no preferential treatment on

the basis of such prior approval.

4. Permissible Golden Parachutes in

Changes in Control

Several comment letters noted that

the First Proposal does not provide an

exception to the prohibition against

golden parachute payments in the case

of a change in control where the

depository institution to be acquired is

troubled. These letters raised the

arguments which were briefly

mentioned in the preamble to the First

Proposal (56 FR 50529, October 7, 1991)

concerning the benefits of protecting

executive officers of companies which

are the subject of hostile takeovers so

that their business decisions concerning

what is best for their company are not

influenced by the acquisition’s ultimate

effect on their employment. While the

FDIC agrees that golden parachute

payments can serve a useful purpose in

such circumstances, expanding the

exceptions permitted pursuant to

§ 359.4 of the First Proposal to include

golden parachute payments made in the

context of changes in control would

open the door to the possibility of

payments being made to institutionaffiliated parties who are substantially

responsible for the depository

institution’s troubled condition. After

balancing the relative advantages and

disadvantages of expanding § 359.4 to

include this exception, the FDIC is of

the opinion that the safety of the deposit

insurance funds and the soundness of

the banking system in general is best

served by permitting limited golden

parachute payments with prior

regulatory approval in the context of
Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules 16073

7Obviously, this analysis does not apply to

situations where the Corporation is assisting in the

acquisition of a troubled insured depository

institution pursuant to section 13 of the FDI Act.

8Obviously, the financial deterioration of the

institution or holding company may adversely

affect the institution’s or holding company’s ability

to make the payments regardless of the regulation.

9This payment could include benefits which

continued to accrue during the tenure of the

institution’s or holding company’s troubled

condition.

unassisted changes in control.7 While

this decision does not adopt completely

the position advocated by the majority

of comment letters, the FDIC is

concerned that a more open-ended

exception would have the unfortunate

result of allowing institution-affiliated

parties who are substantially

responsible for the troubled condition of

their depository institutions to receive

golden parachute payments.

5. Definition of Golden Parachute

Payment

A significant number of comment

letters pointed out that a literal reading

of the definition of golden parachute

payment contained in § 359.1(g) of the

First Proposal would include certain

forms of retirement payments being

made to former institution-affiliated

parties who retired and began collecting

such payments at a time when the

depository institution or its holding

company did not satisfy any of the

circumstances delineated in

§§ 359.1(g)(1)(ii) (A) through (E) of the

First Proposal, but which institution or

holding company subsequently became

troubled. It was also brought to our

attention that a literal reading of the

definition seemed to provide that even

when a troubled depository institution

or its holding company ceased satisfying

any of the criteria delineated in

§§ 359.1(g)(1)(ii) (A) through (E) of the

First Proposal, golden parachute

payments to institution-affiliated parties

who leave the institution subsequent to

its return to financial health would

continue to be prohibited. It is not the

FDIC’s intent that the regulation

produce either of these results.

Institution-affiliated parties who retire

from an insured depository institution

or holding company at a time when it

is not troubled and begin collecting

periodic retirement payments should

not have to worry that the subsequent

deterioration of the institution or

holding company will jeopardize their

continuing to receive such payments, at

least as far as this regulation is

concerned.8 Similarly, if a depository

institution or holding company recovers

from its troubled condition, then it is no

longer covered under the scope of the

regulation with respect to its existing

institution-affiliated parties, and what

might have been considered prohibited

golden parachute payments would no

longer be unlawful and could be paid to

an institution-affiliated party whose

employment is terminated once the

institution or holding company is no

longer troubled.9 It is our opinion that

the revised definition of bona fide

deferred compensation plan or

arrangement contained in § 359.1(d) of

the Second Proposal should alleviate

these concerns since the revised

definition recognizes and includes wellestablished forms of deferred

compensation. However, the FDIC has

also chosen to revise the definition of

golden parachute payment, which is

contained in § 359.1(f) of the Second

Proposal, to make it clear that to be a

golden parachute, an institutionaffiliated party’s employment by or

affiliation with an insured depository

institution or holding company must

terminate at a time when the institution

or holding company is troubled or in

contemplation of it becoming troubled.

Second Proposal § 359.1(f)(1)(iii). If an

institution-affiliated party’s

employment is terminated at a time

when the depository institution or

holding company is troubled, the

payment of prohibited golden parachute

payments to that individual will

continue to be prohibited even after the

institution or holding company ceases

to be troubled.

6. Definition of Depository Institution

Holding Company

Section 359.1(f) of the First Proposal,

the definition of ‘‘depository institution

holding company’’, includes any bank

holding company, savings and loan

holding company and any direct or

indirect subsidiary thereof, other than

an insured depository institution. A

number of comment letters raised the

concern that the definition in the First

Proposal is not consistent with the

definition of depository institution

holding company contained in section

3(w)(1) of the FDI Act. A number of

comment letters also argued that the

broader definition used in the First

Proposal would improperly include

non-financial services affiliates that are

not involved with the business

conducted by the insured depository

institution within the purview of the

regulation. Pursuant to the First

Proposal, golden parachute payments by

a non-financial services company to one

of its executives would be restricted

simply because that company was

ultimately owned by a holding company

which also owned an insured

depository institution. After considering

this point, the FDIC agrees that the

definition of depository institution

holding company in the Second

Proposal should mirror the definition

contained in section 3(w)(1) of the FDI

Act. Second Proposal § 359.1(b).

7. Scope of Rule

Section 359.1(j) of the First Proposal

contains the definition of institutionaffiliated party. A number of comment

letters raised the issue that the

regulatory definition proposed by the

FDIC goes beyond the statutory

definition contained in section 3(u) of

the FDI Act by including persons who

have a certain relationship with a

depository institution holding company.

However, in carefully reviewing the

language of section 18(k)(4)(A) of the

FDI Act, the FDIC is of the opinion that

Congress intended to include within the

statute’s scope individuals who are

institution-affiliated parties of

depository institution holding

companies.

The term ‘‘golden parachute payment’’

means any payment * * * by any insured

depository institution or depository

institution holding company for the benefit

of any institution-affiliated party pursuant to

an obligation of such institution or holding

company that * * * is contingent on the

termination of such party’s affiliation with

the institution or holding company * * *

[Emphasis added].

12 U.S.C. 1828(k)(4)(A). This

interpretation is consistent with section

8(b)(3) of the FDI Act which provides

that the Act’s enforcement provisions

are equally applicable to bank holding

companies. Our consultations with the

Federal Reserve Board staff have

established that the Federal Reserve

Board’s established position is that it

has the authority to take enforcement

action against institution-affiliated

parties of bank holding companies

pursuant to section 8(b)(3) of the FDI

Act.

The FDIC is also of the opinion that

to interpret section 18(k) to not apply to

institution-affiliated parties of holding

companies would subvert the statute’s

intent by leaving a significant gap in its

coverage. Federal Reserve staff has

advised the Corporation that some of the

most abusive golden parachute

payments which were made prior to the

enactment of the statute and were

known to Congress at the time involved

IAPs of holding companies. Thus, the

FDIC has decided not to revise the

definition of IAP contained in the First

Proposal, except for a minor technical

change.
16074 Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules

10 Such a request should be in letter form to the

FDIC’s Regional Director (DOS) for the region in

which the depository institution or holding

company is headquartered.

8. Limitation to Executive Officers and

Directors

Several comment letters suggested

that the scope of the regulation should

be limited to cover only executive

officers and directors of insured

depository institutions and depository

institution holding companies, as

opposed to institution-affiliated parties

of institutions and holding companies.

On the other hand, section 18(k)(4) of

the FDI Act explicitly refers to

‘‘institution-affiliated party’’.

While potential golden parachute

abuses could theoretically involve nonexecutive officers and non-directors, it

has been the FDIC’s experience that

such instances are extremely rare. It is

not the FDIC’s intent to place unfair and

inappropriate limits on payments to a

bank or holding company’s non-official

or non-managerial staff. This is

evidenced, for example, by the

severance pay exception which is

contained in § 359.1(f)(2)(v) of the

Second Proposal. In the Corporation’s

view, it is very unlikely that a bank

teller (or other non-executive/nondirector) would come within the scope

of this rule since bank tellers generally

do not get paid golden parachutes. That

being the case, and in view of the fact

that the statute uses the term

‘‘institution-affiliated party’’, the FDIC

has chosen not to explicitly exclude

employees who are not senior executive

officers or directors from the Second

Proposal’s scope. It should also be

pointed out that any such employee

who feels that he/she is being unfairly

affected by the rule could apply for

permission to receive a payment

pursuant to § 359.4 of the Second

Proposal.

9. Golden Parachute Agreements

Entered Into Prior to Effective Date of

Final Regulation

The First Proposal took the position

that the regulation could limit or

prohibit golden parachute and/or

indemnification payments which are

sought to be made pursuant to contracts

and agreements which were entered into

prior to the effective date of the final

regulation, i.e., as of the effective date of

the statute. A number of comment

letters briefly asserted that the

regulation could not lawfully affect such

agreements since to do so would be

‘‘unconstitutional’’. However, the vast

majority of comment letters which

raised this issue did not explain in any

detail the basis for this alleged

unconstitutionality.

The FDIC has examined this issue in

greater depth and while we remain

convinced that ample precedent exists

to support the position which was taken

in the First Proposal, no compelling

need exists to apply the regulation in

this fashion. However, the FDIC views

the Second Proposal as putting

institutions and IAPs on notice of the

Corporation’s views with regard to these

types of agreements and the FDIC will

look unfavorably upon any golden

parachute agreement which is entered

into after the date of this proposal but

before the effective date of the final

regulation as an attempt to circumvent

the regulation.

10. Prior Approval of Otherwise

Prohibited Golden Parachutes

Section 359.2(b) of the First Proposal

permits the payment of a golden

parachute provided that such payment

is approved by the institution’s

appropriate federal banking agency,

with the written concurrence of the

FDIC. Several comment letters pointed

out, however, that this subsection

afforded only depository institutions

and holding companies the right to

request such an exception. In the

interest of fairness, the FDIC has revised

this subsection to permit institutionaffiliated parties to also request

permission to receive such a payment.10

Section 359.2(b) of the First Proposal

also requires that applicants requesting

permission to make or receive an

otherwise prohibited golden parachute

payment shall provide the appropriate

federal banking agency and the FDIC

with certain information. First Proposal

§§ 359.2(b) (1) through (4). A significant

number of commentators asserted that

this section of the First Proposal

improperly reverses the burden of proof

as delineated in section 18(k)(2) of the

FDI Act to compel the applicant to

demonstrate that the applicant has no

reasonable basis to believe that the

institution-affiliated party to whom the

payment is to be made has committed

any fraudulent act, is substantially

responsible for the insolvency of the

institution or holding company, has

materially violated any banking law or

regulation or has violated certain

specific federal criminal laws. These

comment letters also asserted that the

structure of the proposed regulation

requires the applicant to ‘‘prove a

negative’’, an impossible task.

The FDIC is of the opinion that the

arguments advanced in the comment

letters concerning an inappropriate

reversal of the burden of proof are

misplaced. First, a careful reading of

section 18(k)(2) of the FDI Act reveals

that it does not establish a burden of

proof, in the traditional legal sense, at

all. What this subsection does is to

delineate certain factors which Congress

suggests that the FDIC consider in

evaluating a request to pay or receive an

otherwise prohibited golden parachute

payment. This list of factors is not

mandatory, nor is it exclusive. The only

mandatory language in section 18(k)(2)

requires the FDIC to prescribe whatever

factors it ultimately decides to consider

in any regulation it promulgates. The

statute does not address the question of

which party bears the burden of

producing evidence or the burden of

proof. What the FDIC has chosen to do

in the First Proposal is to place the

burden of production of evidence where

it most reasonably belongs, with the

party that possesses or has the most

complete access to the information

which is necessary for the Corporation

to make an informed and equitable

judgment. The FDIC is not requiring that

a party seeking to make or receive a

golden parachute payment ‘‘prove his or

her innocence’’.

In response to the comment letters,

the FDIC has revised § 359.2(b) of the

First Proposal in an effort to clarify how

this section will function. These

revisions make it clear that the

depository institution, holding company

or institution-affiliated party seeking a

determination that an otherwise

prohibited golden parachute payment is

permissible is required to inform the

appropriate federal banking agency and

the FDIC of any information of which it

is aware that would indicate that there

is a reasonable basis to believe that the

institution-affiliated party in question

satisfies any of the criteria set forth in

§§ 359.4(d) (1) through (4) of the Second

Proposal. If the applicant is not aware

of any such information, it shall so

certify.

11. Condition of Institution at Time of

Termination of Employment Is Crucial

Previously in this preamble, we

clarified that the Second Proposal

should not be construed to cut off the

payment of retirement benefits to former

institution-affiliated employees who

retired and began receiving retirement

payments at a time when the depository

institution or its holding company was

not troubled, in the event that such

institution or holding company

subsequently becomes troubled. This

same question arises in the case of nonretirement benefits. For example, while

most golden parachute payments are

lump sum, the Corporation is aware of

instances where such payments are

made in periodic installments. The
Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules 16075

FDIC is of the opinion that as long as the

institution-affiliated party did not

terminate his/her employment in

contemplation of the depository

institution or holding company

becoming troubled in an effort to

circumvent the regulation’s

proscriptions, such payments should be

allowed to continue because the nexus

between the institution-affiliated party

and the institution’s or holding

company’s troubled condition would

not be present. However, this is not

meant to suggest that such retirement

benefits or permissible golden parachute

payments will be continued in the event

that the institution is placed into

conservatorship or receivership.

12. Other Golden Parachute Issues

A number of comment letters took

issue with the fact that the First

Proposal prohibits the payment of a

golden parachute by both an insured

depository institution and its holding

company when either of those entities is

troubled. These letters suggested that

the First Proposal should be revised to

provide that only the troubled entity be

prohibited from making a golden

parachute payment. The FDIC has

carefully considered this suggestion and

has decided to scale back its original

proposal and to adopt a modified

version of the commenters’ suggestion.

Thus, a troubled insured depository

institution may not make a golden

parachute payment to any of its IAPs,

excluding any of the exceptions

described previously. In addition, a

depository institution holding company

may not make a golden parachute

payment to any of its IAPs if it is

troubled and may not pay a golden

parachute to an IAP of an affiliated

insured depository institution if that

institution is troubled.

The FDIC received several comment

letters which suggested that the

Corporation make an exception to the

golden parachute prohibition for

depository institutions with a composite

rating of ‘‘4’’, but which exceed all

applicable regulatory capital

requirements. The FDIC has decided not

to incorporate this exception into the

Second Proposal since an institution’s

capital level is only one indication of its

overall financial health.

A significant number of comment

letters expressed concern that the

criteria delineated in § 359.1(g)(1)(ii)(C)

of the First Proposal (that the depository

institution or holding company be

designated troubled by its primary

federal regulator) is overly broad since

it would include any institution or

holding company which is subject to a

written supervisory agreement even if

that institution or holding company is

not experiencing significant financial

difficulties. Since the nature of written

supervisory agreements vary and that

the facts of each case are so individual,

the FDIC prefers not to make a blanket

exception to the rule in this case.

Rather, the Corporation will consider

exceptions on a case by case basis

pursuant to § 359.4(d) of the Second

Proposal.

Issues Raised By Commentators—

Indemnification Payments

The FDIC has carefully reviewed and

analyzed the comment letters with

regard to the indemnification portion of

the First Proposal.

1. Criteria for Making Indemnification

Payments

Section 359.5 of the First Proposal

delineates the circumstances under

which an insured depository institution

or depository institution holding

company may make or agree to make

indemnification payments to

institution-affiliated parties. The

comment letters made it clear that this

section of the First Proposal is viewed

as being just as significant as the

sections dealing with golden parachute

payments. The overwhelming majority

of comment letters expressed the

opinion that the prohibitions contained

in this section of the First Proposal

would make it unreasonably difficult for

depository institutions and holding

companies to attract and retain

competent officers, directors and

employees.

Section 359.5(a) of the First Proposal

sets forth six criteria which must be met

in order for a depository institution or

holding company to make or agree to

make indemnification payments to an

institution-affiliated party. The majority

of comment letters which raised

indemnification issues focused on

§ 359.5(a)(1) of the First Proposal. This

subsection provides that in order to

indemnify an institution-affiliated party,

the institution’s or holding company’s

board of directors, in good faith, must

determine in writing that the

institution-affiliated party has a

‘‘substantial likelihood of prevailing on

the merits’’. The consensus of

commentators’ opinions was that this

standard is so difficult to meet that a

board of directors very rarely, if ever,

would be able to authorize

indemnification. Many comment letters

pointed out that requests for

indemnification are customarily made at

the commencement of an administrative

action or civil proceeding when the

institution-affiliated party and his/her

counsel are just beginning to assemble

their case. Thus, many of the facts and

circumstances surrounding the conduct

in question are not yet known. This

being the case, the commentators argued

that it would be very difficult for a

board of directors to find that an

institution-affiliated party had a

substantial likelihood of prevailing on

the merits. Too many unanswered

questions would be present for such a

finding to be realistically made. The

commentators recommended a variety

of lesser standards, most notably that

the institution-affiliated party ‘‘acted in

good faith and in a manner he/she

believed to be in the best interests of the

institution’’, that there is a ‘‘reasonable

likelihood of prevailing on the merits’’

or that the FDIC defer to the applicable

state law standard.

After considerable review, the FDIC

agrees with the position expressed by

the majority of commentators that the

standard contained in § 359.5(a)(1) of

the First Proposal imposes too

significant an obstacle to reasonable and

fair indemnification payments.

However, the Corporation does not

agree with the commentators who

suggested that it should defer to the

applicable state law standard. In

enacting section 18(k) of the FDI Act,

Congress made it quite clear that there

was to be one uniform federal standard

to govern the making of indemnification

payments by insured depository

institutions and depository institution

holding companies. In an effort to

balance the need of depository

institutions to attract and retain

qualified directors and management

with the protection of the deposit

insurance funds, the FDIC has decided

to revise § 359.5(a)(1) of the First

Proposal to utilize a somewhat less

stringent standard. Therefore, § 359.5 of

the Second Proposal requires that the

depository institution’s or holding

company’s board of directors

determines in writing that the

institution-affiliated party requesting

indemnification ‘‘acted in good faith

and in a manner which he/she believed

to be in the best interests of the

institution’’. Of course, the FDIC expects

that an institution’s board of directors

will make such a finding only after due

investigation.

2. Continual Monitoring by Board of

Directors Not Required

A significant number of comment

letters also took issue with the FDIC’s

requirement, contained in § 359.5(a)(3)

of the First Proposal, that the

institution’s or holding company’s

board of directors continually monitor

actions against institution-affiliated

parties so that it can reassess its
16076 Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules

11 If indemnification was authorized and paid by

the depository institution or holding company

pursuant to section 359.5 of this part, the IAP is

obligated to reimburse the institution or holding

company, respectively.

12Of course, the board of directors could decline

to approve the indemnification request despite

counsel’s favorable opinion.

decision to permit indemnification.

These commentators expressed the

opinion that such a requirement places

an unfair and undue burden on both the

board of directors and the institutionaffiliated party seeking indemnification.

The proposed standard would mean that

a board’s decision would never be

‘‘final’’, regardless of the amount of

time, effort and painstaking review that

went into it. It would also mean that an

institution-affiliated party could never

depend on indemnification since a prior

decision to approve indemnification

could be revoked at any time. The FDIC

agrees that there is value in encouraging

an amount of certainty in such cases.

Thus, this requirement has been deleted

from the Second Proposal.

3. Permissible Indemnification

Payments

Section 359.5(a)(4) of the First

Proposal prohibits the use of

indemnification payments to pay or

reimburse an institution-affiliated party

for the amount of, or any cost incurred

in connection with, any settlement of an

administrative proceeding or civil

action instituted by any federal banking

agency or any judgment or penalty

imposed with respect to any such matter

where the IAP is assessed a civil money

penalty, removed from office or made

subject to a cease and desist order. The

FDIC received a substantial number of

comment letters which addressed this

particular restriction. Interestingly,

however, while the proscription of the

use of indemnification to pay for

settlements was criticized, the

arguments against it were often

diametrically opposed. For example, a

number of comment letters made the

argument that to prohibit the use of

indemnification to pay for costs

associated with settlements would force

institution-affiliated parties to litigate

every action to its ultimate conclusion

in the hope of earning the right to be

indemnified. On the other hand, an

approximately equal number of

comment letters argued just as

vociferously that this requirement

would compel institution-affiliated

parties to settle actions immediately

before costs became prohibitively high,

thereby denying them an opportunity to

defend themselves. Other comment

letters pointed out that negotiated

settlements benefit all parties involved

and that a settlement where the

institution-affiliated party does not

admit to wrongdoing should not come

within the definition of indemnification

payment contained in section

18(k)(5)(A) of the FDI Act because the

settlement agreement would not contain

any penalty or require any affirmative

action that would, if embodied in a final

order, preclude indemnification under

FDI Act section 18(k)(5)(A) and

§ 359.5(a)(5) of the First Proposal.

After considerable review, the FDIC

has chosen not to permit

indemnification of settlement costs by

the depository institution or holding

company where the IAP is assessed a

civil money penalty, removed from

office or prohibited from participating

in the conduct of the affairs of the

insured depository institution or

required to cease and desist from or take

any affirmative action described in

section 8(b) of the Act.11 However,

insured depository institutions and

depository institution holding

companies may purchase commercial

insurance policies or fidelity bonds, at

a reasonable cost, which may pay all

costs incurred in an action or

proceeding which is settled, except civil

money penalties and judgements. As we

noted earlier, it is also permissible for

insurance policies and bonds to pay

restitution to the depository institution,

holding company or receiver.

4. Involvement by Majority or All of

Board of Directors

A significant number of comment

letters pointed out that § 359.5(b) of the

First Proposal, which prohibits an

institution-affiliated party who is

requesting indemnification from

participating in any way in the board’s

discussion and approval of such

payments, does not take into account

situations where the majority or all the

members of the board of directors are

the subject of an enforcement action or

civil proceeding. Thus, consistent with

several recommendations we received,

the FDIC has added new §§ 359.5 (c)

and (d) to the Second Proposal. Section

359.5(c) provides that if a majority of

the members of an institution’s or

holding company’s board of directors

are named as respondents in an

administrative proceeding or civil

action commenced by any federal

banking agency the remaining board

member(s) may either make an

independent decision concerning

authorization of indemnification

payments or retain independent legal

counsel to provide an opinion as to

whether the conditions contained in

§ 359.5(a) of the Second Proposal have

been met. If the entire board of directors

is subject to the administrative action or

civil proceeding, § 359.5(d) of the

Second Proposal requires the board to

retain independent legal counsel to

opine as to whether the conditions set

forth in § 359.5(a) have been met. If

independent legal counsel is of the

opinion that these conditions have been

met, the board may rely on such an

opinion in authorizing the requested

indemnification.12 The FDIC would

regard legal counsel as being

‘‘independent’’ (for purposes of this

regulation) if the attorney(s) is not a

member of the depository institution’s

or holding company’s in-house legal

staff, does not have an ongoing

relationship with the depository

institution or holding company and no

other conflict of interest is present. The

FDIC is of the opinion that these

procedures effectively address the

difficulties inherent in situations where

the majority of or the entire board of

directors of an institution or holding

company are the subjects of an

enforcement proceeding. The use of

independent legal counsel ensures an

unbiased review of the five criteria

necessary to approve indemnification

and does not impose any undue

hardship upon the depository

institution or holding company in

question.

5. Definition of Indemnification

Payment

Section 359.1(h) of the First Proposal

contained the definition of

‘‘indemnification payment’’. A number

of comment letters expressed concern

that even if an institution or holding

company could qualify to purchase a

commercial insurance policy or fidelity

bond which would cover the costs of

defending and/or settling an

administrative action or civil

proceeding commenced by a federal

banking agency, the proposed regulation

prohibited an institution or holding

company from purchasing such

coverage. First Proposal § 359.1(h)(2).

Upon further consideration, as we noted

earlier herein, the FDIC is of the opinion

that if a depository institution or

holding company can purchase, at

reasonable rates, a commercial

insurance policy or fidelity bond which

will pay the costs of defending and/or

settling an administrative action or civil

proceeding commenced by a federal

banking agency, neither the statute nor

any consideration of safe and sound

banking practice require the Corporation

to interfere with such an arrangement.

Section 359.1(l)(2) of the Second

Proposal reflects this change. This

revision should address the concerns
Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules 16077

13 Claims for certain benefits may not be provable

or constitute ‘‘actual direct compensatory damages’’

under 12 U.S.C. 1821(e)(3) if the institution is

placed into receivership. This regulation does not

provide otherwise.

raised by numerous comment letters

that the proposed regulation’s

restriction would impair the ability of

depository institutions and holding

companies to attract and retain

competent management and directors. It

is important to emphasize that the

Second Proposal would prohibit such

an insurance policy or bond from being

used to pay or reimburse an institutionaffiliated party for the amount of any

judgment or civil money penalty

assessed against him/her.

6. Fees Incurred During Investigations

The First Proposal did not address the

question of whether indemnification for

counsel fees incurred during the

investigative stage of a potential

administrative enforcement action

should be permitted. In view of the

definition of indemnification payment

contained in section 18(k)(5)(A) of the

FDI Act and its specific reference to

‘‘any administrative proceeding or civil

action instituted by the appropriate

Federal banking agency’’, the FDIC is of

the opinion that indemnification of such

expenses incurred prior to the

commencement of a formal action

should not be prohibited.

Technical Amendments

The comment letters also suggested a

number of technical revisions to the

First Proposal to clarify certain

provisions or avoid certain anomalies.

The definition of golden parachute

payment contained in section

18(k)(4)(A) of the FDI Act refers to ‘‘any

payment (or any agreement to make any

payment) in the nature of compensation

* * *.’’ The definition contained in

section 359.1(g)(1) of the First Proposal

deleted the phrase ‘‘in the nature of

compensation’’. Several comment letters

pointed out that the deletion of this

phrase from the regulatory definition

could be construed to prohibit the

customary payment of certain accrued

benefits upon termination of

employment (e.g., accrued vacation, sick

leave, etc.). Since it is not the FDIC’s

intent to prohibit depository institutions

and holding companies, even those that

are troubled, from paying terminating

employees for accrued but unused

benefits such as vacation or sick time,

this phrase has been added to the

Second Proposal.13 Second Proposal

§ 359.1(f)(1).

Several comment letters also pointed

out that the definition of ‘‘bona fide

deferred compensation plan or

arrangement’’ contained in § 359.1(d)(1)

of the First Proposal did not allow for

reasonable earnings on elective deferred

compensation. Section 359.1(d)(1) of the

Second Proposal makes it clear that a

bona fide deferred compensation plan

includes the reasonable investment

return on such elective deferrals.

Section 18(k)(4)(C) of the FDI Act and

§ 359.1(g)(2) of the First Proposal

delineate certain types of payments

which are not included within the

definition of golden parachute. In

describing such payments, the words

‘‘nondiscriminatory’’ and ‘‘benefit plan’’

are used. In view of the fact that the

precise definition of these terms is very

important, the FDIC has added them to

the list of definitions contained in the

Second Proposal. Second Proposal

§§ 359.1 (c) and (j). In a similar vein,

several comment letters suggested that

the term ‘‘indemnification payment’’

contained in § 359.1(h) of the First

Proposal be changed to ‘‘prohibited

indemnification payment’’ in order to

avoid confusion with certain types of

indemnification payments which are

permissible. The FDIC agrees with and

has adopted this suggestion. Second

Proposal § 359.1(l).

A significant number of comment

letters pointed out that while the

definition of an excess deferred

compensation plan contained in

§ 359.1(d)(2)(i) of the First Proposal

correctly referenced the limitations

imposed by section 415 of the Internal

Revenue Code of 1986, sections

401(a)(17) and 402(g) of the Code are

also applicable, but were not referenced.

The FDIC has revised the Second

Proposal to include references to these

two provisions of the Internal Revenue

Code, as well as any other applicable

provisions. Second Proposal

§ 359.1(d)(2)(i).

A very small number of comment

letters informed us that certain states,

particularly California, have statutes

which require all covered employers to

pay severance benefits in certain

circumstances. These commentators

were concerned that the definition of

golden parachute payment in the First

Proposal would conflict with such state

statutes. In order to avoid such a

conflict, the FDIC revised the definition

of golden parachute payment to

explicitly exclude any severance or

similar payment which is required to be

paid pursuant to state law which

applies to all employers, except those

that are exempted due to their small

number of employees or other similar

criteria. Second Proposal

§ 359.1(f)(2)(vi).

The FDIC has also chosen to clarify

the definition of ‘‘payment’’ contained

in § 359.1(l) of the First Proposal by

making it explicit that the phrase ‘‘the

conferring of any benefit’’ includes the

granting of stock options and stock

appreciation rights. Second Proposal

§ 359.1(k)(3).

The FDIC has added a new subsection

to the proposed regulation, § 359.6,

entitled ‘‘Filing Instructions’’. This new

subsection contains instructions on

where and how to file written requests

for prior approval to make certain

payments which are otherwise not

permitted.

Closed Bank/Receivership Issues

The FDIC has added a new § 359.7 to

the proposed regulation to make it clear

that this regulation would not bind any

receiver of a failed insured depository

institution. The fact that the FDIC or any

other federal banking agency consents to

certain types of payments does not

imply that the approving agency or the

receiver will be responsible for making

the payments in event of the insolvency

of the institution or that the recipient

will receive some sort of preference over

other creditors from the receivership.

Other Enforcement Authority

The FDIC notes that its authority to

regulate golden parachutes and

indemnification payments pursuant to

section 18(k) of the FDI Act is in

addition to its safety and soundness

enforcement authority pursuant to

section 8 of the FDI Act.

Delegations of Authority

The FDIC is also proposing to amend

§ 303.7 of its regulations, 12 CFR 303.7,

to add a new paragraph (g) which would

delegate the Board’s authority to the

Executive Director, Supervision and

Resolutions, Director of the Division of

Supervision, and where confirmed in

writing by the Director, to an associate

director, or to the appropriate regional

director or deputy regional director, to

approve or deny requests to make excess

nondiscriminatory severance plan

payments as permitted by

§ 359.1(f)(2)(v) and golden parachute

payments to ‘‘white knights’’, in change

of control situations and other golden

parachute payments which are not

covered under any of the regulation’s

explicit exceptions, as permitted by

§ 359.4.

Request for Public Comment

The FDIC hereby requests comment

on all aspects of the Second Proposal,

including both legal and policy

considerations. In particular, the

Corporation is especially interested in

whether the revisions to the First

Proposal in response to the first set of
16078 Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules

public comment letters adequately

address the concerns which were raised.

Of course, commenters should discuss

any new issues which have been raised

as a result of these revisions by the

FDIC. Interested parties are invited to

submit comments during a 60 day

comment period.

List of Subjects

12 CFR Part 303

Administrative practice and

procedure, Authority delegations

(Government agencies), Bank deposit

insurance, Banks, Banking, Reporting

and recordkeeping requirements,

Savings associations.

12 CFR Part 359

Banks, Banking, Golden parachute

payments, Indemnity payments.

For the reasons set out in the

preamble, the FDIC Board of Directors

hereby proposes to amend 12 CFR part

303 and to add part 359 to title 12,

chapter III, subchapter B, of the Code of

Federal Regulations as follows:

PART 303—APPLICATIONS,

REQUESTS, SUBMITTALS,

DELEGATIONS OF AUTHORITY, AND

NOTICES REQUIRED TO BE FILED BY

STATUTE OR REGULATION

1. The authority citation for part 303

continues to read as follows:

Authority: 12 U.S.C. 378, 1813, 1815, 1816,

1817(a)(2)(b), 1817(j), 1818, 1819 (‘‘Seventh’’,

‘‘Eighth’’ and ‘‘Tenth’’), 1828, 1831e, 1831o,

1831p–1(a); 15 U.S.C. 1607.

2. In § 303.7, the section heading is

revised and a new paragraph (g) is

added to read as follows:

§ 303.7 Delegation of authority to the

Executive Director for Supervision and

Resolutions, the Director of the Division of

Supervision and to the associate directors,

regional directors and deputy regional

directors to act on certain applications,

requests, and notices of acquisition of

control.

* * * * *

(g) Requests pursuant to section 18(k)

of the Act. Authority is delegated to the

Executive Director, the Director, and

where confirmed in writing by the

Executive Director or Director, to an

associate director, or to the appropriate

regional director or deputy regional

director, to approve or deny requests

pursuant to section 18(k) of the Act to

make:

(1) Excess nondiscriminatory

severance plan payments as provided by

12 CFR 359.1(f)(2)(v); and

(2) Golden parachute payments

permitted by 12 CFR 359.4.

3. New part 359 is added to read as

follows:

PART 359—GOLDEN PARACHUTE

AND INDEMNIFICATION PAYMENTS

Sec.

359.0 Scope.

359.1 Definitions.

359.2 Golden parachute payments

prohibited.

359.3 Prohibited indemnification payments.

359.4 Permissible golden parachute

payments.

359.5 Permissible indemnification

payments.

359.6 Filing instructions.

359.7 Applicability in the event of

receivership.

Authority: 12 U.S.C. 1828(k).

§ 359.0 Scope.

(a) This part limits and/or prohibits,

in certain circumstances, the ability of

insured depository institutions, their

subsidiaries and affiliated depository

institution holding companies to make

golden parachute and indemnification

payments to institution-affiliated parties

(IAP).

(b) The limitations on golden

parachute payments apply to troubled

insured depository institutions which

seek to make golden parachute

payments to their IAPs. The limitations

also apply to depository institution

holding companies which are troubled

and seek to make golden parachute

payments to their IAPs as well as

healthy holding companies which seek

to make golden parachute payments to

IAPs of a troubled insured depository

institution subsidiary. A ‘‘golden

parachute payment’’ is generally

considered to be any payment to an IAP

which is contingent on the termination

of that person’s employment and is

received when the insured depository

institution making the payment is

troubled or, if the payment is being

made by an affiliated holding company,

either the holding company itself or the

insured depository institution

employing the IAP, is troubled. The

definition of golden parachute payment

does not include payments pursuant to

qualified retirement plans, nonqualified

bona fide deferred compensation plans,

nondiscriminatory severance pay plans,

other types of common benefit plans,

state statutes and death benefits. Certain

limited exceptions to the golden

parachute payment prohibition are

provided for in cases involving the

hiring of a ‘‘white knight’’ and

unassisted changes in control. A

procedure is also set forth whereby an

institution or IAP can request

permission to make what would

otherwise be a prohibited golden

parachute payment.

(c) The limitations on indemnification

payments apply to all insured

depository institutions, their

subsidiaries and affiliated depository

institution holding companies

regardless of their financial health.

Generally, this part prohibits insured

depository institutions, their

subsidiaries and affiliated holding

companies from indemnifying an IAP

for costs sustained with regard to an

administrative or civil enforcement

action commenced by any federal

banking agency which results in a final

order or settlement pursuant to which

the IAP is assessed a civil money

penalty, removed from office, prohibited

from participating in the affairs of an

insured depository institution or

required to cease and desist from or take

an affirmative action described in

section 8(b) (12 U.S.C. 1818(b)) of the

Federal Deposit Insurance Act (FDI Act).

However, there are exceptions to this

general prohibition. First, an institution

or holding company may purchase

commercial insurance to cover such

expenses, except judgments and

penalties. Second, the institution or

holding company may indemnify an

IAP directly, except for judgments and

penalties, if its board of directors makes

certain specific findings.

§ 359.1 Definitions.

(a) Act means the Federal Deposit

Insurance Act, as amended (12 U.S.C.

1811, et seq.).

(b) Appropriate federal banking

agency, bank holding company,

depository institution holding company

and savings and loan holding company

have the meanings given to such terms

in section 3 of the Act.

(c) Benefit plan means any plan,

contract, agreement or other

arrangement which is an ‘‘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)), or other

usual and customary plans such as

dependent care, tuition reimbursement,

group legal services or cafeteria plans;

provided however, that such term shall

not include any plan intended to be

subject to paragraphs (f)(2)(iii) and (v) of

this section.

(d) Bona fide deferred compensation

plan or arrangement means any plan,

contract, agreement or other

arrangement whereby:

(1) An IAP 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) and
Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules 16079

the insured depository institution or

depository institution holding company

either:

(i) Recognizes compensation expense

and accrues a liability for the benefit

payments according to generally

accepted accounting principles (GAAP);

or

(ii) Segregates or otherwise sets aside

assets in a trust which may only be used

to pay plan and other benefits, except

that the assets of such trust may be

available to satisfy claims of the

institution’s or holding company’s

creditors in the case of insolvency; or

(2) An insured depository institution

or depository institution holding

company establishes a nonqualified

deferred compensation or supplemental

retirement plan, other than an elective

deferral plan described in paragraph

(e)(1) of this section:

(i) Solely for the purpose of providing

benefits for certain IAPs in excess of the

limitations on contributions and

benefits imposed by sections 415,

401(a)(17), 402(g) or any other

applicable provision of the Internal

Revenue Code of 1986 (26 U.S.C. 415,

401(a)(17), 402(g)); 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 (excluding severance

payments described in paragraph

(f)(2)(v) of this section and permissible

golden parachute payments described in

§ 359.4); and

(3) In the case of any nonqualified

deferred compensation or supplemental

retirement plans as described in

paragraphs (d)(1) and (2) of this section,

the following requirements shall apply:

(i) The plan was in effect at least one

year prior to any of the events described

in paragraph (f)(1)(ii) of this section;

(ii) Any payment made pursuant to

such plan is made in accordance with

the terms of the plan as in effect no later

than one year prior to any of the events

described in paragraph (f)(1)(ii) of this

section and in accordance with any

amendments to such plan during such

one year period that do not increase the

benefits payable thereunder;

(iii) The IAP has a vested right, as

defined under the applicable plan

document, at the time of termination of

employment to payments under such

plan;

(iv) 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);

(v) Any payment made pursuant to

such plan is not based on any

acceleration of vesting or accrual of

benefits which occurs at any time later

than one year prior to any of the events

described in paragraph (f)(1)(ii) of this

section;

(vi) The insured depository institution

or depository institution holding

company 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, except that the assets of such

trust may be available to satisfy claims

of the institution’s or holding

company’s creditors in the case of

insolvency; and

(vii) Payments pursuant to such plans

shall not be in excess of the accrued

liability computed in accordance with

GAAP.

(e) Corporation means the Federal

Deposit Insurance Corporation, in its

corporate capacity.

(f)(1) The term golden parachute

payment means any payment (or any

agreement to make any payment) in the

nature of compensation by any insured

depository institution or an affiliated

depository institution holding company

for the benefit of any current or former

IAP pursuant to an obligation of such

institution or holding company that:

(i) Is contingent on, or by its terms is

payable on or after, the termination of

such party’s primary employment or

affiliation with the institution or

holding company; and

(ii) Is received on or after, or is made

in contemplation of, any of the

following events:

(A) The insolvency (or similar event)

of the insured depository institution

which is making the payment or

bankruptcy or insolvency (or similar

event) of the depository institution

holding company which is making the

payment; or

(B) The appointment of any

conservator or receiver for such insured

depository institution; or

(C) A determination by the insured

depository institution’s or depository

institution holding company’s

appropriate federal banking agency,

respectively, that the insured depository

institution or depository institution

holding company is in a troubled

condition, as defined in the applicable

regulations of the appropriate federal

banking agency (§ 303.14(a)(4) of this

chapter); or

(D) The insured depository institution

is assigned a composite rating of 4 or 5

by the appropriate federal banking

agency or informed in writing by the

Corporation that it is rated a 4 or 5

under the Uniform Financial

Institutions Rating System of the

Federal Financial Institutions

Examination Council, or the depository

institution holding company is assigned

a composite rating of 4 or 5 or

unsatisfactory by its appropriate federal

banking agency; or

(E) The insured depository institution

is subject to a proceeding to terminate

or suspend deposit insurance for such

institution; and

(iii)(A) Is payable to an IAP whose

employment by or affiliation with an

insured depository institution is

terminated at a time when the insured

depository institution by which the IAP

is employed or with which the IAP is

affiliated satisfies any of the conditions

enumerated in paragraphs (f)(1)(ii)(A)

through (E) of this section, or in

contemplation of any of these

conditions; or

(B) Is payable to an IAP whose

employment by or affiliation with an

insured depository institution holding

company is terminated at a time when

the insured depository institution

holding company by which the IAP is

employed or with which the IAP is

affiliated satisfies any of the conditions

enumerated in paragraphs (f)(1)(ii)(A),

(C) or (D) of this section, or in

contemplation of any of these

conditions.

(2) Exceptions. The term golden

parachute payment shall not include:

(i) Any payment made pursuant to a

pension or retirement plan which is

qualified (or is intended within a

reasonable period of time to be

qualified) under section 401 of the

Internal Revenue Code of 1986 (26

U.S.C. 401) or pursuant to a pension or

other retirement plan which is governed

by the laws of any foreign country; or

(ii) Any payment made pursuant to a

benefit plan as that term is defined in

paragraph (c) of this section; or

(iii) Any payment made pursuant to a

bona fide deferred compensation plan

or arrangement as defined in paragraph

(d) of this section; or

(iv) Any payment made by reason of

termination caused by the death or

disability of an institution-affiliated

party; or

(v) Any payment made pursuant to a

nondiscriminatory severance pay plan

or arrangement which provides for

payment of severance benefits to all

eligible employees upon involuntary

termination other than for cause,

voluntary resignation, or early

retirement, in conjunction with a

reduction in force instituted by the

insured depository institution or

depository institution holding company;
16080 Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules

provided, however, that no employee

shall receive any such payment which

exceeds the base compensation paid to

such employee during the twelve

months (or such longer period or greater

benefit as the Corporation shall consent

to) immediately preceding termination

of employment, resignation or early

retirement, and such severance pay plan

or arrangement shall not have been

adopted or modified to increase the

amount or scope of severance benefits at

a time when the insured depository

institution or depository institution

holding company was in a condition

specified in paragraph (f)(1)(ii) of this

section or in contemplation of such a

condition without the prior written

consent of the appropriate federal

banking agency; provided further,

however, that no such payment shall be

made to any senior executive officer (as

defined in § 303.14(a)(3) of this chapter)

of any insured depository institution or

depository institution holding company

without providing 30 days prior written

notice to the appropriate federal

banking agency and the FDIC; or

(vi) Any severance or similar payment

which is required to be made pursuant

to a state statute or foreign law which

is applicable to all employers within the

appropriate jurisdiction (with the

exception of employers that may be

exempt due to their small number of

employees or other similar criteria); or

(vii) Any other payment which the

Corporation determines to be

permissible in accordance with § 359.4

of this part.

(g) Insured depository institution

means any bank or savings association

the deposits of which are insured by the

Corporation pursuant to the Act, or any

subsidiary thereof.

(h) Institution-affiliated party (IAP)

means:

(1) Any director, officer, employee, or

controlling stockholder (other than a

depository institution holding company)

of, or agent for, an insured depository

institution or depository institution

holding company;

(2) Any other person who has filed or

is required to file a change-in-control

notice with the appropriate federal

banking agency under section 7(j) of the

Act (12 U.S.C. 1817(j));

(3) Any shareholder (other than a

depository institution holding

company), consultant, joint venture

partner, and any other person as

determined by the appropriate federal

banking agency (by regulation or caseby-case) who participates in the conduct

of the affairs of an insured depository

institution or depository institution

holding company; and

(4) Any independent contractor

(including any attorney, appraiser, or

accountant) who knowingly or

recklessly participates in: Any violation

of any law or regulation, any breach of

fiduciary duty, or any unsafe or

unsound practice, which caused or is

likely to cause more than a minimal

financial loss to, or a significant adverse

effect on, the insured depository

institution or depository institution

holding company.

(i) Liability or legal expense means:

(1) Any legal or other professional

fees and expenses 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.

(j) Nondiscriminatory means that the

plan, contract or arrangement in

question applies to all employees of an

insured depository institution or

depository institution holding company

who meet reasonable and customary

eligibility requirements applicable to all

employees, such as minimum length of

service requirements. A

nondiscriminatory plan, contract or

arrangement may provide different

benefits to IAPs based only upon length

of service and/or position. In the event

that an employee’s position is used as

a basis for providing a different level of

benefits, employees who are not senior

executive officers (as defined in

§ 303.14(a)(3) of this chapter) of the

insured depository institution or

depository institution holding company

shall be treated more favorably than

senior executive officers.

(k) 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.

(l) Prohibited indemnification

payment. (1) The term prohibited

indemnification payment means any

payment (or any agreement or

arrangement to make any payment) by

any insured depository institution or an

affiliated depository institution holding

company for the benefit of any person

who is or was an IAP of such insured

depository institution, to pay or

reimburse such person for any liability

or legal expense with regard to any

administrative proceeding or civil

action instituted by any federal banking

agency which results in a final order or

settlement pursuant to which such

person:

(i) Is assessed a civil money penalty;

(ii) Is removed from office or

prohibited from participating in the

conduct of the affairs of the insured

depository institution; or

(iii) Is required to cease and desist

from or take any affirmative action

described in section 8(b) of the Act with

respect to such institution.

(2) Exception. The term prohibited

indemnification payment shall not

include any reasonable payment by an

insured depository institution or

depository institution holding company

which is used to purchase any

commercial insurance policy or fidelity

bond, provided that such insurance

policy or bond shall not be used to pay

or reimburse an IAP for the cost of any

judgment or civil money penalty

assessed against such person in an

administrative proceeding or civil

action commenced by any federal

banking agency, but may pay the

amount of any restitution to the insured

depository institution, depository

institution holding company or receiver.

§ 359.2 Golden parachute payments

prohibited.

No insured depository institution or

depository institution holding company

shall make or agree to make any golden

parachute payment, except as provided

in this part.

§ 359.3 Prohibited indemnification

payments.

No insured depository institution or

depository institution holding company

shall make or agree to make any

prohibited indemnification payment,

except as provided in this part.
Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules 16081

§ 359.4 Permissible golden parachute

payments.

(a) An insured depository institution

or depository institution holding

company may agree to make or may

make a golden parachute payment if and

to the extent that:

(1) The appropriate federal banking

agency, with the written concurrence of

the Corporation, determines that such a

payment or agreement is permissible; or

(2) Such an agreement is made in

order to hire a person to become an IAP

either at a time when the insured

depository institution or depository

institution holding company satisfies or

in an effort to prevent it from

imminently satisfying any of the criteria

set forth in § 359.1(f)(1)(ii), and the

institution’s appropriate federal banking

agency and the Corporation consent in

writing to the amount and terms of the

golden parachute payment. Such

consent by the FDIC and the

institution’s appropriate federal banking

agency shall not improve the IAP’s

position in the event of the insolvency

of the institution since such consent can

neither bind a receiver nor affect the

provability of receivership claims. In the

event that the institution is placed into

receivership or conservatorship, the

FDIC and/or the institution’s

appropriate federal banking agency shall

not be obligated to pay the promised

golden parachute and the IAP shall not

be accorded preferential treatment on

the basis of such prior approval; or

(3) Such a payment is made pursuant

to an agreement which provides for a

reasonable severance payment, not to

exceed twelve months salary, to an IAP

in the event of a change in control of the

insured depository institution;

provided, however, that an insured

depository institution or depository

institution holding company shall

obtain the consent of the appropriate

federal banking agency prior to making

such a payment and this paragraph

(a)(3) shall not apply to any change in

control of an insured depository

institution which results from an

assisted transaction as described in

section 13 of the Act (12 U.S.C. 1823)

or the insured depository institution

being placed into conservatorship or

receivership; and

(4) An insured depository institution,

depository institution holding company

or IAP making a request pursuant to

paragraphs (a)(1) through (3) of this

section shall demonstrate that it does

not possess and is not aware of any

information, evidence, documents or

other materials which would indicate

that there is a reasonable basis to

believe, at the time such payment is

proposed to be made, that:

(i) The IAP has committed any

fraudulent act or omission, breach of

trust or fiduciary duty, or insider abuse

with regard to the depository institution

or depository institution holding

company that has had or is likely to

have a material adverse effect on the

institution or holding company;

(ii) The IAP is substantially

responsible for the insolvency of, the

appointment of a conservator or receiver

for, or the troubled condition, as defined

by applicable regulations of the

appropriate federal banking agency, of

the insured depository institution,

depository institution holding company

or any insured depository institution

subsidiary of such holding company;

(iii) The IAP has materially violated

any applicable federal or state banking

law or regulation that has had or is

likely to have a material effect on the

insured depository institution or

depository institution holding company;

and

(iv) The IAP has violated or conspired

to violate section 215, 656, 657, 1005,

1006, 1007, 1014, 1032, or 1344 of title

18 of the United States Code, or section

1341 or 1343 of such title affecting a

federally insured financial institution as

defined in title 18 of the United States

Code.

(b) In making a determination under

paragraphs (a)(1) through (3) of this

section, the appropriate federal banking

agency and the Corporation may

consider:

(1) Whether, and to what degree, the

IAP was in a position of managerial or

fiduciary responsibility;

(2) The length of time the IAP was

affiliated with the insured depository

institution or depository institution

holding company, and the degree to

which the proposed payment represents

a reasonable payment for services

rendered over the period of

employment; and

(3) Any other factors or circumstances

which would indicate that the proposed

payment would be contrary to the intent

of section 18(k) of the Act or this part.

§ 359.5 Permissible indemnification

payments.

(a) An insured depository institution

or depository institution holding

company may make or agree to make

reasonable indemnification payments to

an IAP with respect to an administrative

proceeding or civil action initiated by

any federal banking agency if:

(1) The insured depository

institution’s or depository institution

holding company’s board of directors, in

good faith, determines in writing after

due investigation and consideration that

the institution-affiliated party acted in

good faith and in a manner he/she

believed to be in the best interests of the

institution;

(2) The insured depository

institution’s or depository institution

holding company’s board of directors,

respectively, in good faith, determines

in writing after due investigation and

consideration that the payment of such

expenses will not materially adversely

affect the institution’s or holding

company’s safety and soundness;

(3) The indemnification payments are

limited to the payment or

reimbursement of reasonable legal,

professional or other expenses incurred

in connection with an IAP’s

involvement in an administrative

proceeding or civil action instituted by

any federal banking agency; but in no

event shall such indemnification pay or

reimburse an IAP for the amount of, or

any cost incurred in connection with,

any judgment, penalty or settlement

with respect to any such claim,

proceeding or action, pursuant to which

the IAP:

(i) Is assessed a civil money penalty;

(ii) Is removed from office or

prohibited from participating in the

conduct of the affairs of the insured

depository institution; or

(iii) Is required to cease and desist

from or take any affirmative action

described in section 8(b) of the Act with

respect to such institution;

(4) The IAP agrees in writing to

reimburse the insured depository

institution or depository institution

holding company for such

indemnification payments in the event

that the proceeding or action results in

a final order or is settled on terms under

which the IAP:

(i) Is assessed a civil money penalty;

(ii) Is removed from office or

prohibited from participating in the

conduct of the affairs of the insured

depository institution; or

(iii) Is required to cease and desist

from or take any affirmative action

described in section 8(b) of the Act with

respect to such institution; and

(5) The insured depository institution

or depository institution holding

company provides the appropriate

federal banking agency and the FDIC

with prior written notice of its board of

directors’ authorization of such

indemnification.

(b) An IAP requesting indemnification

payments shall not participate in any

way in the board’s discussion and

approval of such payments; provided,

however, that such IAP may present his/

her request to the board and respond to

any inquiries from the board concerning

his/her involvement in the

circumstances giving rise to the
16082 Federal Register / Vol. 60, No. 60 / Wednesday, March 29, 1995 / Proposed Rules

administrative proceeding or civil

action.

(c) In the event that a majority of the

members of the board of directors are

named as respondents in an

administrative proceeding or civil

action and request indemnification, the

remaining members of the board may

authorize independent legal counsel to

review the indemnification request and

provide the remaining members of the

board with an opinion of counsel as to

whether the conditions delineated in

paragraph (a) of this section have been

met. If independent legal counsel opines

that said conditions have been met, the

remaining members of the board of

directors may rely on such opinion in

authorizing the requested

indemnification.

(d) In the event that all of the

members of the board of directors are

named as respondents in an

administrative proceeding or civil

action and request indemnification, the

board shall authorize independent legal

counsel to review the indemnification

request and provide the board with an

opinion of counsel as to whether the

conditions delineated in paragraph (a)

of this section have been met. If

independent legal counsel opines that

said conditions have been met, the

board of directors may rely on such

opinion in authorizing the requested

indemnification.

§ 359.6 Filing instructions.

Requests to make excess

nondiscriminatory severance plan

payments pursuant to § 359.1(f)(2)(v)

and golden parachute payments

permitted by § 359.4 shall be submitted

in writing to the FDIC regional director

(Supervision) for the region in which

the institution is located. The request

shall be in letter form and shall contain

all relevant factual information as well

as the reasons why such approval

should be granted. In the event that the

consent of the institution’s primary

federal regulator is required in addition

to that of the FDIC, the requesting party

shall submit a copy of its letter to the

FDIC to the institution’s primary federal

regulator. In the case of national banks,

such written requests shall be submitted

to the OCC district office where the

institution is located. In the case of state

member banks and bank holding

companies, such written requests shall

be submitted to the Federal Reserve

district bank where the institution or

holding company, respectively, is

located. In the case of savings

associations and savings association

holding companies, such written

requests shall be submitted to the OTS

regional office where the institution or

holding company, respectively, is

located. In cases where the prior

consent of only the institution’s primary

federal regulator is required and that

agency is not the FDIC, a written request

satisfying the requirements of this

paragraph shall be submitted to the

primary federal regulator as described in

this paragraph.

§ 359.7 Applicability in the event of

receivership.

The provisions of this part, or any

consent or approval granted hereunder

by the FDIC (in its corporate capacity),

shall not in any way bind any receiver

of a failed insured depository

institution. Any consent or approval

granted hereunder by the FDIC or any

other federal banking agency shall not

in any way obligate such agency or

receiver to pay any claim or obligation

pursuant to any golden parachute,

severance, indemnification or other

agreement. Claims for employee welfare

benefits or other benefits which are

contingent, even if otherwise vested,

when the FDIC is appointed as receiver

for any depository institution, including

any contingency for termination of

employment, are not provable claims or

actual, direct compensatory damage

claims against such receiver. Nothing in

this part may be construed to permit the

payment of salary or any liability or

legal expense of any IAP contrary to 12

U.S.C. 1828(k)(3).

By order of the Board of Directors, dated

at Washington, D.C., this 21st day of March,

1995.

Federal Deposit Insurance Corporation

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 95–7603 Filed 3–28–95; 8:45 am]

BILLING CODE 6714–01–P

DEPARTMENT OF COMMERCE

National Oceanic and Atmospheric

Administration

15 CFR Part 944

[Docket No. 950222055–5055–01]

RIN 0648–AH92

Restricting or Prohibiting Attracting

Sharks by Chum or Other Means in the

Monterey Bay National Marine

Sanctuary

AGENCY: Sanctuaries and Reserves

Division (SRD), Office of Ocean and

Coastal Resource Management (OCRM),

National Ocean Service (NOS), National

Oceanic and Atmospheric

Administration (NOAA), Department of

Commerce (DOC).

ACTION: Extension of comment period.

SUMMARY: The National Oceanic and

Atmospheric Administration’s

Sanctuaries and Reserves Division

(SRD) is considering amending the

regulations for the Monterey Bay

National Marine Sanctuary (MBNMS or

Sanctuary) to restrict or prohibit the

attracting of sharks by the use of chum

or other means in the MBNMS. An

advance notice of proposed rulemaking

published February 28, 1995 (60 FR

10812) discusses the reasons SRD is

considering restricting or prohibiting

this activity in the MBNMS. A thirty

day comment period was to close on

March 30, 1995. This notice extends the

comment period by fifteen days.

DATES: Comments must be received by

April 14, 1995.

ADDRESSES: Comments should be sent to

Elizabeth Moore, Sanctuaries and

Reserves Division, National Oceanic and

Atmospheric Administration, 1305 East

West Highway, SSMC4 12th Floor,

Silver Spring, Maryland, 20910.

Comments will be available for public

inspection at the same address and at

the Monterey Bay National Marine

Sanctuary office at 299 Foam Street,

Suite D, Monterey, California, 93940.

FOR FURTHER INFORMATION CONTACT:

Elizabeth Moore at (301) 713–3141 or

Aaron King at (408) 647–4257 or at

mbmns@igc.apc.org.

Federal Domestic Assistance Catalog Number

11.429 Marine Sanctuary Program.

Dated: March 21, 1995.

Frank Maloney,

Deputy Assistant Administrator for Ocean

Services and Coastal Zone Management.

[FR Doc. 95–7606 Filed 3–28–95; 8:45 am]

BILLING CODE 3510–08–M

INTERNATIONAL TRADE

COMMISSION

19 CFR Part 210

Notice of Proposed Rulemaking

Concerning Federal Register Notices

and Service of Documents on Other

Agencies

AGENCY: International Trade

Commission.

ACTION: Notice of proposed rulemaking

and request for comments.

SUMMARY: The Commission proposes to

amend certain final rules for

investigations and related proceedings

under section 337 of the Tariff Act of

1930 (19 U.S.C. 1337) to do the

following: eliminate the Federal

Register publication requirement for