Source: http://www.federalregister.com/Browse/Document/usa/na/fr/2004/7/16/04-16225
Timestamp: 2019-03-23 03:31:37
Document Index: 2793156

Matched Legal Cases: ['§ 1412', '§ 1412', '§ 1412', '§ 1412', '§ 1412', '§ 1412', '§ 1412', '§ 1412', 'art 359', '§ 1412']

69 FR 136 pgs. 42606-42612 - Golden Parachute and Indemnification Payments
Years > 2004 > July, 2004 > Friday, July 16, 2004
Type: PRORULEVolume: 69Number: 136Pages: 42606 - 42612
FR document: [FR Doc. 04-16225 Filed 7-15-04; 8:45 am]
You may send comments by electronic mail through the "News" section of FCSIC's Web site, www.fcsic.gov, or through the Governmentwide "www.regulations.gov" portal. You may also send comments to Dorothy L. Nichols, General Counsel at "nicholsd@fcsic.gov" or by mail at the address listed below. Copies of all comments we receive, may be reviewed in our office in McLean, Virginia.
Section 218 of the Farm Credit System Reform Act of 1996 ("Reform Act") amended the Farm Credit Act of 1971 by adding a new section 5.61B. See Public Law 104-105, Feb. 10, 1996. This section authorizes the Corporation to prohibit or limit, by regulation or order, golden parachute and indemnification payments. See 12 U.S.C. 2277a-10b. Section 5.61B is similar to legislative authorities given to the other Federal financial institution regulators. See e.g. 12 U.S.C. 1828(k).
The terms golden parachute and indemnification payment are defined in the statute at 12 U.S.C. 2277a-10b(a)(1) and (2). In general, golden parachutes are employment contracts that offer substantial payments when employment is terminated. Indemnification payments are often used to reimburse officers or directors for personal losses due to judgments or litigation costs incurred while exercising official duties. The golden parachute portion of the proposed rule applies to any Farm Credit System institution seeking to make golden parachute payments only when the institution is in a "troubled condition." The indemnification part of the proposed rule applies to Farm Credit System institutions regardless of their financial condition. Its primary purpose is to prohibit reimbursements that benefit wrongdoers. For example, an institution could not indemnify officers or directors for legal expenses or liabilities that result from a successful Farm Credit Administration (FCA) administrative action. However, if the officer or director is cleared of the charges, legal fees and costs can be reimbursed.
Following the criteria set out in section 5.61B(a)(1) of the Reform Act, the proposed rule prohibits golden parachute payments by institutions that are insolvent, in conservatorship or receivership, or rated a "4" or "5" in the FCA Financial Institution Rating System. Section 5.61B(a)(1)(A) also authorizes the Corporation to define by regulation other circumstances that warrant a determination that an institution is in a troubled condition.
The proposed rule defines troubled condition to include any institution: (1) Subject to a cease-and-desist order or written agreement issued by the FCA requiring it to improve its financial condition; (2) subject to an FCA proceeding that may result in an order that requires improvement in financial condition; or (3) informed in writing by the Corporation that it is in troubled condition based on its most recent report of examination or other pertinent information. For banks, troubled condition also includes a bank that is: (1) Unable to make timely payments of principal and interest on bank-insured obligations; or (2) receiving assistance from the Insurance Fund. For the Federal Agricultural Mortgage Corporation ("Farmer Mac"), troubled condition also includes inability to make timely payments of principal and interest on its debt obligations or an inability to fulfill its guarantee obligations. The definition of troubled condition in the proposed rule is similar to the definition in rules adopted by the other Federal financial institution regulators. See e.g. , 12 CFR 359.1(f); 12 CFR 563.555 and 12 CFR 701.14.
The proposed rule lists eight exceptions to the prohibition on golden parachute payments in § 1412.2(f)(2). Four of these are listed in the statute: ERISA1qualified retirement plans; nonqualified "bona fide" deferred or supplemental compensation plans; other nondiscriminatory benefit plans; and payments made by reason of death or disability. See 12 U.S.C. 2277a-10b(a)(1)(c).
Nondiscriminatory means a plan or arrangement that applies to all employees who meet customary eligibility requirements such as minimum length-of-service standards. We understand that many severance plans pay somewhat more generous benefits to higher ranking employees. The proposed rule would allow a modest disparity in nondiscriminatory severance benefits linked to objective criteria like job title or length of service. The proposed definition of nondiscriminatory specifies a maximum 20 percent in any one criteria, unless a request for a larger amount is granted by the Corporation. For example, if lower-level employees are provided 50 percent of their yearly salary and 1 week of salary for each year of service, higher level employees could receive 60 percent of their yearly salary plus 1 week of salary for each year of service. Our hope is that this permitted modest discrepancy would allow System institutions to offer severance benefits that conform to industry norms for nondiscriminatory benefit plans. The statute grants the Corporation authority to determine other permissible arrangements and four of the eight exceptions in § 1412.2(f)(2) are exceptions added by the Board for System institutions. They include payments required by state or foreign law and a safe harbor provision.
Finally, the proposed rule in § 1412.5(a)(1) sets out a procedure to allow System institutions to request authority for what would otherwise be a prohibited golden parachute payment. This provision recognizes that there may be valid business reasons to seek an agreement not covered by any of the express exceptions, which the institution believes should not be prohibited. If an institution seeks such an authorization, the statute sets out a number of factors that the FCA and the Corporation may consider. See 12 U.S.C. 2277a-10b(c). The proposed rule at § 1412.5(a)(4) and (b) enumerates the factors that the FCA and the Corporation will consider, including whether the IRP committed any fraudulent acts, breached a fiduciary duty or played a substantial role in the institution's troubled condition. Under the proposed rule, the institution making the request should address the factors specified in the rule so that the FCA and the Corporation can consider whether the requested payment would be contrary to the intent of the prohibition. The institution should include any information of which it has knowledge that indicates there is a reasonable basis to believe that the IRP satisfies any of the criteria set out in § 1412.5(a)(4) and (b). If the applicant is not aware of any such information, it shall certify that it is not.
The proposed rule, at § 1412.2(l), follows the definition of a prohibited indemnification payment set out in the statute. It includes any payment or agreement to pay an institution-related party for any civil money penalty or judgment resulting from an administrative or civil action brought by FCA where the person must pay a civil money penalty, is removed from office or is subject to a cease and desist action. There are two exceptions in the proposed rule. The first allows System institutions to purchase commercial insurance to cover expenses other than judgments and penalties. Second, the proposed rule permits a partial indemnification. If there has been a finding that clears the individual, indemnification is permitted for the legal or professional expenses attributable to these charges. In addition, § 1412.6 sets out criteria for permissible "up front" indemnification payments. The System institution's board of directors must determine that the party requesting indemnification acted in good faith. Also, the payment cannot materially adversely affect the institution's safety and soundness. Finally, the party must agree to reimburse the institution for advanced indemnification payments if they become prohibited payments later, due to an unfavorable ruling.
The prohibitions in 12 U.S.C. 2277a-10b apply to all Farm Credit System institutions. The proposed rule at § 1412.2(b) defines Farm Credit System institutions to include all associations, banks, service corporations and their subsidiaries and affiliates, except the Farm Credit Financial Assistance Corporation. It also includes Farmer Mac and its subsidiaries and affiliates, which is described in 12 U.S.C. 2279aa-1(a)(2) as an institution of the Farm Credit System. Furthermore, 12 U.S.C. 2277a-10b(b) specifies that the prohibition on golden parachute and indemnity payments was meant to include all Farm Credit System institutions, including even a conservatorship or receivership of Farmer Mac. The legislative history of the Reform Act makes this point clear. It states: "New subsection (a) provides that FCSIC has authority to prohibit or limit golden parachutes or indemnifications, including the Federal Agricultural Mortgage Corporation (Farmer Mac)." H.R. Rep. 104-421, 104th Cong., 1st Sess. 12 (1995).
The proposed rule prohibits certain golden parachute and indemnification payments made to or for an institution-related party. The term institution-related party (IRP) is defined in the statute at 12 U.S.C. 2277a-10b(a)(3). It includes directors, officers, employees or agents for a Farm Credit System institution, stockholders (other than another Farm Credit System institution), consultants, joint venture partners and any one else who FCA determines has participated in the affairs of the institution. Additionally, IRPs include independent contractors, including attorneys, appraisers or accountants, that knowingly or recklessly participate in an unsafe or unsound practice that caused or is likely to cause harm to the institution. We will examine very closely any attempt by a Farm Credit System institution to avoid the regulation by employing the IRP in some other capacity ( e.g. , a consultant) and calling the arrangement consulting compensation rather than a severance payment or golden parachute.
The proposed regulation is similar to the regulations of the other Federal financial regulators with similar statutory authority. See, e.g. , 12 CFR part 359. Rather than prohibit all the golden parachute payments above a certain threshold, the proposed regulation allows a Farm Credit System institution that is in a troubled condition, as defined in the regulation, to seek approval for an otherwise prohibited golden parachute payment to an IRP. Similarly, the proposal rule on indemnity payments seeks a rational and fair approach for determining indemnification in order to avoid abuses.
As noted, the proposal sets forth circumstances under which indemnification payments may be made. For example, the Corporation has decided to allow indemnification "up front" for an IRP's legal or other professional expenses if: (1) Its board of directors determines that the party requesting indemnification acted in good faith, (2) the payment will not materially adversely affect the institution, and (3) the person agrees in writing to reimburse the institution if the alleged violations of law, regulation or fiduciary duty are upheld. If these criteria are met, the institution's board of directors will have concluded in good faith that the party requesting indemnification did not commit a fraudulent act, insider abuse or some other actionable offense that had a material adverse effect on the financial condition of the institution. Consideration of these factors in this regulatory requirement is what Congress intended FCSIC to do in taking action under section 5.61B(b) and (c) (12 U.S.C. 2277a-10b(b) and (c)). Also, the Corporation has decided to permit partial indemnification for that portion of the liability or legal expenses incurred where there is a determination on part of the charges in favor of the IRP. Finally, an institution may purchase insurance to cover expenses other than judgments or penalties.
Sec. 1412.1 Scope.1412.2 Definitions.1412.3 Golden parachute payments prohibited.1412.4 Prohibited indemnification payments.1412.5 Permissible golden parachute payments.1412.6 Permissible indemnification payments.1412.7 Filing instructions.1412.8 Applicable in the event of receivership.
(3) Such a payment is made pursuant to an agreement which provides for a reasonable severance payment, not to exceed 12-months' salary, to an IRP in the event of a change in control of the System institution; provided, however , that the System institution shall obtain the consent of the FCA prior to making such a payment and this paragraph (a)(3) shall not apply to any change in control of System institution which results from an assisted transaction as described in section 5.61 of the Farm Credit Act; 12 U.S.C. 2277a-10 or the System institution being placed into conservatorship or receivership; and
(b) An IRP requesting indemnification payments shall not participate in any way in the board's discussion and approval of such payments; provided, however , that such IRP 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 administrative proceeding or civil action.
§ 1412.8 Applicable in the event of receivership.