[Federal Register Volume 63, Number 230 (Tuesday, December 1, 1998)]
[Notices]
[Pages 66177-66185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31915]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Statement of Policy Pursuant to Section 19 of the Federal Deposit
Insurance Act Concerning Participation in the Conduct of the Affairs of
an Insured Institution by Persons Who Have Been Convicted of Crimes
Involving Dishonesty, Breach of Trust or Money Laundering or Who Have
Entered Pretrial Diversion Programs For Such Offenses
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final policy statement.
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SUMMARY: The FDIC is updating its statement of policy (SOP), which is
issued pursuant to section 19 of the Federal Deposit Insurance Act (12
U.S.C. 1829). Section 19 prohibits, without the prior written consent
of the FDIC, any person from participating in banking who has been
convicted of a crime of dishonesty or breach of trust or money
laundering, or who has entered a pretrial diversion in connection with
such an offense. Section 19 was significantly expanded by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA),
Pub. L. No. 101-73, 103 Stat.183 (1989) and the Comprehensive Thrift
and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 (Crime
Control Act), Pub. L. No. 101-647, 104 Stat. 4789 (1990). As a result,
the two existing policy statements for section 19 are outdated, and the
new SOP is intended to replace them and to supersede prior guidelines.
While the SOP maintains the FDIC's current requirement that an
application seeking the FDIC's consent must be filed by an insured
depository institution (insured institution), it provides blanket
approval for certain de minimis crimes, and allows for a waiver of the
institution filing requirement where an individual can demonstrate
substantial good cause for such a waiver. Other significant provisions
include the exclusion from section 19's coverage of a conviction that
has been completely expunged, pretrial diversion and similar programs
entered before November 29, 1990, and youthful offender adjudgments.
The SOP clarifies that the scope of section 19's coverage applies to
employees of an insured institution, and also to other persons who are
in a position to influence or control the management or affairs of an
insured institution.
EFFECTIVE DATE: December 1, 1998.
FOR FURTHER INFORMATION CONTACT: James M. Orlowsky, Review Examiner,
Division of Supervision (202) 898-6763
[[Page 66178]]
or Andrea Winkler, Counsel, Legal Division (202) 898-3727, Federal
Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C.
20429.
SUPPLEMENTARY INFORMATION:
I. Background
As amended by FIRREA and the Crime Control Act, section 19
prohibits, without the prior written consent of the FDIC, a person
convicted of any criminal offense involving dishonesty or breach of
trust or money laundering (covered offenses), or who has entered into a
pretrial diversion or similar program in connection with a prosecution
for such offense, from becoming or continuing as an institution-
affiliated party, owning or controlling, directly or indirectly an
insured institution, or otherwise participating, directly or
indirectly, in the conduct of the affairs of an insured institution. In
addition, the law forbids an insured institution from permitting such a
person to engage in any conduct or to continue any relationship
prohibited by section 19. It imposes a ten-year ban against the FDIC's
consent for a person convicted of certain crimes enumerated in Title 18
of the United States Code, absent a motion by the FDIC and approval by
the sentencing court.
A proposed SOP was published in the Federal Register on July 24,
1997 (62 FR 39840 (1997)). The FDIC invited comments on all aspects of
the proposal, as well as on a number of specific aspects of the SOP.
Comments were due by September 22, 1997. The FDIC received a total of
19 comment letters: 12 from banks, savings associations or bank holding
companies; two from law firms; one from a state banking department; and
four from trade associations. Based upon the comments, as discussed
below, the final SOP is a significant revision of the proposal.
II. Final Statement of Policy
A. Scope of Section 19
(1) Participation
Section 19 covers institution-affiliated parties, as defined by 12
U.S.C. 1813(u), and others who are participants in the conduct of the
affairs of an insured depository institution. Therefore, all employees
of an insured institution fall within the scope of section 19. The
proposed SOP indicated that, additionally, persons employed by an
institution's holding company or an affiliate, subsidiary or joint
venture of an insured institution or of its holding company may be
within the scope of section 19 where such person is engaged in
performing banking or banking-related activities on a regular and
material basis. For independent contractors, the proposal indicated
that participation by an independent contractor or an employee of an
independent contractor would occur where either is performing banking
or banking-related activities on behalf of, or for the benefit of, an
insured institution on a regular and material basis so as to be
involved in the ordinary course of operations or to be exercising
control over such operations. The proposal did not define what
constitutes such activities. The SOP stated that ``person,'' for
purposes of section 19, means a natural person, and does not include a
corporation, firm, or other business entity.
The FDIC received fourteen comments relevant to what constitutes
``participation'' and what classes of individuals should be considered
``participants.'' Ten of the comments were received from banks, savings
associations or bank holding companies; one from a law firm; one from a
state banking department; and two from trade associations. In general,
the commenters expressed the view that the FDIC's definition of
participation was overly broad and ambiguous, particularly with regard
to affiliates and independent contractors, and did not adequately
consider the risk of particular positions to the safety and soundness
of an insured institution or its depositors. For example, one commenter
indicated that under the proposal, section 19 could cover a computer
technician employed by the institution's holding company who
periodically performs routine maintenance at the institution's
facilities, despite the low level of risk associated with the position.
Concern was expressed that the proposal might have a crippling effect
on independent contractors who employ large numbers of employees.
Commenters felt that although independent contractors engage in
activities that are related to banking, many do not exercise any
decision-making authority with regard to the activities of the insured
institution, and thus should not be subject to section 19. For example,
if having access to sensitive bank data is a banking-related activity,
then providers of automated teller machines and securities systems
firms might arguably be included within the scope of section 19.
Commenters requested that the FDIC specifically define the positions or
types of independent contractors and activities that are covered by
section 19.
After considering the comments, the FDIC believes that it is not
the purpose of the SOP to define precisely what activities constitute
``participation.'' Rather, agency and court decisions should provide
the guide as to what standards should be applied. As a general
proposition, participation will be determined by the degree of
influence or control over the management or affairs of an insured
institution. Furthermore, given the changes in banking, including
financial modernization and the rapid pace of technology, a listing of
activities in the SOP is neither practical nor advisable. The FDIC must
maintain flexibility in such determinations, and in reaching such
determinations, the FDIC will consider the facts and circumstances and
the degree of involvement of the individual in the institution's
affairs. Under this standard, persons who function as ``de facto''
employees regardless of their relationship to the institution, will be
covered by section 19. Likewise, the SOP need not specifically define
what activities constitute direct as distinguished from indirect
participation. The relevant inquiry is whether the individual
personally participates in an institution's affairs, or whether the
individual does so through another person or entity, i.e.,
``indirectly.''
The final SOP adopts the standard that whether persons, other than
institution-affiliated parties of an insured institution, are
participants covered by section 19 depends upon their degree of
influence or control over the management or affairs of an insured
institution. It retains the definition of ``person'' set forth in the
proposed SOP as not including corporations, firms or other business
entities. Thus, section 19 would not apply to persons who are simply
employees of a bank holding company, but would apply if those persons
were in a position to influence or control the management or affairs of
the insured institution. To the extent that the holding company's
officers and directors have the power to define and direct the policies
of the subsidiary insured institution, such persons would be deemed to
be participants in the affairs of those subsidiaries, and therefore
covered by section 19.
Similarly, directors and officers of affiliates, subsidiaries or
joint ventures of an insured institution or its holding company will be
covered if they are in a position to influence or control the
management or affairs of the insured institution. In those cases in
which such individuals exercise policymaking functions for the insured
institution, they should be deemed ``participants.'' For example,
officers of an electronic data processing (EDP) affiliate would not
typically exercise a controlling
[[Page 66179]]
influence to the extent that the affiliate simply provides a processing
service to the bank. On the other hand, if a mortgage banking affiliate
sends loans to an insured institution that the institution is obligated
to purchase, then the officers of the affiliate may be participants in
the insured institution's affairs. Where an employee of an EDP service
has access to sensitive bank records and the ability to manipulate data
so as to influence or control the management or affairs of an insured
institution, that person will be covered by section 19. The degree of
such influence may be controlled by reliance upon the safeguards and
internal controls put in place by the affiliate and the bank.
Insured depository institutions continue to out source increasing
numbers of banking tasks. To the extent that independent contractors
are utilized, an analysis similar to that for affiliates may be
applied. Typically an independent contractor does not have a
relationship with the insured institution other than the activity
contracted for by the depository institution. Independent contractors
are not considered institution-affiliated parties unless they knowingly
or recklessly participate in violations, unsafe or unsound practices or
breaches of fiduciary duty which result in the consequences set forth
in 12 U.S.C. 1813(u). Those who do so, and who have been convicted of
or entered pretrial diversion programs for covered offenses would, of
course, be covered by section 19. In terms of participation, however,
the typical independent contractor does not influence or control the
bank's management or affairs. This would also be true of consultants
who perform a specific defined task for the insured institution.
Additionally, it has been determined that ``person'' within the context
of section 19 means individuals, but not companies. This approach may
eliminate coverage for many independent contractors. It would
eliminate, for example, marketers of special promotions and similar
independent contractors whose activity is not commonly thought to pose
a risk to the operation of a financial institution. To the extent that
any officer of such a company or any individual contractor attempts to
use their position to influence or control the management or affairs of
a financial institution, they would be covered as participants.
The FDIC is aware that an effort can be made to evade the coverage
of section 19 by ``converting'' an employee to an independent
contractor. In those cases, generally applicable standards of
employment law will be used to identify such arrangements, and to find
that the person is a ``de facto'' employee. This same analysis will be
used where an individual is employed by the holding company simply to
avoid section 19 coverage.
The FDIC believes that the approach adopted in the final SOP
preserves the distinction between employees and independent contractors
for contractual, regulatory and tax purposes, and avoids the criticism
that the FDIC is imposing an excessive regulatory burden upon
institutions without commensurate benefit. Furthermore, the FDIC
expects that the relationship between an independent contractor and an
insured institution is to be governed by a written contract, through
which the insured institution may require typical safeguards such as
warranties and bond coverage.
(2) ``Ownership'' and ``Control''
Section 19 specifically prohibits a person subject to its coverage
from owning or controlling an insured institution. The proposed SOP did
not specifically define ``own'' or ``control,'' although the
accompanying Preamble indicated that the FDIC was using the definition
of ``control'' set forth in Regulation Y (12 CFR Part 225) which the
Board of Governors of the Federal Reserve System (Federal Reserve
Board) uses to implement the Change in Bank Control Act (CBCA) (12
U.S.C. 1817(j)). The proposal stated that a controlling shareholder or
a member of a control group subject to section 19 could not, without
the prior written consent of the FDIC engage in the following conduct:
(i) exercise any voting rights in any shares of stock of an insured
institution or its holding company; (ii) own or control such shares of
stock so as to result in controlling the management or policies of an
insured institution; (iii) control such shares of stock so as to result
in controlling the management or policies of an insured institution;
(iv) solicit, procure, transfer, or attempt to transfer, vote, or
attempt to vote any proxy, consent or authorization with respect to any
voting rights in any insured institution; or (v) modify or set aside
any voting agreement previously approved by the appropriate federal
banking agency.
The FDIC received six comments regarding the issue of ownership and
control-three from depository institutions; one from a state banking
department; and two from trade associations. Most commenters supported
the conclusion that ``control'' should have the same meaning as set
forth in the CBCA. Generally, the commenters indicated that absent an
influence on the operations of an insured operation, mere ownership
should not impose a section 19 obligation, nor should the ownership of
a de minimis interest in the outstanding shares of an institution.
As a general rule, since the 1990 Crime Control Act amendments, the
FDIC has followed the interpretation found in the CBCA regarding
``control.'' ``Control'' under the CBCA occurs where the person has the
power to direct the management or policies of an institution (12 U.S.C.
1817(j)(8)(B)). The statute and the FDIC's implementing regulation (12
CFR Part 303) deem the power to vote 25 percent or more of a class of
voting securities to constitute such control. In addition, the FDIC's
regulation creates a presumption of control, i.e., that the person can
direct management or policies of the institution, where the person
owns, controls, or has the power to vote ten percent or more of the
institution's voting securities if that person is the largest
shareholder.
The FDIC agrees with the commenters that ``own'' must mean more
than simply owning a few shares. In order to give meaning to the
ownership prohibition contained in section 19, the FDIC will apply the
25 percent limitation regarding the power to vote shares to include an
ownership limitation of 25 percent. The FDIC will also apply the ten
percent limitation to ownership of voting shares where that person is
the largest shareholder. Consequently, a person would be prohibited
from owning or having the power to vote 25 percent or more of an
institution's voting shares, or ten percent of those shares where that
person is the largest shareholder. These standards would also apply to
an individual acting in concert with others so as to have such
ownership or control. The FDIC believes that this approach will avoid
the absurd result of requiring a convicted person who owns one share or
ten shares of stock in a large publicly traded insured depository
institution from having to divest his or her ownership interest.
Absent the FDIC's consent, persons subject to the prohibitions of
section 19 will be required to divest their ownership of shares above
the foregoing limits. Section 19 does not contain specific statutory
prohibitions regarding specific activities relating to the voting of
stock. Therefore, the FDIC has decided not to incorporate into the
final SOP any prohibitions on specific voting activities other than the
aforementioned limitations regarding ownership, control, and
participation.
It should be noted that while the Preamble accompanying the
proposed
[[Page 66180]]
SOP referred to the Federal Reserve Board's Regulation Y (12 CFR Part
225) as enunciating the standards for ``own'' and ``control,'' the FDIC
has decided that use of its own regulations in this area would be more
appropriate. Regulation Y has wide reaching attribution rules for stock
ownership among family members. An attempt to restrict ownership or
control of shares by family members simply because of a person's
conviction raises significant due process issues that are best avoided,
however, control of a convicted person's shares by family members may
be precluded where such control is detrimental to the bank, based upon
the facts in a particular case.
B. Standards for Determining Whether an Application Is Required
The Proposed SOP contained the requirement that an application
seeking the consent of the FDIC prior to engaging in banking activities
be submitted in all cases in which any adult or minor treated as an
adult was convicted or entered into a pretrial diversion program with
regard to a covered offense. As discussed more fully in section (5),
below, based upon its experience in processing section 19 applications,
and in light of comments received, the final SOP reflects the FDIC's
determination that it will provide automatic approval and dispense with
the application requirement in certain cases involving de minimis
crimes.
(1) Convictions
The proposal required that there be a conviction of record, and
excluded arrests, pending cases not brought to trial, acquittals, or
any conviction which has been reversed on appeal. Under the proposed
SOP, a conviction with regard to which an appeal is pending required an
application until or unless reversed. The proposal stated that a
conviction which has been expunged, or for which a pardon has been
granted, required an application.
The FDIC received seven comments regarding the issue of expunged
convictions--five from depository institutions; one from a law firm;
and one from a trade association. The commenters overwhelmingly favored
excluding expunged convictions from section 19's coverage. As the
commenters pointed out, under most state laws, an expunged conviction
is deemed not to have occurred, and is not a conviction ``of record.''
Further problems arise regarding the ability of an institution to
discover whether someone has an expunged criminal record, and in some
states, laws prohibit and punish disclosure of information regarding
expunged records.
Historically, the FDIC has taken the position that convictions
which have been completely expunged are not covered by section 19. The
FDIC proposed a change in that position in the proposed SOP based upon
the rationale that the Crime Control Act amendments require a person
who has entered into a pre-trial diversion or similar program to file a
section 19 application. This requirement appears to create an anomalous
result when compared with the FDIC policy that those with expunged
convictions need not file.
Based upon the comments, however, and because it appears that
expunged convictions do not constitute convictions of record, the final
SOP excludes expunged convictions from the coverage of section 19.
Furthermore, institutions have been advised in the past that expunged
convictions were not covered by section 19. Excluding expunged
convictions would avoid the significant practical problems of a change
in policy which would require those previously allowed to work at
institutions to now file section 19 applications. Therefore, the final
SOP adopts the FDIC's current interpretation that persons with
completely expunged convictions are not required to file section 19
applications.
(2) Pretrial Diversions
The proposed SOP defined a pretrial diversion as a program entry,
as determined by relevant federal, state or local law, whether formal
or informal, which is characterized by a suspension or eventual
dismissal of charges or criminal prosecution upon agreement by the
accused to treatment, rehabilitation, restitution, or other noncriminal
or nonpunitive alternatives. The FDIC received two comments on the
issue of what should constitute a ``pretrial diversion program,'' one
from a law firm and one from a trade association. Each made suggestions
as to whether certain specific programs ought to be included in the
definition.
The FDIC believes that it would be impractical to attempt to
identify in the SOP all of the specific programs which might constitute
pretrial diversion programs. As is the current practice, the final SOP
states that the FDIC will continue to determine whether a program
constitutes a pretrial diversion on a case-by-case basis. In addition,
in 1990, the Crime Control Act amendments made pretrial diversion
programs subject to section 19 for the first time. Persons working in
financial institutions at the time of the 1990 amendments who had
previously entered into a pre-trial diversion program would be unaware
that they were suddenly prohibited from working in banking. In order to
avoid the issue of retroactive application, and to provide a ``bright
line'' test, the FDIC has decided to except pre-trial diversions
entered before November 29, 1990, from section 19's coverage. In
addition, since most offenses eligible for pre-trial diversion are
relatively minor, and since only those offenses more than seven and a
half years old would be excluded from coverage, the risk to financial
institutions from this proposal is slight.
(3) Covered Offenses Involving Dishonesty or Breach of Trust
The proposed SOP indicated that for section 19 to apply, the
conviction or program entry must be for a criminal offense involving
dishonesty, breach of trust or money laundering. Under the proposal,
``dishonesty'' was defined as directly or indirectly to cheat or
defraud; to cheat or defraud for monetary gain or its equivalent; or
wrongfully to take property belonging to another in violation of any
criminal statute. Dishonesty includes acts involving want of integrity,
lack of probity, or a disposition to distort, cheat, or act deceitfully
or fraudulently, and may include crimes which federal, state or local
laws define as dishonest. ``Breach of trust'' means a wrongful act,
use, misappropriation or omission with respect to any property or fund
which has been committed to a person in a fiduciary or official
capacity, or the misuse of one's official or fiduciary position to
engage in a wrongful act, use, misappropriation or omission.
The proposed SOP made clear that all convictions for offenses
concerning the illegal manufacture, sale, distribution of or
trafficking in controlled substances required an application (drug
offenses). The proposal indicated that a ``controlled substance'' shall
mean those so defined by federal law. While the proposal acknowledged
that use of a controlled substance does not per se constitute a covered
offense, the circumstances of the offense may contain elements of
dishonesty or breach of trust or money laundering, and that the FDIC
would determine on a case-by-case basis whether to approve an
application regarding a person convicted of such an offense.
The FDIC received three comments regarding the definitions of
``dishonesty'' and ``breach of trust''--two from insured institutions
and one from a law firm. The commenters requested clarification of what
[[Page 66181]]
constitutes a conviction involving ``dishonesty'' and ``breach of
trust,'' and requested that the SOP contain a specific list of crimes
to which section 19 will apply, or safe harbors to which it will not
apply. Concern was expressed that crimes of violence may not be
covered, while one expressed the view that all crimes are dishonest.
With regard to drug offenses, the FDIC received four comments-three
from insured institutions and one from a bank holding company-all of
which were generally unfavorable regarding the approach the proposal
took regarding drug offenses. The commenters felt that no application
should be required of those convicted of using or possessing drugs,
citing concerns regarding laws pertaining to disabilities and
rehabilitation. In addition, concern was expressed regarding the
proposed case-by-case method of reviewing the underlying circumstances
of each drug offense to determine whether an application should be
approved.
After considering the comments, the FDIC has altered its approach
in the final SOP. The FDIC has generally acknowledged that not all
crimes are covered by section 19, and that many crimes involving
violence do not have dishonesty and breach of trust as elements. The
FDIC believes that whether a crime involves ``dishonesty'' or ``breach
of trust'' must be determined from the statutory elements of the crime
itself, rather than the factual circumstances surrounding a crime, and
the final SOP adopts this approach. To do otherwise would require
insured institutions and the FDIC to analyze the factual background of
every conviction, including such offenses as disturbing the peace. For
many convictions, records of a factual background are not available.
All convictions for offenses concerning the illegal manufacture, sale,
distribution of or trafficking in controlled substances shall require
an application. A ``controlled substance'' shall mean those so defined
by federal law.
(4) Youthful Offender Adjudgments
The proposed SOP indicated that an adjudgment by a court against a
person as a ``youthful offender'' under any youth offender law, or any
adjudgment as a ``juvenile delinquent'' by any court having
jurisdiction over minors as defined by state law does not require an
application. Such adjudications are not considered convictions for
criminal offenses.
The FDIC received three comments-all from insured institutions,
which strongly favored the stated approach. Historically, the FDIC has
followed the approach of exempting youthful offender adjudgments from
the coverage of section 19, with no perceived ill effects upon
institutions. Furthermore, it is questionable whether the institution
or the FDIC would be able to obtain records regarding such adjudgments.
Therefore, the final SOP adopts, without change, the position set forth
in the proposed SOP.
(5) De minimis Offense
The proposed SOP required any person with a conviction or program
entry concerning a covered offense to submit an application. The FDIC
received six comments--four from insured institutions or holding
companies, one from a law firm and one from a trade association--
regarding whether there should be an exemption for a de minimis crime.
All commenters favored an approach whereby a de minimis crime would not
require an application, although there was no general consensus as to
the precise definition of such offenses.
Suggestions were made that a de minimis offense should include any
misdemeanor committed by a juvenile, any one-time crime of dishonesty
or breach of trust where the amount of loss was small, and a single
misdemeanor committed by an adult. Further, commenters suggested that
there should be a distinction between felonies and misdemeanors, and
consideration of the time that has elapsed since the conviction, a
person's present integrity and the risk associated with the position
sought. A list of the specific crimes or the factors which should be
taken into account in determining whether an offense is de minimis was
requested. An alternative suggestion was a streamlined approach with a
shortened approval period based upon the level of risk the person's
position presents to the institution.
Section 19 applies, without exception, to convictions for crimes
involving dishonesty or breach of trust. The FDIC, therefore, must
provide prior written consent before covered persons may participate in
banking. However, based upon the comments, and in light of its
experience in processing and approving many applications involving
minimal offenses, the FDIC has determined to grant blanket approval,
through the final SOP, to certain defined categories of offenses. Such
offenses are considered to be of such a minimal nature and of such low
risk that the affected person may be employed at any institution, in
any position. The foregoing approach would have the advantage of
addressing a large number of pretrial diversion applicants, since in
most cases, the crimes involved in such programs are not serious ones
which would involve risk to an insured institution.
The final SOP provides that approval is automatically granted and
application will not be required where the covered offense is
considered de minimis, because it meets the following criteria: there
is only one conviction or program entry of record for a covered
offense; the offense was punishable by imprisonment for a term of less
than one year and/or a fine of less than $1000, and the individual did
not serve time in jail; the conviction or program was entered at least
five years prior to the application; and the offense did not involve an
insured institution or insured credit union. The above factors
generally encompass offenses that are less than felonies. This
exception represents the FDIC's view that an individual should
generally not be prohibited from participating in banking because of a
singular offense of lesser consequence. The basic underlying premise of
section 19 is to prevent risk to the safety and soundness of an insured
institution or the interests of its depositors, and to prevent
impairment of public confidence in the insured institution. We find it
incongruous to accord blanket approval to individuals who have
previously committed an offense against an insured institution or
insured credit union, and an application therefore will be required in
such cases. Any person who meets the foregoing criteria shall be
covered by a fidelity bond to the same extent as others in similar
positions, and shall disclose the presence of the conviction or program
entry to all insured institutions in the affairs of which he or she
wishes to participate.
C. Procedures
The proposed SOP indicated in the section regarding procedures that
section 19 imposes a duty upon the insured institution to make a
reasonable inquiry regarding an applicant's history, which consists of
taking steps appropriate under the circumstances, consistent with
applicable law, to avoid hiring or permitting participation in its
affairs by a person who has a conviction or program entry for a covered
offense. It stated that an institution might believe that undertaking a
minimal inquiry might not be necessary in certain circumstances,
however, the FDIC believes that at a minimum, each insured institution
should establish a screening process which provides the insured
institution with information concerning any conviction or program entry
pertaining to a job applicant. The
[[Page 66182]]
proposed SOP provided examples of what would constitute a reasonable
inquiry, including, the completion of a written employment application
which requires a listing of all convictions and program entries; (2)
fingerprinting and (3) periodic inquiries to determine whether a person
has a conviction or program entry. The proposed SOP indicated that the
foregoing were not requirements, and that the FDIC would look to the
circumstances of each situation to determine whether the inquiry is
reasonable.
The procedures set forth in the proposed SOP were that upon notice
of a conviction or program entry, an application seeking the FDIC's
consent prior to the person's participation must be filed. When an
application is required, forms and instructions should be obtained
from, and the application filed with, the appropriate FDIC Regional
Director.
The proposed SOP stated that the application must be filed by an
insured institution on behalf of a person, but contained an exception
to this requirement for a shareholder seeking to exercise voting rights
if the insured institution has refused to file an application on that
person's behalf. Where a person currently employed by an insured
institution is discovered to have a conviction or program entry, the
proposed SOP allowed that, upon request, the Regional Director could
grant a conditional approval pending the processing of the application.
Fourteen comments were received pertaining to whether the screening
process, including the idea of fingerprinting, was burdensome--nine
from depository institutions, one from a bank holding company, one from
a law firm and three from trade associations. The comments were
generally not favorable, or found the proposed SOP confusing about what
was being required. One commenter took exception to the FDIC imposing
any duty upon insured depository institutions for making a reasonable
inquiry into whether a person has a conviction or program entry based
upon the argument that section 19 imposes no duty to discover such
offenses, it only demands action once the presence of a conviction
becomes known. The FDIC believes that the commenter's approach does not
comport with the intent of the law which is designed as a preventive
measure to protect against risk to the safety and soundness of insured
institutions and their depositors.
(1) Fingerprinting
The issue of fingerprinting generated more discussion than any
other. It is apparent that fingerprinting as a recommended practice,
even though explicitly not required in the SOP, is not welcomed by the
banking community. The smaller banks, especially, appear to be opposed
to the practice. They maintain that because of the smaller communities
they serve, they are familiar with their applicants and view
fingerprinting as an unnecessary burden. Many commenters expressed
concern that a recommendation or guideline that fingerprinting is
advocated would be interpreted as an industry standard, and by field
examiners as mandatory.
Others feared that bankers would deem fingerprinting a requirement
and feared liability for any loss which could have been prevented by
fingerprinting. Others suggested that a written application listing
previous convictions or program entries would suffice, but that the
screening process must be coordinated with the standards in the
institution's fidelity bond to avoid any loss of insurance. One
commenter stated that the SOP should only contain minimum standards,
and that institutions should be encouraged to develop even stricter
standards. Others suggested restricting fingerprinting to high-risk
positions, or using bonding or other companies to perform such
screening. The remainder of the comments addressed the difficulty of
obtaining criminal background information and fingerprints, the delay
and cost inherent in fingerprinting, the burdensome impact of the
process would have upon small institutions, and the need to ensure that
requirement of criminal background checks was consistent with other
laws which protect against disclosure of criminal or arrest
information.
After considering the comments, the FDIC has decided not to address
fingerprinting in the final SOP. Instead, the FDIC will allow each
insured institution to determine what screening methods it will use,
and will look to the circumstances of each situation to determine
whether an inquiry was reasonable. The FDIC believes that at a minimum,
each institution should have a screening process to uncover information
regarding a job applicant's convictions and program entries, which
would include, for example, a written application listing such
convictions and program entries, although other alternatives may be
appropriate. The final SOP reflects this guidance.
(2) Periodic Inquiries
Seven commenters addressed the issue of periodic inquiries. The
majority of comments were not favorable, and indicated that using
periodic inquiry to determine whether current employees were subject to
recent convictions would be burdensome on institutions and that such an
inquiry was not mandated by section 19. Others stated that periodic
inquires on recent convictions were not useful because employees would
be afraid of losing their jobs. Others stated that there are regular
channels by which institutions learn about recent convictions or
program entries by their employees other than having routine inquires.
Alternatively it was suggested that periodic inquiries should be
optional or limited to high-risk positions, only required at the
beginning of employment or only conducted at lengthy intervals such as
every ten years.
Similar to the analysis regarding fingerprinting, after considering
the comments, the FDIC believes that whether periodic background checks
are used should be optional, and that the major responsibility should
be upon the individual to bring to the institution's attention any
change in ``conviction'' status for purposes of section 19.
(3) Who May Be an Applicant?
The proposed SOP requires that an application be filed by an
institution rather than an individual. This policy is based upon the
rationale that in determining whether to approve a section 19
application, the FDIC must assess whether the person's participation in
an insured institution constitutes a risk to the safety and soundness
of the insured institution or its depositors or impairs public
confidence in the institution. In making this determination, the FDIC
has traditionally considered the position the person will occupy at the
institution, the extent of the supervision of the person that the
institution will provide, the size and condition of the institution and
the fidelity bond coverage by the institution's bonding company. Where
an individual is filing an application without institution sponsorship,
the FDIC may not have the foregoing information available to it.
Furthermore, an application may be filed by an individual who has no
prospect of employment by an insured institution, and is merely seeking
agency certification for potential employment. On the other hand, the
FDIC is mindful that such a requirement may be unfair to an individual
in certain circumstances. Therefore, the notice accompanying the
proposed SOP sought comments whether the FDIC should change this
longstanding policy.
[[Page 66183]]
There were ten comments on this issue-seven from depository
institutions, one from a bank holding company and two from trade
associations. Only one commenter believed that individuals should be
permitted to file a section 19 application, although one indicated that
independent contractors, if covered by section 19, might be allowed to
file applications without bank sponsorship since the FDIC would be able
to assess from the application what services the independent contractor
provides for the financial institution.
The remaining comments were opposed to permitting an individual to
file a section 19 application without institution sponsorship. The
reasons generally were that insured institutions should maintain
control over the process because they are in the best position to have
available information to determine when section 19 applications should
be submitted on behalf of an individual based upon the person's
position and the risk to the institution. Further, the FDIC's resources
should be available to handle section 19 applications filed by
institutions on an expedited basis, and such handling should not be
delayed because the FDIC is reviewing applications by individuals who
may or may not have a legitimate interest in working for an insured
institution. Another concern expressed was that if an individual filed
an application without institution sponsorship and received approval
for a particular position, the individual could later be employed in
that position at another institution without the prior notice or
consent of the FDIC.
After considering the comments, the FDIC has decided to maintain
its requirement that an institution file a section 19 application on
behalf of an individual. However, the FDIC is aware that many
institutions will not file applications on behalf of a convicted
individual under any circumstance. For those with relatively minor
convictions this appears to be a harsh result, and the FDIC has
attempted to lessen this harsh effect by adopting the de minimis
exception discussed above. In addition, the FDIC is mindful that others
may not fall within the de minimis exception, yet the institution
filing requirement may result in a harsh result. Therefore, while the
final SOP retains the institution filing requirement, it provides that
an individual may seek a waiver of this requirement where substantial
good cause for granting a waiver is shown. For example, a waiver is
likely to be granted where the person requesting consent is a
shareholder seeking to exercise voting rights and the insured
institution has refused to file an application on his or her behalf.
The FDIC expects that waivers will be granted on an infrequent basis,
and only in truly meritorious cases.
(4) Conditional Approvals
The proposed SOP provided for a conditional approval by the
Regional Director upon request, pending the processing of an
application. Two comments received from depository institutions
strongly supported this approach. At the time the proposed SOP was
issued, the FDIC had not proposed a de minimis exception to filing. In
light of the fact that under this new approach, the number of
applications will decrease, the FDIC believes it will be able to act in
an expedited manner on an application where necessary. Therefore, there
is no provision for conditional approval in the final SOP.
D. Evaluation of Section 19 Applications
The proposed SOP stated that the essential criteria in assessing an
application are whether the person has demonstrated his or her fitness
to participate in the conduct of the affairs of an insured institution,
and whether the affiliation, ownership, control or participation by the
person in the conduct of the affairs of the insured institution may
constitute a threat to the safety and soundness of the insured
institution or the interests of its depositors or threaten to impair
public confidence in the insured institution. Factors listed as
relevant to this determination were the conviction or program entry and
the specific nature and circumstances of the covered offense; evidence
of rehabilitation including the person's reputation since the
conviction or program entry, the person's age at the time of conviction
or program entry, and the time which has elapsed since the conviction
or program entry; the position to be held or the level of participation
by the person at an insured institution; the amount of influence and
control the person will be able to exercise over the management or
affairs of an insured institution; the ability of management of the
insured institution to supervise and control the person's activities;
the degree of ownership the person will have of the insured
institution; the applicability of the insured institution's fidelity
bond coverage to the person; the opinion or position of the primary
Federal and/or state regulator; and any additional factors in the
specific case that appear relevant.
The proposed SOP indicated that the foregoing criteria will also be
applied by the FDIC to determine whether the interests of justice are
served in seeking an exception in the appropriate court when an
application is made to terminate the ten-year ban prior to its
expiration date. The proposal stated that approval orders will be
subject to the condition that the person shall be covered by a fidelity
bond to the same extent as others in similar positions, and that when
deemed appropriate, approval orders may also be subject to the
condition that the prior consent of the FDIC will be required for any
proposed significant changes in the person's duties and/or
responsibilities. Such proposed changes may, in the discretion of the
Regional Director, require a new application. In situations in which an
approval has been granted for a person to participate in the affairs of
a particular insured institution and that person subsequently seeks to
participate at another insured institution, approval does not
automatically follow. In such cases, another application must be
submitted. The proposed SOP also indicated in its introduction that
some applications can be approved without an extensive review because
the person will not be in a position to constitute any substantial risk
to the safety and soundness of the insured institution. Persons who
will occupy clerical, maintenance, service or purely administrative
positions, generally fall into this category. A more detailed analysis
will be performed in the case of persons who will be in a position to
influence or control the management or affairs of the insured
institution.
Only one comment was received, which requested that the FDIC define
what constitutes a substantial change in duties so as to require a new
application. The FDIC believes, however, that an institution should
itself be aware whether a person's duties have changed to the extent
that their influence and risk upon the institution would require a
section 19 application.
The final SOP incorporates all of the standards and factors set
forth in the proposed SOP. In addition, it addresses the policy
regarding a waiver by stating that in cases in which a waiver of the
institution filing requirement has been granted to an individual,
approval of the application will be conditioned upon that person
disclosing the presence of the conviction to all insured institutions
in the affairs of which he or she wishes to participate. The FDIC
believes this is essential to ensuring that institutions are aware of
the potential risks to safety and soundness posed by their employees
and participants, and are
[[Page 66184]]
able to fully apprise their fidelity insurers of such risks.
The Board of Directors of the FDIC has rescinded two earlier policy
statements regarding section 19--Consent to Service of Persons
Convicted of Offenses Involving Dishonesty or Breach of Trust as
Directors, Officers or Employees of Insured Banks (41 FR 42699 (Sept.
22, 1976)) and Applications Under Section 19 of the Federal Deposit
Insurance Act (March 31, 1980), and adopted the following Statement of
Policy for Section 19 of the FDI Act:
FDIC Statement of Policy for Section 19 of the FDI Act
Section 19 of the Federal Deposit Insurance Act (12 U.S.C. 1829)
prohibits, without the prior written consent of the Federal Deposit
Insurance Corporation (FDIC), a person convicted of any criminal
offense involving dishonesty or breach of trust or money laundering
(covered offenses), or who has agreed to enter into a pretrial
diversion or similar program in connection with a prosecution for such
offense, from becoming or continuing as an institution-affiliated
party, owning or controlling, directly or indirectly an insured
depository institution (insured institution), or otherwise
participating, directly or indirectly, in the conduct of the affairs of
an insured institution. In addition, the law forbids an insured
institution from permitting such a person to engage in any conduct or
to continue any relationship prohibited by section 19. It imposes a
ten-year ban against the FDIC's consent for persons convicted of
certain crimes enumerated in Title 18 of the United States Code, absent
a motion by the FDIC and court approval.
Section 19 imposes a duty upon the insured institution to make a
reasonable inquiry regarding an applicant's history, which consists of
taking steps appropriate under the circumstances, consistent with
applicable law, to avoid hiring or permitting participation in its
affairs by a person who has a conviction or program entry for a covered
offense. The FDIC believes that at a minimum, each insured institution
should establish a screening process which provides the insured
institution with information concerning any convictions or program
entry pertaining to a job applicant. This would include, for example,
the completion of a written employment application which requires a
listing of all convictions and program entries. The FDIC will look to
the circumstances of each situation to determine whether the inquiry is
reasonable. Upon notice of a conviction or program entry, an
application seeking the FDIC's consent prior to the person's
participation must be filed.
Section 19 applies, by operation of law, as a statutory bar to
participation absent the written consent of the FDIC. The purpose of an
application is to provide the applicant an opportunity to demonstrate
that, notwithstanding the bar, a person is fit to participate in the
conduct of the affairs of an insured institution without posing a risk
to its safety and soundness or impairing public confidence in that
institution. The burden is upon the applicant to establish that the
application warrants approval.
A. Scope of Section 19
Section 19 covers institution-affiliated parties, as defined by 12
U.S.C. 1813(u), and others who are participants in the conduct of the
affairs of an insured institution. Therefore, all employees of an
insured institution fall within the scope of section 19. In addition,
those deemed to be de facto employees as determined by the FDIC based
upon generally applicable standards of employment law, will also be
subject to section 19. Whether other persons who are not institution-
affiliated parties are covered depends upon their degree of influence
or control over the management or affairs of an insured institution.
For example, section 19 would not apply to persons who are merely
employees of an insured institution's holding company, but would apply
to its directors and officers to the extent that they have the power to
define and direct the policies of the insured institution. Similarly,
directors and officers of affiliates, subsidiaries or joint ventures of
an insured institution or its holding company will be covered if they
are in a position to influence or control the management or affairs of
the insured institution. Those who exercise major policymaking
functions of an insured institution would be deemed participants in the
affairs of that institution and covered by section 19. Typically, an
independent contractor does not have a relationship with the insured
institution other than the activity for which the insured institution
has contracted. Under 12 U.S.C. 1813(u), independent contractors are
institution-affiliated parties if they knowingly or recklessly
participate in violations, unsafe or unsound practices or breaches of
fiduciary duty which are likely to cause significant loss to, or a
significant adverse effect on, an insured institution. In terms of
participation, an independent contractor who influences or controls the
management or affairs of the insured institution, would be covered by
section 19. In addition, ``person'' for purposes of section 19 means an
individual, and does not include a corporation, firm or other business
entity.
Section 19 specifically prohibits a person subject to its coverage
from owning or controlling an insured institution. For purposes of
defining ``control'' and ``ownership'' under section 19, the FDIC has
adopted the definition of ``control set forth in the Change in Bank
Control Act (12 U.S.C. 1817(j)(8)(B)). A person will be deemed to
exercise ``control'' if that person has the power to vote 25 percent or
more of the voting shares of an insured institution (or ten percent of
the voting shares if no other person has more shares) or the ability to
direct the management or policies of the insured institution. Under the
same standards, person will be deemed to ``own'' an insured institution
if that person owns 25 percent or more of the insured institution's
voting stock, or ten percent of the voting shares if no other person
owns more. These standards would also apply to an individual acting in
concert with others so as to have such ownership or control. Absent the
FDIC's consent, persons subject to the prohibitions of section 19 will
be required to divest their ownership of shares above the foregoing
limits.
B. Standards for Determining Whether an Application Is Required
Except as indicated in paragraph (5), below, an application must be
filed where there is present a conviction by a court of competent
jurisdiction for a covered offense by any adult or minor treated as an
adult, or where such person has entered a pretrial diversion or similar
program regarding that offense.
(1) Convictions. There must be present a conviction of record.
Section 19 does not cover arrests, pending cases not brought to trial,
acquittals, or any conviction which has been reversed on appeal. A
conviction with regard to which an appeal is pending will require an
application until or unless reversed. A conviction for which a pardon
has been granted will require an application. A conviction which has
been completely expunged is not considered a conviction of record and
will not require an application.
(2) Pretrial Diversion or Similar Program. Program entry, whether
formal or informal, is characterized by a suspension or eventual
dismissal of charges or criminal prosecution upon agreement by the
accused to treatment, rehabilitation, restitution, or other noncriminal
or nonpunitive
[[Page 66185]]
alternatives. Whether a program constitutes a pretrial diversion is
determined by relevant federal, state or local law, and will be
considered by the FDIC on a case-by-case basis. Program entries prior
to November 29, 1990, are not covered by section 19.
(3) Dishonesty or Breach of Trust. The conviction or program entry
must be for a criminal offense involving dishonesty, breach of trust or
money laundering. ``Dishonesty'' means directly or indirectly to cheat
or defraud; to cheat or defraud for monetary gain or its equivalent; or
wrongfully to take property belonging to another in violation of any
criminal statute. Dishonesty includes acts involving want of integrity,
lack of probity, or a disposition to distort, cheat, or act deceitfully
or fraudulently, and may include crimes which federal, state or local
laws define as dishonest. ``Breach of trust'' means a wrongful act,
use, misappropriation or omission with respect to any property or fund
which has been committed to a person in a fiduciary or official
capacity, or the misuse of one's official or fiduciary position to
engage in a wrongful act, use, misappropriation or omission.
Whether a crime involves dishonesty or breach of trust will be
determined from the statutory elements of the crime itself. All
convictions for offenses concerning the illegal manufacture, sale,
distribution of or trafficking in controlled substances shall require
an application.
(4) Youthful Offender Adjudgments. An adjudgment by a court against
a person as a ``youthful offender'' under any youth offender law, or
any adjudgment as a ``juvenile delinquent'' by any court having
jurisdiction over minors as defined by state law does not require an
application. Such adjudications are not considered convictions for
criminal offenses.
(5) De minimis Offenses. Approval is automatically granted and an
application will not be required where the covered offense is
considered de minimis, because it meets all of the following criteria:
There is only one conviction or program entry of record
for a covered offense;
The offense was punishable by imprisonment for a term of
less than one year and/or a fine of less than $1000, and the individual
did not serve time in jail;
The conviction or program was entered at least five years
prior to the date an application would otherwise be required; and
The offense did not involve an insured depository
institution or insured credit union.
Any person who meets the foregoing criteria shall be covered by a
fidelity bond to the same extent as others in similar positions, and
shall disclose the presence of the conviction or program entry to all
insured institutions in the affairs of which he or she intends to
participate.
C. Procedures
When an application is required, forms and instructions should be
obtained from, and the application filed with, the appropriate FDIC
Regional Director. The application must be filed by an insured
institution on behalf of a person unless the FDIC grants a waiver of
that requirement. Such waivers will be considered on a case-by-case
basis where substantial good cause for granting a waiver is shown.
D. Evaluation of Section 19 Applications
The essential criteria in assessing an application are whether the
person has demonstrated his or her fitness to participate in the
conduct of the affairs of an insured institution, and whether the
affiliation, ownership, control or participation by the person in the
conduct of the affairs of the insured institution may constitute a
threat to the safety and soundness of the insured institution or the
interests of its depositors or threaten to impair public confidence in
the insured institution. In determining the degree of risk, the FDIC
will consider:
(1) The conviction or program entry and the specific nature and
circumstances of the covered offense;
(2) Evidence of rehabilitation including the person's reputation
since the conviction or program entry, the person's age at the time of
conviction or program entry, and the time which has elapsed since the
conviction or program entry;
(3) The position to be held or the level of participation by the
person at an insured institution;
(4) The amount of influence and control the person will be able to
exercise over the management or affairs of an insured institution;
(5) The ability of management of the insured institution to
supervise and control the person's activities;
(6) The degree of ownership the person will have of the insured
institution
(7) The applicability of the insured institution's fidelity bond
coverage to the person;
(8) The opinion or position of the primary Federal and/or state
regulator; and (9) Any additional factors in the specific case that
appear relevant.
The foregoing criteria will also be applied by the FDIC to
determine whether the interests of justice are served in seeking an
exception in the appropriate court when an application is made to
terminate the ten-year ban prior to its expiration date.
Some applications can be approved without an extensive review
because the person will not be in a position to constitute any
substantial risk to the safety and soundness of the insured
institution. Persons who will occupy clerical, maintenance, service or
purely administrative positions, generally fall into this category. A
more detailed analysis will be performed in the case of persons who
will be in a position to influence or control the management or affairs
of the insured institution. Approval orders will be subject to the
condition that the person shall be covered by a fidelity bond to the
same extent as others in similar positions. In cases in which a waiver
of the institution filing requirement has been granted to an
individual, approval of the application will be conditioned upon that
person disclosing the presence of the conviction to all insured
institutions in the affairs of which he or she wishes to participate.
When deemed appropriate, approval orders may also be subject to the
condition that the prior consent of the FDIC will be required for any
proposed significant changes in the person's duties and/or
responsibilities. Such proposed changes may, in the discretion of the
Regional Director, require a new application. In situations in which an
approval has been granted for a person to participate in the affairs of
a particular insured institution and subsequently seeks to participate
at another insured institution, approval does not automatically follow.
In such cases, another application must be submitted.
By order of the Board of Directors.
Dated at Washington, DC, this 17th day of November, 1998.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-31915 Filed 11-30-98; 8:45 am]
BILLING CODE 6714-01-P
