95-7522. Contracts Adverse to Safety and Soundness of Insured Depository Institutions

[Federal Register Volume 60, Number 59 (Tuesday, March 28, 1995)]
[Proposed Rules]
[Pages 15882-15883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7522]



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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 334

RIN 3064-AB06


Contracts Adverse to Safety and Soundness of Insured Depository 
Institutions

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Proposed rule; withdrawal.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is 
withdrawing its proposed rule which would have implemented the 
statutory prohibition on contracts that adversely affect the safety or 
soundness of insured depository institutions. The statutory provision 
remains in place and unchanged. The FDIC has decided to withdraw the 
proposed rule because the existence of adverse contracts involving 
insured institutions has decreased considerably since the proposed rule 
was issued for public comment on April 1, 1991, because of the 
overwhelmingly negative comments received from the industry to the 
proposal, and because of an FDIC policy statement that recommends the 
withdrawal of proposed rules that have not been acted upon by the FDIC 
Board of Directors within nine months of the date of proposal. Many of 
the negative comments received in response to the proposal expressed 
the view that such a regulation would create unnecessary regulatory 
burden and that the Federal banking agencies already possess the 
necessary supervisory authority to deal with adverse contracts. Since 
the type of activity that the proposed rule was intended to eliminate 
(i.e., abuses involving contracts made by or on behalf of an insured 
institution that seriously jeopardize or misrepresent its safety and 
soundness) has been substantially reduced through greater industry 
awareness and use of alternative supervisory actions by the Federal 
banking agencies, there appears to be no need to promulgate such a 
regulation at this time. However, the FDIC may decide at a later date 
to publish a new proposal if it determines that the existence of 
adverse contracts has increased or that such action is otherwise 
necessary or appropriate.

DATES: The withdrawal of proposed Part 334 is made on March 28, 1995.

FOR FURTHER INFORMATION CONTACT: Robert F. Miailovich, Associate 
Director, Division of Supervision, [phone]; Michael D. Jenkins, 
Examination Specialist, Division of Supervision, [phone]; or 
Gwen E. Factor, Counsel, Legal Division, [phone], Federal 
Deposit Insurance Corporation, 550 17th Street NW., Washington, D.C. 
20429.

SUPPLEMENTARY INFORMATION:

Background

    Section 225 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 added new section 30 to the Federal Deposit 
[[Page 15883]] Insurance Act (Act), 12 U.S.C. 1831g, which prohibits 
any insured depository institution from entering into a written or oral 
contract with any person to provide goods, products or services to or 
for the benefit of the institution if the performance of such contract 
would adversely affect its safety or soundness. Section 30(b) 
authorizes the FDIC to prescribe such regulations as may be necessary 
to carry out the purposes of section 30. In accordance with this 
authority, the FDIC Board of Directors issued for public comment a 
proposal to add new Part 334 to the FDIC's rules and regulations (which 
was published in the Federal Register on April 1, 1991 (56 FR 13291)) 
to address adverse contracts.
    The proposed rule would have implemented section 30 of the Act by 
prohibiting any insured depository institution from entering into any 
contract determined to be adverse and would have treated all adverse 
contracts uniformly without distinguishing between contracts with 
affiliates and those with non-affiliates. The proposed rule would not 
have defined with specificity the types of contracts that would be 
considered adverse. Instead, the proposal provided examples of terms 
that could indicate an adverse arrangement and identified prohibited 
actions by a discussion of previously encountered abuses.
    Under the proposed rule, each contract would have been evaluated 
separately on the basis of its own terms and by comparison with the 
terms of similar contracts entered into by the institution and other 
institutions. The burden of establishing the propriety of a contract 
with respect to which the appropriate Federal banking agency has made 
an initial determination of adverse effect on the institution's safety 
or soundness would have been on the institution and its contractor. As 
discussed in the preamble, the ``preponderance of evidence'' standard 
normally would have applied, but where there was evidence of bad faith, 
intentional wrong-doing or fraud, the propriety and legality of the 
contract would have been determined by clear and convincing evidence. 
The proposed rule also would have made clear that enforcement actions 
may be taken directly against any contractor, as an ``institution-
affiliated party''.
    The proposed rule also requested specific comment on how to prevent 
abuses involving contracts with holding companies and other affiliates. 
Although an approach for dealing with affiliate contracts was discussed 
in the preamble, no rule was proposed. It was suggested that the FDIC 
might establish a rebuttable regulatory presumption that certain types 
of contracts between an insured institution and its affiliates are 
adverse. However, it was specifically noted that such a rebuttable 
presumption would not prohibit all affiliate contracts. Instead, only 
certain specified types of contracts would be covered and contracts 
with other insured institutions or with subsidiaries of insured 
institutions would be excluded from being presumed adverse.

Discussion

Summary of Comments Received

    The FDIC received 206 comments on the proposed rule. Almost all of 
the comments received opposed the proposed rule or suggested major 
changes, while many commenters requested that the FDIC withdraw the 
proposed rule. Many commenters expressed the view that a regulation 
dealing with adverse contracts would create an unnecessary regulatory 
burden and that the Federal banking agencies already possess the 
necessary supervisory authority to deal with such contracts. Many of 
the objections to the proposal focused on the possibility of treating 
contracts with affiliates differently from those with non-affiliates 
and were virtually unanimous in their opposition to developing an 
additional rule dealing with affiliate contracts. Other objections to 
the proposed rule focused on: (1) Inadequacies in the definition of 
``contract''; (2) the requirement that an insured institution must 
rebut a prima facie case that a particular contract is adverse with 
clear and convincing evidence; and (3) including independent 
contractors as ``institution-affiliated parties'' who could be joined 
to FDIC cease-and-desist actions against insured institutions and/or 
named as respondents in civil money penalty and prohibition actions.

Policy Statement

    The FDIC's policy statement on Development and Review of FDIC Rules 
and Regulations (44 FR 31007, May 30, 1979) calls for withdrawal of any 
proposed regulation with respect to which final action by the FDIC 
Board of Directors has not been taken within nine months from the date 
of proposal. The FDIC believes that withdrawal of the proposed rule is 
appropriate because no action has been taken with respect to the 
proposal for over nine months.

Effect of Withdrawal of Proposed Rule

    Section 30 of the Act authorizes (but does not require) the FDIC to 
promulgate such regulations as may be necessary to administer and carry 
out the purposes of, and prevent evasions of, the statutory 
prohibition. The statute is enforceable by its own terms by the FDIC 
and the other Federal banking agencies in the absence of an 
implementing regulation. The FDIC has decided to withdraw the proposed 
rule because of the significant decrease in the type of activity that 
the proposed rule was intended to eliminate (i.e., abuses involving 
contracts made by or on behalf of an insured institution that seriously 
jeopardize or misrepresent its safety and soundness), the 
overwhelmingly negative comments received on the proposed rule, and an 
FDIC policy statement that recommends the withdrawal of proposed rules 
that have not been acted upon by the FDIC Board of Directors within 
nine months of the date of proposal. Moreover, the FDIC believes that 
the statute can be administered without regulation. The FDIC may 
decide, however, at a later date to publish a new proposal if it 
determines that the existence of adverse contracts has increased or 
that such action is otherwise necessary or appropriate. If the FDIC 
wishes at a later date to promulgate a regulation that deals with or 
addresses adverse contracts, it will begin the rulemaking process anew.
    In consideration of the foregoing, the FDIC hereby withdraws 
proposed new Part 334 of Title 12 of the Code of Federal Regulations.

    By Order of the Board of Directors.

    Dated at Washington, DC, this 21st day of March 1995.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 95-7522 Filed 3-27-95; 8:45 am]
BILLING CODE 6714-01-P