Guidance Regarding Restrictions on Institutions in Troubled Condition

FRB: Supervisory Letter SR 03-6 on guidance regarding restrictions on institutions in troubled condition -- April 22, 2003

BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 03-6

April 22, 2003

TO THE OFFICER IN CHARGE OF

SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION

STAFF AT EACH FEDERAL RESERVE BANK AND TO DOMESTIC

BANKING ORGANIZATIONS SUPERVISED BY THE FEDERAL RESERVE

SUBJECT:  Guidance Regarding

Restrictions on Institutions in Troubled Condition

Recently, it has come to the attention of the staff

of the Division of Banking Supervision and Regulation

that some state member banks and bank holding companies

that are in less than satisfactory condition may

not be aware of certain statutory restrictions on

severance payments made to their institution-affiliated

parties, which are referred to as "golden parachute"

payments, and requirements regarding the appointment

of new directors or senior executive officers that

may apply to such institutions.

1

The purpose of this SR letter is to remind Reserve Bank

examination and applications staff about these restrictions

and to ensure that banking organizations subject

to the restrictions are fully aware of them and have

monitoring programs in place to ensure compliance

with the statutory requirements regarding certain

payments and appointments

ly to such institutions.

1

The purpose of this SR letter is to remind Reserve Bank

examination and applications staff about these restrictions

and to ensure that banking organizations subject

to the restrictions are fully aware of them and have

monitoring programs in place to ensure compliance

with the statutory requirements regarding certain

payments and appointments.

Troubled Condition

For Federal Reserve supervisory purposes, the restrictions

described in this SR letter apply only to state

member banks and bank holding companies that are

in "troubled condition." Section 225.71

of Regulation Y defines a "troubled condition"

for a state member bank or bank holding company as

an institution that (i) has a composite rating

of 4 or 5; (ii) is subject to a cease

and desist order or formal written agreement that

requires action to improve the institution's financial

condition, unless otherwise informed in writing by

the Federal Reserve; or (iii) is informed

in writing by the Federal Reserve that it is

in a troubled condition.

Except in some limited circumstances, cease and desist

orders or written agreements issued by the Federal Reserve

are aimed at improving the financial condition of

the banking organization subject to the action. Therefore,

most state member banks and bank holding companies

subject to a formal enforcement action need to comply

with the restrictions placed on troubled institutions

by the federal laws and regulations that are described

below.

2

Golden Parachute Payments

"Golden parachute" payment restrictions

were enacted as part of the Crime Control Act

of 1990.

3

The law added section 18(k) to the Federal Deposit

Insurance Act (12 U.S.C. 1828(k))

and authorized the FDIC to issue implementing regulations

rictions placed on troubled institutions

by the federal laws and regulations that are described

below.

2

Golden Parachute Payments

"Golden parachute" payment restrictions

were enacted as part of the Crime Control Act

of 1990.

3

The law added section 18(k) to the Federal Deposit

Insurance Act (12 U.S.C. 1828(k))

and authorized the FDIC to issue implementing regulations.

The FDIC's golden parachute regulations may apply

to an insured depository institution or its holding

company if the institution or company is in a "troubled

condition" as defined in Regulation Y.

The purposes of the law and regulations include safeguarding

the assets of financial institutions and limiting

rewards to institution-affiliated parties who may

have contributed to the institution's condition.

In general, the FDIC's regulations prohibit insured

depository institutions and their holding companies

from making "golden parachute" payments

except in certain circumstances.

4

Under the FDIC's regulations, a "golden parachute"

payment means any payment in the nature of compensation

(or agreement to make such a payment) for the benefit

of any current or former institution-affiliated party

of an insured depository institution or its holding

company that meets three criteria. First, the payment

or agreement must be contingent upon the termination

of the institution-affiliated party's employment

or association. Second, the payment or agreement

is received on or after, or made in contemplation

of, among other things, a determination that the

institution or holding company is in a "troubled

condition" under the regulations of the applicable

banking agency

or agreement must be contingent upon the termination

of the institution-affiliated party's employment

or association. Second, the payment or agreement

is received on or after, or made in contemplation

of, among other things, a determination that the

institution or holding company is in a "troubled

condition" under the regulations of the applicable

banking agency. Third, the payment or agreement must

be payable to an institution-affiliated party who

is terminated when the institution or holding company

meets certain specific conditions, including being

subject to a determination that it is in a troubled

condition.

The definition of a "golden parachute"

payment also covers a payment made by a bank holding

company that is not in a troubled condition to an

institution-affiliated party of an insured depository

institution subsidiary that is in a troubled condition,

if the other criteria in the definition are met.

This circumstance may arise when a bank holding company,

as part of an agreement to acquire a troubled bank

or savings association, proposes to make payments

to the troubled institution's institution-affiliated

parties that are conditioned on their termination

of employment.

5

A state member bank or bank holding company may make

or enter into an agreement to make a golden parachute

payment only:  (i) if the Federal Reserve,

with the written concurrence of the FDIC, determines

that the payment or agreement is permissible; (ii) as

part of an agreement to hire competent management

in certain conditions, with the consent of the Federal Reserve

and the FDIC as to the amount and terms of the proposed

payment; or (iii) pursuant to an agreement to

provide a reasonable severance not to exceed twelve

months' salary in the event of an unassisted change

in control of the depository institution, with the

consent of the Federal Reserve

ent management

in certain conditions, with the consent of the Federal Reserve

and the FDIC as to the amount and terms of the proposed

payment; or (iii) pursuant to an agreement to

provide a reasonable severance not to exceed twelve

months' salary in the event of an unassisted change

in control of the depository institution, with the

consent of the Federal Reserve. In determining

permissibility of the payment, the Federal Reserve

may consider a variety of factors, including the

individual's degree of managerial responsibilities,

length of service, the reasonableness of the payment,

and any other factors or circumstances that would

indicate that the proposed payment would be contrary

to the purposes of the statute or regulations.

A state member bank or bank holding company requesting

approval to make a golden parachute payment or enter

into an agreement to make such a payment should submit

its request simultaneously to the appropriate FDIC

regional office and Reserve Bank. The request

must detail the proposed payments and demonstrate

that the state member bank or bank holding company

does not possess and is not aware of any evidence

that there is reasonable basis to believe, at the

time that the payment is proposed to be made, that

the institution-affiliated party receiving such a

payment has committed any fraud, breach of fiduciary

duty, insider abuse, or materially violated any applicable

banking law or regulation that had or is likely to

have a material adverse affect on the bank or company,

that the individual is substantially responsible

for the institution's insolvency or troubled condition,

and has violated specified banking or criminal laws

ent has committed any fraud, breach of fiduciary

duty, insider abuse, or materially violated any applicable

banking law or regulation that had or is likely to

have a material adverse affect on the bank or company,

that the individual is substantially responsible

for the institution's insolvency or troubled condition,

and has violated specified banking or criminal laws.

In the event that a state member bank or bank holding

company makes or enters into an agreement to make

a golden parachute payment without prior regulatory

approval when required, appropriate follow-up supervisory

action should be taken. This could include an enforcement

action requiring the offending institution-affiliated

party to reimburse the institution for the amount

of the prohibited payment. Applications involving

state member banks or bank holding companies with

golden parachute-related issues identified in the

supervisory process should be carefully reviewed

by appropriate Reserve Bank and Board applications

and supervisory staff for compliance with the law

and the FDIC's regulations.

Appointment of Directors and Senior Executive

Officers

Under section 32 of the Federal Deposit Insurance

Act (12 U.S.C. 1831i) and Subpart H

of Regulation Y (12 C.F.R. 225.71

et seq.

),

any state member bank or bank holding company that

is in a troubled condition or does not meet minimum

capital standards must provide 30 days' written

notice to the Board of Governors prior to appointing

any new director or senior executive officer.

6

This requirement also applies to any change in the

responsibilities of any current senior executive

officer who is proposing to assume a different senior

officer position. Subpart H of Regulation Y

details the procedures for filing and the content

of the notice

en

notice to the Board of Governors prior to appointing

any new director or senior executive officer.

6

This requirement also applies to any change in the

responsibilities of any current senior executive

officer who is proposing to assume a different senior

officer position. Subpart H of Regulation Y

details the procedures for filing and the content

of the notice. The Board may disapprove a notice

if it finds that the competence, experience, character,

or integrity of the proposed individual indicates

that such service would not be in the best interest

of the institution's depositors or the public. A

disapproved individual or the institution that filed

the notice may appeal the Federal Reserve's

notice of disapproval under the procedures detailed

in Regulation Y. The individual may not serve

as a director or senior executive officer while the

appeal is pending.

In the event that a state member bank or bank holding

company that is in a troubled condition appoints

a director or senior officer without the required

30 days' prior written notice, appropriate follow-up

supervisory action should be taken.

Reserve Banks are asked to distribute this SR letter

to their examination and applications staff, and

to state member banks and bank holding companies

in their Districts to remind the institutions about

the restrictions imposed by federal law and regulations

on "troubled institutions" regarding severance

payments and new director and senior executive officer

appointments.

Should you have any questions regarding this matter,

please contact Nancy Oakes, Counsel, Division

of Banking Supervisions and Regulation, at (202) 452-2743,

or Richard M. Ashton, Associate General

Counsel, Legal Division, at (202) 452-3750.

Herbert A

on "troubled institutions" regarding severance

payments and new director and senior executive officer

appointments.

Should you have any questions regarding this matter,

please contact Nancy Oakes, Counsel, Division

of Banking Supervisions and Regulation, at (202) 452-2743,

or Richard M. Ashton, Associate General

Counsel, Legal Division, at (202) 452-3750.

Herbert A. Biern

Senior Associate Director

Cross Reference:

SR

letter 90-38

Notes:

The term "institution-affiliated

party" includes any officer, director,

employee, and controlling stockholder, as well

as others who participate in the affairs of

a financial institution. The term is defined

in the law at 12 U.S.C. 1813(u).

Return to text

Board staff, in consultation

with Reserve Bank staff, will determine when

a banking organization subject to a cease and

desist order or written agreement will be advised

that is not considered to be in a "troubled

condition" due to the limited purpose

or scope of the enforcement action.

Return to text

SR letter 90-38,

dated December 5, 1990, generally

describes the provisions of the Crime Control Act

of 1990.

Return to text

The full scope of

the FDIC's golden parachute regulations is

set out in 12 C.F.R. Part 359.

Return to text

The FDIC's regulations

exclude from the definition of a golden parachute

payment several types of payments, such as

payments made pursuant to a qualified pension

or retirement plan, a benefit plan or bona fide

deferred compensation plan (which are further

defined in the FDIC's regulations), or a severance

plan that provides benefits to all eligible

employees, does not exceed the base compensation

paid over the preceding twelve months, and

otherwise meets the regulatory definition of

or retirement plan, a benefit plan or bona fide

deferred compensation plan (which are further

defined in the FDIC's regulations), or a severance

plan that provides benefits to all eligible

employees, does not exceed the base compensation

paid over the preceding twelve months, and

otherwise meets the regulatory definition of

nondiscriminatory and other conditions in the

FDIC's regulations.

Return to text

The Board or Reserve

Bank may permit an individual to serve as a

director or senior executive officer before

a notice is provided under extraordinary circumstances;

however, this does not affect the Federal Reserve's

authority to disapprove a notice within 30 days

of its filing.

Return to text

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Last update: April 25, 2016