Contracts Adverse to Safety and Soundness of Insured Depository Institutions

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

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, (202) 898-6918; Michael D. Jenkins,

Examination Specialist, Division of Supervision, (202) 898-6896; or

Gwen E. Factor, Counsel, Legal Division, (202) 898-8522, 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

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

ndness. 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''

latory

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

.

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