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Board Report: 2014-SR-B-011 July 25, 2014

Enforcement Actions and Professional Liability Claims Against Institution-Affiliated Parties and Individuals Associated with Failed Institutions

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Appendix 4: Regulatorsí Responses

FDIC 
Federal Deposit Insurance Corporation
Office of the Chairman


550 17th Street NW, Washington, D.C. 20429-9990

June 27, 2014

Stephen M. Beard
Deputy Inspector General for Audits and Evaluations
Office of Inspector General for the Federal Deposit Insurance Corporation
3501 Fairfax Drive
Arlington, VA 22226

Dear Mr. Beard:

Thank you for the opportunity to review and comment on the draft report by the Offices of Inspector General for the Federal Deposit Insurance Corporation (the "FDIC"), Board of Governors of the Federal Reserve System and Consumer Financial Protection Bureau, and Department of the Treasury (the "OIGs"), which is entitled Enforcement Actions and Professional Liability Claims Against Institution-Affiliated Parties and Individuals Associated with Failed Institutions, Assignment No. 2013-023 (the "Report"). The objective of the Report is to evaluate (1) the federal banking regulators' efforts to investigate, pursue, and impose enforcement actions against institution-affiliated parties ("IAPs") and (2) the FDIC's efforts to pursue professional liability claims against individuals and entities whose actions harmed institutions that failed.

The Report makes seven recommendations intended to strengthen the federal banking agencies' enforcement programs and the FDIC's professional liability program. The FDIC concurs with each of the recommendations directed to it. Below are the specific actions that the FDIC will undertake to address each recommendation. I appreciate your review and recommendations.

OIGs Audit Recommendation 1: Evaluate existing authorities, legal precedents, and supervisory approaches and establish and communicate, as appropriate, methodologies in which examination results and documentation can support the pursuit of removal/prohibition orders based on willful or continuing disregard/or safety or soundness of an institution. Such methodologies may include: a. providing guidance to examiners on how to document and develop evidence sufficient to meet the willful or continuing disregard criteria, and/or b. ensuring adequate internal coordination among legal and supervision divisions, as necessary, about what evidence is needed to successfully bring such orders.

FDIC Response: The FDIC concurs with this recommendation.

Staff has already drafted comprehensive guidance to describe examples of misconduct involving willful or continuing disregard, which may warrant investigation or potential enforcement action. This guidance is nearly ready for dissemination and training is being planned for senior examiners and regional office case managers on this matter.

In addition, the FDIC has recently brought removal/prohibition actions based on the willful or continuing disregard of former IAPs of two failed banks, and continues to consider other such actions.

OIGs Audit Recommendation 2: Research the use of personal cease and desist orders as an enforcement tool to address safety and soundness issues that do not meet the criteria for a removal/prohibition order.

FDIC Response: The FDIC concurs with this recommendation.

Staff is evaluating the use of personal cease-and-desist ("PC&D") orders to ensure that they are appropriately considered as part of the FDIC's enforcement program. Staff has also incorporated the option of issuing PC&D orders into the ongoing reviews of failed insured depository institutions.

OIGs Audit Recommendation 3: Establish written guidance describing under what circumstances to issue formal letters pursuant to section 19 of the FDI Act and post these letters to its public Web site.

FDIC Response: The FDIC concurs with this recommendation.

Staff has begun preparing written guidance describing the criteria for issuing formal letters under 12 U.S.C. § 1829. As part of this process, staff is coordinating with the Office of the Comptroller of the Currency (the "OCC") and the Federal Reserve Board (the "FRB") about their criteria for issuing formal letters. Staff has also begun to discuss how to implement the guidance and post formal letters on the FDIC's public website. The FDIC expects to create a repository for formal letters on its public Enforcement Decision and Orders website, which is located at https://www5.fdic.gov/EDO/index.html.

OIGs Audit Recommendation 4: Consider the need to (1) increase their level of written EA coordination to meet the requirements of Federal Register policy statement 62 Fed. Reg. 7782, or (2) revise the policy statement to reflect the Regulators' current level of coordination.

FDIC Response: The FDIC will work with the other federal banking regulators to either revise or rescind Federal Register policy statement 62 Fed. Reg. 7782 (1997), which is entitled Interagency Coordination of Formal Corrective Action by the Federal Bank Regulatory Agencies.

Communication among the Federal Banking Agencies has evolved since the 1997 policy statement was written. Since the 1990s, the FDIC has posted all its enforcement actions on its public Enforcement Decision and Orders website, which includes all enforcement actions that the FDIC has issued since the 1990s. Further, on at least a monthly basis, staff has been coordinating with the OCC and FRB regarding enforcement investigations and actions against former IAPs of failed insured depository institutions. The FDIC will work with the OCC and FRB to determine whether the policy statement should be revised or rescinded in light of intervening developments.

OIGs Audit Recommendation 5: Perform additional research pertaining to ways to compensate for lost revenues as a result of regulatory and other insurance policy exclusions.

FDIC Response: The FDIC concurs with this recommendation.

Both during the prior failing institution crisis (1982-1994) and the more recent crisis (beginning in 2008), the FDIC has performed research and analyzed options to identify ways to compensate for lost recoveries due to insurance policy provisions that exclude coverage for FDIC liability claims. Staff continues to do so. Accordingly, the FDIC fully supports this recommendation. The FDIC has created an interdivisional working group to consider options to address this issue.

OIGs Audit Recommendation 6: Advise their regulated institutions about insurance policy exclusions (OCC and FRB only).

FDIC Response: This recommendation is only directed to the OCC and FRB.

In October 2013, the FDIC issued Financial Institution Letter, FIL-47-2013, entitled Director and Officer Liability Insurance Policies, Exclusions, and Indemnification for Civil Money Penalties. The FIL discusses the importance of reviewing and understanding the risks associated with coverage exclusions pertaining to director-and-officer ("D&O") liability insurance policies. The letter recommends that all directors and officers fully understand the protections and limitations provided by their D&O liability policies. The FDIC supports the recommendation that the OCC and FRB similarly advise their regulated institutions about insurance policy exclusions and other policy provisions that may reduce coverage for certain claims.

OIGs Audit Recommendation 7: Track recoveries and expenses associated with professional liability claims by institution, and periodically report this information to the FDIC Board of Directors and other FDIC executives.

FDIC Response: The FDIC concurs with this recommendation.

The FDIC's Professional Liability Unit currently reports recoveries and expenses on an aggregate basis to the FDIC Board of Directors. Historically, this information has not been reported by institution because, although investigations are conducted in connection with every failed institution, many do not result in the assertion of claims and thus do not have any recoveries. For these institutions, the only expenses to report are the "sunk" costs associated with the professional liability investigations. With respect to those failed institutions for which claims are asserted, the FDIC Board of Directors or the appropriate FDIC delegated authorities are advised of recoveries and expenses at various points, including when staff seeks authority to file lawsuits, settle claims, or make expenditures. On a going forward basis, staff will take the recommended additional step to report on recoveries and expenses by institution on an annual basis for those failed institutions in which all claims areas were closed or fully resolved during the reporting period.

In sum, thank you again for the opportunity to review and comment on the Report. I appreciate your team's professionalism, regular communication, and analysis. Your findings, observations, and recommendations have provided the FDIC with constructive suggestions for enhancing its enforcement and professional liability programs.

Sincerely
/signed/

Martin J. Gruenberg
Chairman

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Board of Governors of the Federal Reserve
System
Scott G. Alvarez
General Counsel
Washington, D.C. 20551

 

July 1, 2014

Mark Bialek, Inspector General
Board of Governors of the Federal Reserve System
Washington, D.C. 20551

Dear Mr. Bialek:

Thank you for the opportunity to comment on your draft report about enforcement actions and professional liability claims against institution-affiliated parties ("IAPs") associated with failed institutions. As the report recognizes, the Board uses the full range of enforcement tools available to pursue actions against IAPs of failed institutions for their role in violations of law and unsafe and unsound practices committed by the firm. In taking these actions, we work cooperatively with other agencies in the U.S. Government and relevant state governments in investigating and punishing IAPs who engage in misconduct.

The draft report contains two recommendations relating to enforcement actions against IAPs. The first recommendation is that the Board and other Federal banking agencies consider increasing their written interagency coordination on enforcement actions or revise a 1997 interagency policy statement to reflect the current level of coordination.1 We plan to review the interagency policy statement, in coordination with the other Federal banking agencies, and consider ways to ensure an appropriate and effective level of communication between the Federal banking agencies as the report recommends.

The second recommendation is that the Board establish and communicate to Federal Reserve supervision staff, as appropriate, methodologies for developing and documenting examination results that support the pursuit of removal and prohibition orders against IAPs where examiners detect willful or continuing disregard for safety and soundness. Legal training is made available to supervision staff on enforcement matters, including the relevant standards for prohibition and removal actions. As a matter of practice, supervisory and legal staff work together in developing specific actions against individuals. We will consider revisions to our training program that may improve coordination among supervisory staff and legal staff about situations and evidence that support enforcement actions.

A third recommendation relates to the report's finding with regard to the FDIC's efforts to pursue professional liability claims against individuals and entities whose actions harmed institutions that ultimately failed. The report recommends that the Federal Reserve and the OCC provide guidance to their regulated institutions, similar to an advisory statement sent by the FDIC to its institutions in 2013, about the level of, and exclusions to, director and officer insurance liability policies for board members and executive officers.2 While the Federal Reserve has issued supervisory guidance urging the institutions it supervises to review their bylaws and any outstanding indemnification agreements, as well as insurance policies to ensure that they conform with the requirements of federal law and regulations, we will review this policy to ensure it is current and appropriately circulated to institutions supervised by the Federal Reserve.3

Thank you, again, for the opportunity to provide comments to this draft report.

Sincerely,
/signed/

Scott Alvarez

  • 1. 62 Fed. Reg. 7782 (Feb. 20, 1997). Return to text
  • 2. Director and Officer Liability Insurance Policies, Exclusions, and Indemnification for Civil Money Penalties, FDIC FIL-47-2013 (October 10, 2013). Return to text
  • 3. Guidance Regarding Indemnification Agreements and Payments, SR 02-17 (July 8, 2002). Return to text

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Office of the Comptroller of the Currency
Washington, DC 20219

July 16, 2014

Susan Barron
Audit Director
Department of the Treasury
Office of Inspector General
Washington, DC 20220

Subject: Response to Draft Report

Dear Ms. Barron:

We have reviewed the Federal Deposit Insurance Corporation's (FDIC) draft joint report titled "Enforcement Actions and Professional Liability Claims Against Institution-Affiliated Parties and Individuals Associated with Failed Institutions." The audit objective was to: 1) describe the regulators' processes for investigating and pursuing enforcement actions (EAs) against institution-affiliated parties (IAPs) associated with failed institutions; 2) describe the FDIC's process for investigating and pursuing Professional Liability Claims (PLCs) against individuals and entities associated with failed institutions and its coordination with the Board of Governors of the Federal Reserve System (FRB) and OCC; 3) determine the results of the regulators' efforts in investigating and pursuing EAs against IAPs and the FDIC's efforts in pursuing PLCs; and 4) assess key factors that may impact the pursuit of EAs and PLCs.

You found that regulators can use EAs against IAPs to remove and prohibit them from participating in the affairs of any insured depository institution for life. Accordingly, the statutory criteria for sustaining a removal/prohibition order are rigorous and the regulators must meet the requisite legal standard for three separate prongs of the statute: misconduct, effect of the misconduct, and culpability for the misconduct. In addition, the regulators each have similar, formal processes to investigate and impose EAs on IAPs whose actions harmed institutions. These processes generally include an investigative period (which can include a formal investigation), agency review, an opportunity for the IAP to consent to the action, and issuance of a Notice of Charges followed by an administrative hearing and an opportunity to appeal to a federal court of appeals if the IAP does not consent to the action.

You made three recommendations to the OCC.

First, you recommend the OCC establish, and communicate, as appropriate, methodologies in which examination results and documentation can support the pursuit of removal/prohibition orders based on willful or continuing disregard for the safety or soundness of an institution.

The OCC will complete a review of existing authorities and legal precedents related to the willful or continuing disregard for the safety or soundness standard by June 30, 2015. The OCC will then consider, as appropriate, developing additional guidance for examiners on how to document and support actions based on that standard.

Second, you recommend the OCC consider the need to (1) increase their level of written EA coordination to meet the requirements of Federal Register policy statement 62 Fed. Reg. 7782, or (2) revise the policy statement to reflect the regulators' current level of coordination.

The OCC will coordinate with representatives from the FDIC and FRB by March 31, 2015, to determine whether to increase the level of coordination and communication consistent with the policy statement or to revise the policy statement as appropriate.

Finally, you recommend the OCC should advise its regulated institutions about insurance policy exclusions.

We plan to address the insurance policy exclusion issues in updates to the OCC's The Director's Book and a new section of the Comptroller's Handbook titled "Corporate and Risk Governance." December 31, 2015, is the scheduled completion date for both issuances.

If you need additional information, please contact me or Jennifer Kelly, Senior Deputy Comptroller for Midsize and Community Bank Supervision, at 202-649-5420.

Sincerely,
/signed/

Thomas J. Curry
Comptroller of the Currency