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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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Enforcement Actions Against Individuals

Tools to Hold Individuals and IAPs Accountable

The primary means for addressing supervisory concerns at institutions is through the ordinary course of routine examinations. However, when a supervised institution exhibits unsafe or unsound practices or where the practice or an alleged violation of law is so widespread or serious that normal recourse to ordinary supervisory methods are not appropriate or sufficient, the Regulators may use their authority to take formal EAs against institutions or IAPs.

An IAP includes a director, officer, employee, or controlling shareholder of, or agent for, an institution as well as an independent contractor (such as an attorney, appraiser, or accountant). The Regulators have broad discretion in determining the appropriate enforcement remedies to address misconduct committed by insiders and deter others from performing illegal acts. These remedies are listed below.

Removal/Prohibition Orders. Pursuant to section 8(e)(1) of the FDI Act, these orders result in the removal of IAPs from banking and prohibit them from participating in any affairs of any insured depository institution for life. This remedy imposes an industry-wide ban designed to protect the banking industry. The SOL to commence these actions6 is generally 5 years from the date of the misconduct or the date the institution incurred a loss.

To pursue these actions, the Regulators must obtain evidence of three grounds, each of which contain several elements, as described below. At least one element from each of the three grounds must be proven to pursue this EA.

  • Misconduct
    • The individual violated any law or regulation, cease-and-desist order that has become final, written agreement, or condition imposed in writing by a federal banking agency in connection with any action on any application, notice, or request by the institution or IAP;
    • The individual engaged or participated in any unsafe or unsound practice in connection with the institution; or
    • The individual committed or engaged in any act, omission, or practice constituting a breach of that person's fiduciary duty.
  • Effect of the Misconduct
    • The institution suffered or will probably suffer financial loss or other damage,
    • Interests of the institution's depositors have been or could be prejudiced, or
    • The individual received financial gain or other benefit.
  • Culpability for the Misconduct
    • The individual exhibited personal dishonesty, or
    • The individual demonstrated a willful or continuing disregard for the safety or soundness of the institution.

Civil Money Penalties. Pursuant to section 8(i)(2) of the FDI Act, the Regulators may impose CMPs on IAPs or depository institutions for engaging in improper conduct while employed or contracted by an institution. Collections resulting from all CMPs are remitted to the Treasury. The SOL to commence these actions is generally 5 years from the date of the misconduct and the SOL to collect is generally 5 years after an order is issued.

For most misconduct, CMPs are divided into three tiers with increasingly higher penalties for more egregious conduct. Penalties associated with tiers 1, 2, and 3 can be as high as $7,500, $37,500, and $1,425,000, respectively, per day for each day of the violation. The FDI Act requires Regulators to consider four mitigating factors in determining the appropriateness of a penalty: (1) the available resources and good faith of the person charged, (2) the gravity of the violation, (3) the history of previous violations, and (4) such other matters as justice may require.

Administrative Restitution. Section 8(b)(6) of the FDI Act grants the Regulators the authority to issue cease and desist orders requiring IAPs to make restitution to repay losses incurred by institutions as a result of their actions. Collections resulting from restitution orders are paid to the institutions unless they failed, in which case, they are paid to the FDIC. There is no express SOL to bring these orders.

To pursue administrative restitution, the Regulators must prove that:

  • The IAP or depository institution was unjustly enriched (e.g., accepted and retained a benefit) in connection with a violation or practice; or
  • The violation or practice involved a reckless disregard for the law or any applicable regulations or prior order of the appropriate federal banking agency.

Cease and Desist Orders. A cease and desist order pursuant to section 8(b) of the FDI Act is a supervisory response to an immediate, present, or ongoing unsafe and unsound practice, violation of law or regulation, or violation of written condition on the part of a depository institution or IAP, in an attempt to control and put a stop to the behavior or practice that is harming an institution. These orders require parties to stop engaging in certain violations or practices and affirmative action to correct the conditions resulting from any such violation or practice. Affirmative action may require an institution or IAP to make restitution or provide reimbursement, indemnification, or a guarantee against loss.

While cease and desist orders are often issued to institutions, they may also be issued to IAPs (herein referred to as personal cease and desist orders). There is no express SOL to commence cease and desist orders; however, the Regulators lose the ability to commence an action against an individual 6 years after the individual leaves the subject institution. 

To pursue personal cease and desist orders, the Regulators must prove that the IAP:

  • Is engaging in, has engaged, or is about to engage in an unsafe or unsound practice pertaining to a depository institution, or
  • Is violating, has violated or is about to violate a law, rule, regulation, or any condition imposed in writing.

The OCC and FRB issue (and the OTS issued) personal cease and desist orders against IAPs. However, the FRB had not issued any such orders pertaining to the failed institutions under its supervision that were included in this evaluation. As discussed later in this report, the FDIC currently does not use personal cease and desist orders.

Formal Letters. In addition to pursuing the EAs against IAPs discussed above, the Regulators have issued formal letters7 to individuals who were convicted of covered offenses, pursuant to section 19 of the FDI Act (12 U.S.C. § 1829). Section 19 generally prohibits a person convicted of any criminal offense involving dishonesty, breach of trust, or money laundering (covered offenses) from working in any affairs of an insured depository institution or bank holding company. The ban is for life unless an exception is granted through consent by the FDIC. For certain offenses, an exception cannot be granted for 10 years following the date of conviction, except by order of the sentencing court.

Formal letters reiterate existing prohibitions and do not impose any additional constraints. If after receiving a formal letter, a person reenters the banking industry in violation of 12 U.S.C. § 1829, he or she does so "knowingly," and may therefore be subject to criminal sanctions and/or penalties.

The Regulators typically identify such persons by reviewing suspicious activity reports (SAR), through routine bank examinations, from institution personnel, or as a result of the prosecution process initiated by DOJ or other law enforcement officials. EA investigations may also identify a condition warranting a formal letter.

The Regulators may elect to issue a formal letter in lieu of a removal/prohibition order. FDIC officials prefer to impose a removal/prohibition order, if appropriate, but may issue a formal letter if the FDIC learns of an offense after a removal/prohibition SOL has expired or when it is otherwise unable to impose a removal/prohibition order. The OCC considers whether there was a related prohibited transaction amounting to at least $5,000 when deciding whether to issue a formal letter. The FRB will consider issuing a formal letter if it learns of a conviction or a plea agreement involving certain criminal offenses related to the individual's role at the banking organization.

The Regulators' EA Processes

The FDIC, FRB, and OCC each have a formal process for pursuing EAs and a flowchart of each Regulator's process is provided in Appendix 2.

There are several similarities in each Regulator's process for investigating and pursuing EAs against IAPs. The Regulators generally identify issues that may warrant EAs through routine oversight activities such as conducting examinations and reviewing SARs, from institution employees and customers, and from contact with other supervisory agencies or law enforcement officials. After reviewing the initial information, the Regulators may initiate an investigation if they believe there is sufficient evidence to pursue an EA. As part of the investigation, the Regulators interview witnesses, take sworn testimonies, and compel the production of relevant documents necessary to establish a legal basis for an EA. If there is sufficient evidence, the Regulators provide the respondents with the opportunity to consent to an EA. Most cases are settled through consent.

If the respondent refuses to consent, the Regulator files a Notice of Charges against the IAP with the Office of Financial Institution Adjudication8 and an administrative hearing process is initiated. The ALJ assigned to the Regulators reviews the case documents, the IAP has an opportunity to respond to the Notice of Charges, a public hearing is held, and the ALJ issues a recommended decision. The FDIC's Board, the FRB, or the Comptroller of the Currency reviews the case materials, the ALJ's recommendation, and makes a final decision about whether to issue an order against an IAP.9 Respondents have the right to appeal to the federal courts.

Throughout the process, various divisions within each Regulatory agency coordinate with each other. If at any point the Regulators determine that there is insufficient information to pursue an EA, it is closed out. The Regulators publicize EA activity, in accordance with section 8(u) of the FDI Act and report EA activity to their agency's executive management and in their annual reports, which are provided to Congress.

Beginning in 2010, the FDIC established expectations for the timely handling and disposition of cases once they have been opened and has consistently met these expectations. The FRB and OCC do not have or plan to establish similar metrics.

EA Activity from 2008-2012

For the 465 institutions that failed from 2008 through 2012, the Regulators issued a total of 275 EAs pertaining to 87 institutions (19 percent), as follows:

  • 128 removal/prohibition orders,
  • 120 CMPs,
  • 8 administrative restitution orders, and
  • 19 personal cease and desist orders.

Additionally, as of September 30, 2013, the FDIC, FRB, and OCC had potential EAs against IAPs in-process at an additional 59 institutions. These EAs will ultimately be imposed or closed-out.

The FRB and OCC issued formal letters to 14 individuals affiliated with 9 failed institutions. The FDIC and OTS had not issued any formal letters associated with the failed institutions that they supervised.

In two instances, the FDIC used its back-up enforcement authority under section 8(t) of the FDI Act and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) to pursue EAs against five former directors and officers from two institutions that were previously regulated by the OTS.

Table 2 shows EAs imposed against IAPs by each of the Regulators.

Table 2: Enforcement Actions Against IAPs Pertaining to 465 Failed Institutions



EA Activity

Totals: All Regulators
by EA Type (adjusted for duplication)


Associated Institutions

Removal/ Prohibition Order




128 EAs issued to IAPs associated with
75 institutions.










Money Penalty


63 for $4.1 million


120 EAs issued to IAPs associated with
42 institutions.





28 for $1.69 millionb



29 for $195,500




5 for $284,000


8 EAs issued to IAPS
associated with
5 institutions.





3 for $728,000


OTS c, d



Personal Cease and Desist Order Against 
an IAP




19 EAs issued to IAPs
associated with
6 institutions.










Totals (adjusted for duplication)

All Regulators

There were a total of 275 EAs issued against
218 IAPs associated with 87 institutions.

Source: Generated by the FDIC OIG based on information from FDIC, FRB, and OCC management officials and the agencies' public Web sites. Data is as of September 30, 2013.

aIncludes removal/prohibition orders issued by the FDIC to five former officers and directors of two institutions formerly supervised by the OTS. In issuing these orders, the FDIC exercised its back-up enforcement authority. Return to text
bIncludes one removal/prohibition order and one CMP issued by the OCC to an institution formerly supervised by the OTS. Return to text
cWe were unable to locate information pertaining to any administrative restitution orders issued by the OTS. Return to text
dOTS activity from January 1, 2008 through July 21, 2011, when the OTS was abolished. Return to text

Summary information for each Regulator follows:

FDIC: The FDIC issued 154 EAs against 122 IAPs associated with 58 institutions (20 percent of 291 failed institutions: 289 regulated by the FDIC and 2 formerly supervised by the OTS). Specifically the FDIC issued:

  • Removal/prohibition orders to 79 directors and officers and seven other employees.
  • CMPs against 63 former bank directors and officers, for amounts ranging from $500 to $1.3 million.
  • Administrative restitution penalties to five directors, for amounts ranging from $4,000 to $225,000.

FRB: The FRB issued four EAs against four IAPs associated with two institutions (4 percent of the 49 failed institutions regulated by the FRB). Specifically, the FRB issued:

  • Removal/prohibition orders to four bank officers.

Additionally, the FRB issued formal letters to six individuals (three officers, one bank teller, and two unknown) affiliated with four institutions.

OCC: The OCC issued 65 EAs against 41 IAPs associated with 17 institutions (21 percent of 80 failed institutions: 79 regulated by the OCC and 1 formerly regulated by the OTS). Specifically the OCC issued:

  • Removal/prohibition orders to 18 directors and officers and one assistant manager.
  • CMPs to 28 directors and officers, for amounts ranging from $5,000 to $1 million. The $1 million CMP was imposed against a former President of an institution regulated by the OTS.
  • Administrative restitution penalties to three directors and officers.
  • Personal cease and desist orders to 15 directors and officers.

Additionally, the OCC issued formal letters to eight individuals associated with five institutions (three officers, two managers, and three lower-level employees). One of these letters was to an employee of an institution formerly regulated by the OTS.

OTS (January 1, 2008 through July 21, 2011): The OTS issued 52 EAs against 51 IAPs associated with 11 institutions (23 percent of the 48 failed institutions formerly regulated by the OTS). Specifically, the OTS issued:

  • Removal/prohibition orders to 19 IAPs (five to directors and officers and most of the others to lower-level employees such as tellers, branch managers, and consultants).
  • CMPs against 29 former bank directors, for amounts ranging from $500 to $50,000.
  • Personal cease and desist orders against four former bank directors associated with one institution.

Comparison of Current and Historical EA Data. As noted above, during the 2008 financial crisis, the Regulators imposed removal/prohibition EAs against individuals affiliated with 75 out of 465 institutions (16 percent). As of September 30, 2013, potential EAs against IAPs were in-process at an additional 59 institutions (25, 8, and 26 institutions regulated by the FDIC, FRB, and OCC, respectively). These EAs will ultimately be imposed or closed-out. We also looked at removal/prohibition EAs imposed on IAPs affiliated with institutions that failed over the 11-year period from 1985 through 1995. During this period, 1,375 FDIC, FRB, and OCC-regulated institutions failed and removal/prohibition EAs were imposed on IAPs affiliated with 79 institutions (6 percent), as follows:

  • FDIC: 34 out of 682 failures (5 percent),
  • FRB: 3 out of 108 failures (3 percent), and
  • OCC: 42 out of 585 failures (7 percent).

Accordingly, during the 2008 financial crisis, the FDIC, FRB, and OCC experienced an increase in the percentage of failed institutions for which they pursued removal/prohibition orders against IAPs.

Criminal Sanctions. While not a focus of this report, the Regulators have shared information with or referred criminal matters to the DOJ, which obtained convictions against 44 individuals (36 of whom were bank officers) associated with 25 of the 465 failed institutions included in this evaluation.

The DOJ obtained 3,674 criminal restitution orders imposing $280.8 million in monetary judgments against individuals associated with the 465 failed institutions. In these cases, the FDIC requested to be named a victim in the restitution orders.

Over the 6-year period from 2008 through 2013, the FDIC received $29.4 million in criminal restitution and forfeiture collections.

The FDIC's Use of Back-up Enforcement Authority. Under certain circumstances, section 8(t) of the FDI Act and FDICIA permit the FDIC to engage in back-up enforcement action pertaining to all insured depository institutions, depository institution holding companies, and IAPs. Thus, the FDIC is permitted to pursue EAs against IAPs where the related institutions are or were regulated by a PFR other than the FDIC. While the PFR typically pursues EAs against IAPs, the FDIC may invoke its back-up enforcement authority under circumstances when the PFR consents or the FDIC believes that the PFR has not timely pursued an EA in response to a recommendation from the FDIC.

The FDIC used back-up enforcement authority to pursue EAs in two instances, as noted below. In both instances, the institutions were originally regulated by the OTS and subsequently by the OCC when the OTS was abolished. The FDIC and OCC consulted about the FDIC's use of back-up enforcement authority prior to the FDIC's decision to implement this authority.

Downey Savings and Loan Association, FA (Downey). Downey failed and was closed by the OTS on November 21, 2008, and the FDIC was appointed as Receiver.

The primary causes of Downey's failure were the thrift's high concentrations in single-family residential loans, which included concentrations in option adjustable rate mortgage loans, reduced documentation loans, subprime loans, and loans with layered risk; inadequate risk-monitoring systems; the thrift's unresponsiveness to OTS' recommendations; and high turnover in the thrift's management.

The FDIC exercised its back-up enforcement authority based on the results of a preliminary investigation where the FDIC concluded that Downey extensively underwrote negative amortization loans, which constituted reckless and risky behavior that put customers at risk.

In June 2012, four of Downey's former directors and officers each stipulated and consented to removal/prohibition orders that prohibited them from participating in any banking affairs for life. Additionally, the FDIC recovered $31.9 million as a result of a separate PLC settlement agreement with these four and other former Downey directors and officers. At the same time, the FDIC, in its corporate capacity, released these four directors and officers from the imposition of any additional EAs and seven former directors and officers from the imposition of any EAs.

IndyMac Bank, FSB (IndyMac). IndyMac failed and was closed by the OTS on July 11, 2008, and the FDIC was named conservator.

The primary causes of IndyMac's failure were the institution's aggressive growth strategy, high concentration of Alt-A loans, insufficient underwriting, credit concentrations in residential real estate in the California and Florida markets, and heavy reliance on costly funding sources and brokered deposits.

The magnitude of IndyMac's loss and concerns about the institution's management prompted the FDIC to exercise its back-up enforcement authority. In December 2012, the institution's former Chairman and Chief Executive Officer stipulated and consented to a removal/prohibition order. Additionally, the FDIC separately settled pending PLC litigation against the same officer for $12 million.

Types of Actions Warranting EAs. Removal/prohibition orders may be based on personal dishonesty or willful or continuing disregard for the safety or soundness of the institution.  Most of the removal/prohibition orders issued by the Regulators included personal dishonesty as a basis for the action.  The Regulators brought very few removal/prohibition orders based solely on willful or continuing disregard for safety or soundness. 

EAs against IAPs were issued in response to actions such as making false entries in institution financial statements, embezzlement, misappropriation, creating false invoices and other documents, forgery, participating in counterfeit check schemes, accepting illegal cash payments, knowingly underwriting loans containing fraudulent documentation, making unsound loans, using institution funds to pay for personal expenses, misapplying funds, obstructing a bank examination, intentional financial misstatements to make the institution's performance look better, and concealing the true source of an illegal capital infusion.

EAs also referenced safety or soundness such as the failure of institutions to: change lending strategies based on warnings that certain credit concentrations were too high, monitor brokered loan activities, adhere to state lending limits, comply with institution lending policies, and disclose conflicts of interest.

In this respect, most of our OIG MLRs covering 142 failed institutions concluded that management did not operate institutions in a safe and sound manner, which contributed to institution failures. Most commonly, we reported that these institution failures were caused by the institutions' management strategy of aggressive growth that concentrated assets in commercial real estate loans, which was often coupled with inadequate risk management practices for loan underwriting, credit administration, and credit quality review.  However, the Regulators have held very few individuals associated with failed institutions accountable for safety or soundness issues when a finding of dishonesty was not present.  Notably, the OCC and the OTS issued personal cease and desist orders to address safety or soundness issues associated with failed institutions covered by our evaluation.

As discussed in the next section, we are recommending that the Regulators develop methodologies for issuing removal/prohibition EAs that can be supported by the willful or continuing disregard for safety or soundness element.

Factors Impacting the Pursuit of EAs

Based on our research and interviews with the Regulators, we identified the following factors that have impacted the Regulators' ability to pursue EAs.

Statutory Requirements. The Regulators noted that a factor impacting the frequency of removal/prohibition EAs against individuals associated with failed institutions is the rigorous statutory criteria for imposing these EAs. The Regulators stated that even if an IAP acted poorly or made negligent business decisions that resulted in losses to an institution, such conduct does not provide enough evidence to show that the IAP acted with the required intent, according to the statute.

As stated previously, to pursue a removal/prohibition order, the Regulators must obtain evidence of the following three statutory criteria, each of which contains several elements:

  • Misconduct,
  • Effect of the Misconduct, and
  • Culpability for the Misconduct.

To prove the last criterion, "culpability for the misconduct," the Regulators must show that the individual (1) exhibited personal dishonesty or (2) demonstrated a willful or continuing disregard for the safety or soundness of the institution. The second element (willful or continuing disregard) can be particularly difficult to prove in support of a removal/prohibition order, according to the Regulators.

Court opinions have opined as follows with regards to the elements to satisfy culpability:

"Before [a Regulator] may impose the ultimate sanction of a Prohibition Order against a banker that forever bans him or her from working in the American banking industry, the [Regulator] must show a degree of culpability well beyond mere negligence, i.e., there must be a showing of scienter."10

With regards to personal dishonesty and a willful or continuing disregard for the safety or soundness of an institution:

"These standards of culpability require some showing of scienter.The term ‘personal dishonesty' has been held to mean a disposition to lie, cheat, defraud, misrepresent, or deceive. It also includes a lack of straightforwardness and a lack of integrity."11
Willful disregard has been defined as "deliberate conduct which exposed the bank to abnormal risk of loss or harm contrary to prudent banking practices." Continuing disregard has been defined as conduct which has been "voluntarily engaged in over a period of time with heedless indifference to the prospective consequences."12

OCC officials stated that in a large number of cases, the factual record does not provide a basis to meet the culpability requirements noted above and these requirements have posed a significant obstacle to pursuing removal/prohibition orders.

OCC officials also noted that the definition of "unsafe and unsound," utilized by certain Federal circuit courts has posed obstacles to pursuing removal/prohibition orders. For example, the United States Court of Appeals for the Fifth Circuit held that unsafe and unsound practices are limited to "practices with a reasonably direct effect on an association's financial soundness."13  The Court further explained that such effects must bear a relationship to an institution's financial integrity and the government's insurance risk.  An OCC official noted that this formulation suggests that only those acts or practices that threaten the continued viability of an insured institution rise to the level of unsafe and unsound practices.  Such a standard would not include acts or practices that threaten significant loss or damage to an institution if they do not also threaten its viability.  

The Regulators noted that because removal/prohibition orders permanently remove IAPs from banking, thus, taking away their livelihood, it is appropriate for the legal standards to be rigorous.

In 2011, we reported that the Regulators often did not address risky behavior at institutions until financial and/or capital decline occurred.14 This practice resulted in supervisory actions that were taken too late for many of the institutions that failed during the 2008 financial crisis. Additionally, during our current evaluation, we learned that this practice made it challenging for the Regulators to support a finding of willful or continuing disregard for safety or soundness against former IAPs.

At the time of this evaluation, the FDIC's Division of Risk Management Supervision (RMS) and Legal Division were working on a strategy for documenting instances of willful or continuing disregard for safety or soundness in order to successfully pursue removal/prohibition orders that include this element. We believe that each of the Regulators could benefit from developing guidance in this area to proactively address risky behavior or document willful or continuing disregard in the event that such behavior persists.15 Documenting such actions as they occur and ensuring adequate coordination between agencies' legal and examination units on this matter could make it easier to later sustain the willful or continuing disregard element of a removal/prohibition EA.

We recommend that the FDIC, FRB, and OCC:

  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 for safety or soundness of an institution. Such methodologies may include:
    1. providing guidance to examiners on how to document and develop evidence sufficient to meet the willful or continuing disregard criteria, and/or
    2. ensuring adequate internal coordination among legal and supervision divisions, as necessary, about what evidence is needed to successfully bring such orders.

Use of Available Enforcement Tools. The Regulators have a number of progressive enforcement tools for dealing with unsafe and unsound practices at institutions starting with informal actions such as board resolutions and memoranda of understanding (MOU) and extending to formal cease and desist orders and termination of deposit insurance. We observed that the Regulators have fewer enforcement tools available for holding IAPs accountable. The Regulators noted that the legal standards for sustaining a removal/prohibition order should be rigorous since such actions take away one's livelihood. However, this approach can limit the regulators' options in holding individuals accountable for their actions.

Using personal cease and desist orders broadens the range of tools that the Regulators can use to hold individuals accountable, prevent future misconduct, and address safety and soundness issues. The OCC and OTS have imposed personal cease and desist orders against individuals associated with the failed institutions included in this review. The FRB also uses this tool against individuals, but has not done so in relation to individuals associated with the failed institutions under its supervision.16 The FDIC does not currently use personal cease and desist orders. FDIC officials noted that the FDIC issues cease and desist orders against institutions that include management-related provisions, which may affect individual bank officials.

The Regulators have flexibility in determining the types of provisions to include in personal cease and desist orders. Those issued by the OCC and FRB have required IAPs to: cease and desist from certain acts in their current positions, ensure those acts are not carried out in any future employment positions, furnish future employers with a copy of the order, and notify the Regulator if the IAP is employed by an institution in the future. The Regulators are required to publicize EAs, including personal cease and desist orders, and have done so on their public Web sites.

As discussed earlier, cease and desist orders do not have to meet the same rigorous standards as removal/prohibition orders. In some instances, particularly when pursuing removal/prohibition orders, the evidence falls short of proving the required statutory elements. In instances such as these, the FDIC may wish to consider imposing cease and desist orders against IAPs whose actions resulted in unsafe or unsound practices. Cease and desist orders against IAPs may afford the FDIC a tool to address safety and soundness issues when it concludes that a removal/prohibition order is not warranted and/or supportable.

We recommend that the FDIC:

  1. 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.

Risk Appetite. We concluded that the Regulators' risk appetite plays a role in their pursuit of EAs. The Regulators' legal officials may be reluctant to pursue a case if these officials believe that it is not sufficiently strong and could set a precedent that could impede the agency's ability to win future cases in the same area.

We understand that it is important to ensure that individual cases are sufficiently strong to avoid setting precedents and jeopardizing future cases. However, legal officials need to ensure that their risk appetite aligns with that of the agency head. Ultimately, legal officials should clearly communicate the legal risks of pursuing a particular EA, but the agency head or senior official with delegated authority should set the level of litigation risk that the agency is willing to assume.

Statute of Limitations. None of the Regulators identified the expiration of SOLs or related tolling agreements as impacting the pursuit of ongoing EAs. However, the Regulators may not identify actions that could lead to EAs until several years after a questionable act occurs. Because the SOL for commencing removal/prohibition orders and CMPs is typically 5 years from the date of the misconduct or the date the institution incurs a loss, the Regulators' ability to pursue such EAs could be impeded if the misconduct is identified several years later.

The Regulators may pursue personal cease and desist orders up to 6 years after an IAP leaves the subject institution. Accordingly, this tool may provide the Regulators a longer period within which to pursue an EA. We noted that in some instances, the FDIC's Legal Enforcement section elected not to pursue a removal/prohibition order against an IAP, in part, because the SOL had expired or was about to expire. In such cases, a personal cease and desist order could provide a viable alternative to removal/prohibition orders and extend the time within which the FDIC may take action.

Staff Resources. The Regulators did not attribute increased workloads or a lack of resources to not pursuing EAs. However, even if a case appears to meet the statutory criteria, the Regulators may choose to not pursue a removal/prohibition order based on other circumstances of a case. For example, in cases involving lower-level employees, one or more of the Regulators have considered the nature and effect of the misconduct, the resources involved in pursuing the case, and the risks presented by an individual's continued participation in the institution's affairs and decided to devote their limited resources to other more significant cases.

Limited Recovery Resources. A respondent's ability to pay is another consideration in pursuing actions such as CMPs and restitution. For example, an individual may not have the means to pay if the majority of his/her wealth was in the institution's stock and the institution failed or if that individual was a career banker and subject to a removal/prohibition order. There were several instances when the Regulators did not pursue CMPs or restitution due to a respondent's inability to pay.

Parallel proceedings by DOJ. In some instances the Regulators perform investigations simultaneously with the DOJ. At other times, the DOJ may ask, or the Regulators may decide, to delay their pursuit of EAs until the DOJ completes its criminal investigation or proceeding. While this delays EAs, it may also benefit the Regulators in the long run, such as when the DOJ imposes criminal sanctions that the Regulators can subsequently rely on to impose EAs. On the other hand, because DOJ criminal convictions ban individuals from banking, a Regulator may conclude that it's not necessary to also issue a removal/prohibition order. In determining how to proceed, the Regulators may also consider whether other regulators have open investigations on the matter.

Other Matters Pertaining to EAs

The FDIC's Handling of Formal Letters. As discussed earlier, the FDIC, FRB and OCC issue formal letters to individuals who were convicted of certain crimes, pursuant to section 19 of the FDI Act. Formal letters reiterate that an individual has previously been prohibited from participating in banking for committing a criminal offense involving dishonesty, breach of trust, or money laundering.

The FRB posts formal letters on its public Web site and the OCC identifies the IAPs that were the subjects of these letters on its public Web site.

We found inconsistencies among the FDIC's regional offices regarding their use of formal letters. The FDIC has not issued guidance on using, nor does it publicize these letters. Issuing guidance would better ensure a uniform approach to using section 19 letters. Publicizing such letters would be prudent in further holding individuals accountable and providing potential employers with a means for being aware of these individuals' past actions as part of the hiring and screening process.

We recommend that the FDIC:

  1. 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.

EA Interagency Coordination Efforts. In 1997, a revised policy statement was published in the Federal Register, which encouraged increased coordination efforts among the banking Regulators concerning EAs.17 The statement generally calls for the Regulators to notify each other and state supervisory authorities in writing, prior to or when initiating EAs against IAPs and depository institutions. For the purposes of interagency notification, an EA is initiated when the appropriate responsible agency official, or group of officials, determines that a formal EA should be taken. Initiating EA activity typically consists of issuing a Notice of Charges or Stipulated Order to an IAP. Providing notifications to the federal Regulators when initiating EAs helps to ensure a consistent approach to pursuing EAs and may alert the Regulators if an IAP under investigation moves to an institution regulated by a different PFR.

The Regulators posted EA orders to their public Web sites on a monthly basis as required by the FDI Act.18 Additionally, the FDIC, FRB, and OCC coordinated with each other to varying degrees in terms of providing information to each other when initiating EAs and these agencies notified state regulatory authorities. Further, the FDIC, FRB, and OCC met on a case-by-case basis to discuss matters of mutual supervisory concern. However, the Regulators did not consistently provide written notifications about EAs to each other, as described in the policy statement.

The Federal Register policy statement has not been revised since 1997, and therefore may not reflect technological advances for communicating EA activities. Accordingly, the Regulators may benefit from revisiting the policy statement to determine the best ways to address its requirements and differences that have arisen over time in agency notification practices.

We recommend that the FDIC, FRB, and OCC:

  1. 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.
  • 6. Commencing formal EAs consists of issuing a Notice of Charges or Stipulated Order. Return to text
  • 7. The FDIC and FRB refer to formal letters as section 19 letters and the OCC refers to them as 1829 prohibition letters. For simplicity, this report uses the term formal letters. Return to text
  • 8. The Office of Financial Institution Adjudication is an executive body charged with overseeing administrative enforcement proceedings of the FDIC, FRB, OCC, and National Credit Union Administration (NCUA). One ALJ is assigned to and hears all cases presented by the FDIC, FRB, OCC, and NCUA. This ALJ reports to an oversight committee comprised of members from the FDIC, FRB, OCC, and NCUA. Return to text
  • 9. For the EAs discussed in this report that went before an ALJ, all of the Regulators have upheld the ALJ's recommended actions in making the final decision on whether to pursue EAs. Return to text
  • 10. Kim v. Office of Thrift Supervision, 40 F.3d 1050 (9th Cir. 1994). The term scienter refers to a state of mind often required to hold a person accountable for his or her acts. Scienter denotes a level of intent or knowledge than an act was wrong or deceptive. Return to text
  • 11. Michael v. FDIC, 687 F. 3d 337 (7th Cir. 2012). Return to text
  • 12. Grubb v. FDIC, 34 F. 3d 956 (10th Cir. 1994). Return to text
  • 13. Gulf Federal Savings and Loan Association of Jefferson Parish v. Federal Home Loan Bank Board, 651 F.2d 259 (5th Cir. 1981). Return to text
  • 14. Evaluation of Prompt Regulatory Action Implementation, September 2011. Return to text
  • 15. We note that an increased use of enforcement authority under Section 39 of the FDI Act may provide a means to proactively document safety and soundness concerns and build support for proving continuing disregard. Although rarely used, Section 39, Standards for Safety and Soundness, would allow Regulators to take action against seemingly healthy institutions that were engaging in risky practices before losses occurred. While Section 39 actions are imposed against institutions, they can also serve to document safety and soundness concerns against institution management. Return to text
  • 16. Additionally, all of the Regulators have issued cease and desist orders against institutions, including the 465 failed institutions that were included in this study. However, this evaluation is primarily limited to EAs pertaining to IAPs and PLCs against individuals and entities associated with failed institutions. Return to text
  • 17. 62 Fed. Reg. 7782 (Feb. 20, 1997). Return to text
  • 18. 12 U.S.C. § 1818(u). Return to text