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5000 - Statements of Policy
{{12-31-98 p.5155}}
FDIC STATEMENT OF POLICY FOR SECTION 19 OF THE FDI ACT
Section 19 of the Federal Deposit Insurance Act
(12 U.S.C. 1829) prohibits,
without the prior written consent of the Federal Deposit Insurance
Corporation (FDIC), a person convicted of any criminal offense
involving dishonesty or breach of trust or money laundering (covered
offenses), or who has agreed to enter into a pretrial diversion or
similar program in connection with a prosecution for such offense, from
becoming or continuing as an institution-affiliated party, owning or
controlling, directly or indirectly an insured depository institution
(insured institution), or otherwise participating, directly or
indirectly, in the conduct of the affairs of the insured institution.
In addition, the law forbids an insured institution from permitting
such a person to engage in any conduct or to continue any relationship
prohibited by section 19. It imposes a ten-year ban against the FDIC's
consent for persons convicted of certain crimes enumerated in Title 18
of the United States Code, absent a motion by the FDIC and court
approval.
Section 19 imposes a duty upon the insured institution to make a
reasonable inquiry regarding an applicant's history, which consists of
taking steps appropriate under the circumstances, consistent with
applicable law, to avoid hiring or permitting participation in its
affairs by a person who has a conviction or program entry for a covered
offense. The FDIC believes that at a minimum, each insured institution
should establish a screening process which provides the insured
institution with information concerning any convictions or program
entry pertaining to a job applicant. This would include, for example,
the completion of a written employment application which requires a
listing of all convictions and program entries. The FDIC will look to
the circumstances of each situation to determine whether the inquiry is
reasonable. Upon notice of a conviction or program entry, an
application seeking the FDIC's consent prior to the person's
participation must be filed.
Section 19 applies, by operation of law, as a statutory bar to
participation absent the written consent of the FDIC. The purpose of an
application is to provide the applicant an opportunity to demonstrate
that, notwithstanding the bar, a person is fit to participate in the
conduct of the affairs of an insured institution without posing a risk
to its safety and soundness or impairing public confidence in that
institution. The burden is upon the applicant to establish that the
application warrants approval.
A. Scope of Section 19
Section 19 covers institution-affiliated parties, as
defined by 12 U.S.C. 1813(u),
and others who are participants in the conduct of the affairs of an
insured institution. Therefore, all employees of an insured institution
fall within the scope of section 19. In addition, those deemed to be de
facto employees as determined by the FDIC based upon generally
applicable standards of employment law, will also be subject to section
19. Whether other persons who are not institution-affiliated parties
are covered depends upon their degree of influence or control over the
management or affairs of an insured institution. For example, section
19 would not apply to persons who are merely employees of an insured
institution's holding company, but would apply to its directors and
officers to the extent that they have the power to define and direct
the policies of the insured institution. Similarly, directors and
officers of affiliates, subsidiaries or joint ventures of an insured
institution or its holding company will be covered if they are in a
position to influence or control the management or affairs of the
insured institution. Those who exercise major policymaking functions of
an insured institution would be deemed participants in the affairs of
that institution and covered by section 19. Typically, an independent
contractor does not have a relationship with the insured institution
other than the activity for which the insured institution has
contracted. Under 12 U.S.C. 1813(u), independent contractors are
institution-affiliated parties if they knowingly or recklessly
participate in violations, unsafe or unsound practices or breaches of
fiduciary duty which are likely to cause significant loss to, or a
significant adverse effect on, an insured institution. In terms of
participation, an independent contractor who influences or controls the
management or affairs of the insured institution, would be covered by
section 19. In addition, "person" for purposes of section 19
means an individual, and does not include a corporation, firm or other
business entity.
Section 19 specifically prohibits a person subject to its coverage
from owning or controlling an insured institution. For purposes of
defining "control" and "ownership" under section 19, the
FDIC has adopted the definition of "control set forth in the Change
in Bank Control Act (12 U.S.C.
1817(j)(8)(B)). A person will be deemed to exercise
"control" if that person has the power to vote 25 percent or more
of the voting shares of
{{12-31-98 p.5156}}an insured institution
(or ten percent of the voting shares if no other person has more
shares) or the ability to direct the management or policies of the
insured institution. Under the same standards, person will be deemed to
"own" an insured institution if that person owns 25 percent or
more of the insured institution's voting stock, or ten percent of the
voting shares if no other person owns more. These standards would also
apply to an individual acting in concert with others so as to have such
ownership or control. Absent the FDIC's consent, persons subject to
the prohibitions of section 19 will be required to divest their
ownership of shares above the foregoing limits.
B. Standards for Determining Whether an Application Is
Required
Except as indicated in paragraph (5), below, an application must be
filed where there is present a conviction by a court of competent
jurisdiction for a covered offense by any adult or minor treated as an
adult, or where such person has entered a pretrial diversion or similar
program regarding that offense.
(1) Convictions. There must be present a conviction of record.
Section 19 does not cover arrests, pending cases not brought to trial,
acquittals, or any conviction which has been reversed on appeal. A
conviction for which a pardon has been granted will require an
application. A conviction which has been completely expunged is not
considered a conviction of record and will not require an application.
(2) Pretrial Diversion or Similar Program. Program entry, whether
formal or informal, is characterized by a suspension or eventual
dismissal of charges or criminal prosecution upon agreement by the
accused to treatment, rehabilitation, restitution, or other noncriminal
or nonpunitive alternatives. Whether a program constitutes a pretrial
diversion is determined by relevant federal, state or local law, and
will be considered by the FDIC on a case-by-case basis. Program entries
prior to November 29, 1990, are not covered by section 19.
(3) Dishonesty or Breach of Trust. The conviction or program
entry must be for a criminal offense involving dishonesty, breach of
trust or money laundering. "Dishonesty" means directly or
indirectly to cheat or defraud; to cheat or defraud for monetary gain
or its equivalent; or wrongfully to take property belonging to another
in violation of any criminal statute. Dishonesty includes acts
involving want of integrity, lack of probity, or a disposition to
distort, cheat, or act deceitfully or fraudulently, and may include
crimes which federal, state or local laws define as dishonest.
"Breach of trust" means a wrongful act, use, misappropriation or
omission with respect to any property or fund which has been committed
to a person in a fiduciary or official capacity, or the misuse of
one's official or fiduciary position to engage in a wrongful act, use,
misappropriation or omission.
Whether a crime involves dishonesty or breach of trust will be
determined from the statutory elements of the crime itself. All
convictions for offenses concerning the illegal manufacture, sale,
distribution of or trafficking in controlled substances shall require
an application.
(4) Youthful Offender Adjudgments. An adjudgment by a court
against a person as a "youthful offender" under any youth
offender law, or any adjudgment as a "juvenile delinquent" by any
court having jurisdiction over minors as defined by state law does not
require an application. Such adjudications are not considered
convictions for criminal offenses.
(5) De minimis Offenses. Approval is automatically
granted and an application will not be required where the covered
offense is considered de minimis, because it meets all of
the following criteria:
• There is only one conviction or program entry of record
for a covered offense;
• The offense was punishable by imprisonment for a term
of less than one year and/or a fine of less than $1000, and the
individual did not serve time in jail;
• The conviction or program was entered at least five
years prior to the date an application would otherwise be required;
and
• The offense did not involve an insured depository
institution or insured credit union.
Any person who meets the foregoing criteria shall be covered by a
fidelity bond to the same extent as others in similar positions, and
shall disclose the presence of the conviction or program entry to all
insured institutions in the affairs of which he or she intends to
participate.
{{12-31-98 p.5157}}
C. Procedures
When an application is required, forms and instructions should be
obtained from, and the application filed with, the appropriate FDIC
Regional Director. The application must be filed by an insured
institution on behalf of a person unless the FDIC grants a waiver of
that requirement. Such waivers will be considered on a case-by-case
basis where substantial good cause for granting a waiver is shown.
D. Evaluation of Section 19 Applications
The essential criteria in assessing an application are whether the
person has demonstrated his or her fitness to participate in the
conduct of the affairs of an insured institution, and whether the
affiliation, ownership, control or participation by the person in the
conduct of the affairs of the insured institution may constitute a
threat to the safety and soundness of the insured institution or the
interests of its depositors or threaten to impair public confidence in
the insured institution. In determining the degree of risk, the FDIC
will consider:
(1) The conviction or program entry and the specific nature and
circumstances of the covered offense;
(2) Evidence of rehabilitation including the person's reputation
since the conviction or program entry, the person's age at the time of
conviction or program entry, and the time which has elapsed since the
conviction or program entry;
(3) The position to be held or the level of participation by the
person at an insured institution;
(4) The amount of influence and control the person will be able
to exercise over the management or affairs of an insured institution;
(5) The ability of management of the insured institution to
supervise and control the person's activities;
(6) The degree of ownership the person will have of the insured
institution
(7) The applicability of the insured institution's fidelity bond
coverage to the person;
(8) The opinion or position of the primary Federal and/or state
regulator; and (9) Any additional factors in the specific case that
appear relevant.
The foregoing criteria will also be applied by the FDIC to determine
whether the interests of justice are served in seeking an exception in
the appropriate court when an application is made to terminate the
ten-year ban prior to its expiration date.
Some applications can be approved without an extensive review
because the person will not be in a position to constitute any
substantial risk to the safety and soundness of the insured
institution. Persons who will occupy clerical, maintenance, service or
purely administrative positions, generally fall into this category. A
more detailed analysis will be performed in the case of persons who
will be in a position to influence or control the management or affairs
of the insured institution. Approval orders will be subject to the
condition that the person shall be covered by a fidelity bond to the
same extent as others in similar positions. In cases in which a waiver
of the institution filing requirement has been granted to an
individual, approval of the application will be conditioned upon that
person disclosing the presence of the conviction to all insured
institutions in the affairs of which he or she wishes to participate.
When deemed appropriate, approval orders may also be subject to the
condition that the prior consent of the FDIC will be required for any
proposed significant changes in the person's duties and/or
responsibilities. Such proposed changes may, in the discretion of the
Regional Director, require a new application. In situations in which an
approval has been granted for a person to participate in the affairs of
a particular insured institution and subsequently seeks to participate
at another insured institution, approval does not automatically follow.
In such cases, another application must be submitted.
By order of the Board of Directors, November 16, 1998.
[Source:
63 Fed.
Reg. 66184 December 1, 1998]
[The page following this is 5175.]
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