[Federal Register Volume 59, Number 248 (Wednesday, December 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31707]
[Federal Register: December 28, 1994]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 356
RIN 3064-AA94
Insider Transactions--Conflicts of Interest
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Proposed rule; withdrawal.
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SUMMARY: The FDIC is withdrawing its proposed rule governing business
dealings other than extensions of credit between an insured nonmember
bank and its directors, executive officers, principal shareholders, and
related interests of such persons. Several factors have led the FDIC to
its decision to withdraw the proposed rule. These include an
intervening federal statute and implementing regulations that have
addressed many of the concerns contained in the proposal,
overwhelmingly negative comments received in response to the proposed
rule, and an FDIC policy statement recommending the withdrawal of
proposed rules that have not been acted upon by the FDIC's Board of
Directors within nine months of the date of proposal. The FDIC, in its
discretion, will revisit the issue at a later date if the agency
determines that such course of action is necessary or appropriate.
DATES: Proposed Part 356 is withdrawn on December 28, 1994.
FOR FURTHER INFORMATION CONTACT: Pamela E.F. LeCren, Senior Counsel,
Legal Division (202-898-3730), Michael D. Jenkins, Examination
Specialist, Division of Supervision (202-898-6896), or Lori J.
Sommerfeld, Attorney, Legal Division (202-898-8515).
SUPPLEMENTARY INFORMATION:
Background
On August 8, 1991, the FDIC published for comment a proposal (56 FR
37673) to add a new Part 356 to its regulations designed to address
conflicts of interest in two areas: (1) business dealings, other than
extensions of credit, between an insured state nonmember bank and its
directors, executive officers and principal shareholders, as well as
their related interests (bank insiders); and (2) business dealings in
which an insured nonmember bank invests in real estate in which one of
its insiders holds an equity interest. While the second category of
transactions would have been strictly prohibited, the first category of
business dealings would have been subject to an arms-length standard.
The impetus for the proposed rule was the FDIC's statistical
finding that insider business dealings gave rise to unsafe and unsound
banking practices that resulted in losses to the deposit insurance
funds (see 56 FR 37674). The objective of the proposed rule was to
prevent further losses from occurring. The proposed rule would have
established certain requirements designed to ensure that business
dealings between insured nonmember banks and bank insiders are
conducted in an arm's length manner consistent with safe and sound
banking and to ensure that such transactions receive adequate review
and control by the bank's board of directors. The preliminary view
adopted in the proposal was that risks arising from the conflicts of
interest inherent in situations in which banks invest in real estate
owned by insiders were so great that such business dealings should be
prohibited. The rationale advanced for this prohibition was that real
estate investment activities involve greater risk than at least some
other activities in which banks engage and that those dangers are
exacerbated when a bank insider has an interest in the real estate in
question.
Other than losses to the deposit insurance funds, two other
concerns prompted the 1991 proposal. First, the preamble stated that it
was important for all members of an institution's management team to be
cognizant of their responsibilities and to discharge those
responsibilities in such a manner that would ensure the stability and
soundness of the institutions they serve. Management must act so as to
put the performance of their duties above personal gain and must never
abuse their influence with respect to management of the institution.
Second, the preamble expressed the FDIC's view that inadequate
recordkeeping by banks contributes to insider abuse and that any type
of investigation into such abuse is often hampered by the lack of
adequate records. In typical cases of fraud and abuse, the institution
lacked policies and procedures designed to detect insider involvement
in transactions early enough to prevent the abuse from occurring. Tying
the two concerns together, the preamble stated that a bank's board of
directors is not properly discharging its fiduciary obligations unless
it pays sufficient attention to recordkeeping and internal control
issues.
Discussion
Several factors have led the FDIC to its decision to withdraw
proposed Part 356. Most significantly, as a result of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) (Pub. L.
102-242, 105 Stat. 2236), the FDIC now has several statutory and
regulatory tools to combat the dangers inherent in transactions between
bank insiders and their institutions that the agency lacked in 1991
when the proposed rule was issued. Specifically, FDICIA required the
FDIC to promulgate rules governing three areas germane to the proposed
rule: external audits (section 112 of FDICIA), safety and soundness
standards (section 132 of FDICIA), and permissible state bank
activities and investments (section 303 of FDICIA). The FDIC believes
that these three regulations, when taken as a whole, adequately address
many of the concerns articulated in the proposal. In addition, the FDIC
received strongly negative comments in response to the proposed rule.
Commenters cited increased recordkeeping burdens and costs and an
inability to attract directors and officers if the rule were adopted.
Moreover, an FDIC policy statement advises the withdrawal of any
proposed rule that has not been acted upon by the FDIC's Board of
Directors within nine months of issuance.
Pursuant to section 112 of FDICIA, the FDIC added a new Part 363
(12 CFR Part 363) to its regulations requiring external audits and
audit committees for insured banks and thrifts. The final rule, issued
on June 2, 1993 and effective July 2, 1993 (58 FR 31332), applies to
institutions with $500 million or more in total assets as of the
beginning of each fiscal year after December 31, 1992. The rule
requires each covered institution to file an annual report with the
FDIC, its primary federal regulator, and any appropriate state banking
agency within 90 days after the end of its fiscal year. An independent
accountant must also report separately on the institution's compliance
with designated safety and soundness laws and regulations. The rule
further requires each covered institution to establish an audit
committee composed entirely of independent outside directors, who must
review the annual audit findings with management and the independent
public accountant. Additional audit committee requirements are imposed
upon ``large institutions,'' defined as those having $3 billion or more
in total assets.
Furthermore, section 132 of FDICIA added a new section 39 to the
Federal Deposit Insurance Act (FDI Act, 12 U.S.C. 1831p-1, as amended
by section 318(a) of the Riegle Community Development and Regulatory
Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160) which
requires the Federal bank and thrift supervisors to promulgate, either
by regulation or guideline, certain safety and soundness standards for
insured institutions and their holding companies. An interagency
proposal issued on November 18, 1993 (58 FR 60802), if adopted, would
articulate general safety and soundness standards in three categories
mandated by FDICIA: (1) operations and management; (2) asset quality,
earnings and stock valuation; and (3) employee compensation. However,
the proposed rule leaves the specific methods for achieving the
objectives of proper operations and management to each institution. The
standards are designed to identify emerging safety and soundness
problems and to require submission of a compliance plan before those
problems become serious enough to impair capital. If an institution
fails to meet a standard prescribed by guideline, the appropriate
Federal banking agency may require the institution to submit an
acceptable plan to achieve compliance with the standard.
Finally, section 303 of FDICIA added section 24 to the FDI Act
which prohibits insured state-chartered banks from directly or
indirectly acquiring or retaining any equity investments of a type or
in an amount not permissible for national banks. Section 24, which
became effective on the date of FDICIA's enactment (December 19, 1991),
requires divestiture of prohibited equity investments as quickly as
prudently possible, but no later than December 19, 1996. The FDIC
issued a final rule adding a new Part 362 (12 CFR Part 362) to its
regulations which implements section 24 on November 9, 1992 (57 FR
53211).
The FDIC believes that its regulations governing external audits
and safety and soundness standards sufficiently address the
recordkeeping and conflicts of interest concerns expressed in the
proposed rule. Furthermore, the FDIC's rules governing permissible
state bank investments effectively supplant the prohibition on real
estate investment contained in the proposal. Therefore, the proposed
rule is no longer necessary.
In addition, the comments received in response to the proposed rule
were overwhelmingly negative. In particular, 158 of the 213 comments
received opposed the rule. Only 11 supported the proposal, and 42
commenters suggested modifying it. Nearly half of all commenters (106)
argued that the proposal would adversely affect the ability of
institutions to attract and retain directors and officers by placing
unwarranted constraints on insider business transactions. Some
commenters further asserted that the rule would have the adverse effect
of discouraging any insider business dealings regardless of whether
they were sound transactions. Seventy-six commenters criticized the
proposed rule as creating tremendous recordkeeping burdens and costs on
banks with minimal demonstrated benefit. Furthermore, 53 commenters
characterized the proposal as unnecessary, maintaining that existing
statutes and regulations provide adequate protection to address the
proposal's concerns (e.g., section 8 of the FDI Act, granting general
enforcement authority (12 U.S.C. 1818); section 30 of the FDI Act,
prohibiting contracts that would adversely affect the safety and
soundness of insured institutions (12 U.S.C. 1831g); and sections 23A
and 23B of the Federal Reserve Act, imposing restrictions on
transactions with affiliates (12 U.S.C. 371c and 371c-1)). These
commenters insisted the problem was simply lax enforcement. Several
commenters also opposed the prohibition on real estate investments in
which an insider holds an equity interest, arguing that such
investments should be subject to an arm's-length standard like any
other insider transaction.
Lastly, the withdrawal is consistent with the FDIC's policy
statement on Development and Review of FDIC Rules and Regulations (44
FR 31007, May 30, 1979) which calls for withdrawal of any proposed
regulation on which final action by the FDIC's Board of Directors has
not been taken within nine months from the date of proposal. Far more
than nine months have elapsed since the proposed rule was adopted.
As a result of the intervening developments discussed above, the
FDIC believes that most of the elements and concerns contained in the
proposed rule have been adequately addressed. Therefore, the FDIC
considers the proposal unnecessary at this juncture. The FDIC reserves
the right, however, to revisit the issue at a later date if it
determines that such action is required or appropriate. In accordance
with the aforementioned FDIC policy statement, if the FDIC wishes at a
later date to reconsider a proposed regulation that has been withdrawn,
it will begin the rulemaking process anew (i.e., republish in the
Federal Register, resolicit public comment, etc.).
In consideration of the foregoing, the FDIC hereby withdraws
proposed Part 356 of Title 12 of the Code of Federal Regulations.
By Order of the Board of Directors.
Dated at Washington, D.C. this 20th day of December, 1994.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-31707 Filed 12-27-94; 8:45 am]
BILLING CODE 6714-01-P