Incorporation of Existing Statement of Policy Regarding Requests for Participation in the Affairs of an Insured Depository Institution by Convicted Individuals
| Published date | 20 August 2020 |
| Citation | 85 FR 51312 |
| Record Number | 2020-16464 |
| Section | Rules and Regulations |
| Court | Federal Deposit Insurance Corporation |
Federal Register, Volume 85 Issue 162 (Thursday, August 20, 2020)
[Federal Register Volume 85, Number 162 (Thursday, August 20, 2020)]
[Rules and Regulations]
[Pages 51312-51324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16464]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303 and 308
RIN 3064-AF19
Incorporation of Existing Statement of Policy Regarding Requests
for Participation in the Affairs of an Insured Depository Institution
by Convicted Individuals
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Final rule.
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SUMMARY: Section 19 of the Federal Deposit Insurance Act requires
persons convicted of certain criminal offenses to obtain prior written
consent before participating in the conduct of the affairs of any
depository institution. The Federal Deposit Insurance Corporation
(FDIC) is revising its existing regulations relating to section 19 to
revise the FDIC's procedures and standards relating to applications for
the FDIC's written consent, and to incorporate and revise the FDIC's
existing Statement of Policy for Section 19 of the Federal Deposit
Insurance Act (SOP). Incorporating the SOP into the FDIC's regulations
will make application of the SOP more transparent, increase certainty
concerning the FDIC's application process, afford regulatory relief,
and help both insured depository institutions and affected individuals
to understand the impact of section 19 and to potentially seek relief
from it. The FDIC's existing SOP will be rescinded on the date this
final rule (rule) becomes effective.
DATES: This rule is effective September 21, 2020.
FOR FURTHER INFORMATION CONTACT: Timothy Schuett, Review Examiner (763)
614-9473; Brian Zeller, Review Examiner (571) 345-8170; or Larisa
Collado, Section Chief (202) 898-8509, [email protected], in the
Division of Risk Management Supervision; or Graham Rehrig, Senior
Attorney, (202) 898-3829; John Dorsey, Acting Supervisory Counsel,
(202) 898-3807; Anne DeSimone, Deputy Regional Counsel, (781) 794-5541;
or Andrea Winkler, Acting Assistant General Counsel, (202) 898-3727, in
the Legal Division.
SUPPLEMENTARY INFORMATION:
I. Policy Objectives
The policy objective of the rule is to clarify how the FDIC
interprets and applies section 19 of the Federal Deposit Insurance Act
(section 19),\1\ clarify the application process for insured depository
institutions and individuals who seek relief from section 19, and
expand the scope of relief available for certain offenses. The FDIC SOP
provides the public with guidance relating to section 19 and the FDIC's
application of this statute. The current SOP, with modifications over
time, has been published and a resource for the public for over twenty
years. However, the terms and procedures outlined in the SOP have not
been adopted as formal regulations by the FDIC. To remove potential
ambiguities about the FDIC's approach to section 19 or the application
process, the rule incorporates much of the current SOP, while adopting
certain changes suggested by commenters.
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\1\ 12 U.S.C. 1829.
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II. Background and Public Comments
Section 19 prohibits, without the prior written consent of the
FDIC, the participation in banking by any person who has been convicted
of a crime of dishonesty or breach of trust or money laundering, or who
has agreed to enter into a pretrial diversion or similar program in
connection with the prosecution for such an offense. Further, this law
forbids an insured depository institution (IDI) from permitting such a
person to engage in any conduct or to continue any relationship
prohibited by section 19. Section 19 also imposes a ten-year ban for a
person convicted of certain crimes enumerated in Title 18 of the United
States Code, which can be removed only upon a motion by the FDIC and
approval by the sentencing court.
On December 16, 2019, the FDIC published a notice of proposed
rulemaking (proposal) to incorporate the SOP into the FDIC's existing
Procedure and Rules of Practice.\2\ In the proposal, the FDIC provided
a history of the SOP from its issuance in December 1998, through
clarifications in 2007 and 2011, modification in 2012, and through its
most-recent revision in August 2018.\3\ The FDIC proposed to
incorporate the current provisions of the SOP into its rules and
procedures in order to provide greater transparency into the FDIC's
interpretation and application of section 19, to provide greater
certainty concerning the FDIC's application process, and to aid both
IDIs and individuals who may be affected by section 19 to understand
its impact and potentially seek relief from its provisions. The FDIC
proposed to rescind such sections of 12 CFR 308, subpart M, that would
be duplicative of the changes proposed for part 303, subpart L, and to
revise the remaining sections to ensure conformity for any request for
a hearing when an application under section 19 has been denied.
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\2\ See 84 FR 68353.
\3\ See 84 FR 68353-54.
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The FDIC, in the proposal, requested comments on all aspects of its
approach to section 19. The FDIC also requested comments, in
particular, on the following topics:
[[Page 51313]]
The de minimis criteria for offenses that represent low
risk to the Deposit Insurance Fund;
expansion of the de minimis category for use of fake
identification;
modification of the five-year post-conviction cooling-off
period for certain offenses; and
the application of section 19 to expungements.
The comment period closed on March 16, 2020. The FDIC received
multiple comments from nine different commenters, consisting of three
policy institutes, a reentry employment provider, a depository
institution trade group, two financial institutions, an advocacy group
on behalf of 28 additional organizations, and an individual. All of the
comments generally supported the proposal. The comment received from
the individual did not offer specific changes to the proposal, but the
other eight commenters suggested a variety of changes. The comments and
the FDIC's responses are discussed below in Sections III and IV.
III. Description and Expected Effects of the Rule
The rule addresses, among other topics, who is covered by section
19, the types of offenses covered by section 19, the effect of the
completion of sentencing or pretrial-diversion program requirements in
the context of section 19, and the FDIC's procedures for reviewing
applications filed under section 19. The rule makes several significant
changes to the SOP, partly in response to the public comments. These
revisions include the following:
Expungements. The rule excludes all covered offenses that
have been expunged or sealed by a court of competent jurisdiction or by
operation of law.
De minimis offenses (offenses for which a person will be
deemed automatically approved and no application will be required).
Increases the small-dollar theft threshold to $1,000. Expands the de
minimis exception to include the use of a fake or false identification
by a person under the age of 21 to circumvent age based restrictions on
purchases, activities, or entry (not just alcohol-related purposes).
Allows for two covered de minimis offenses on a person's criminal
record to still qualify for the de minimis exception. (Note, no offense
committed against an IDI or insured credit union can qualify as ``de
minimis.'') If an individual has two covered offenses on their record,
the rule decreases the amount of time that must elapse, following the
date of conviction or entry into a pre-trial diversion program, before
the covered offenses may be deemed de minimis.\4\ The rule also
eliminates this waiting period when there is only one covered, de
minimis offense on a person's record.
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\4\ The FDIC notes that, during the de minimis waiting period,
individuals retain the option of filing an application for
consideration by the FDIC.
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Application procedures. Clarifies when and how an
application must be filed, the application types available, and how the
FDIC will evaluate an application. In addition, the rule addresses
denials of applications.
Specifically, the rule does the following:
A. Revised Provisions of 12 CFR Part 303, Subpart L
1. Section 303.220 What is section 19 of the FDI Act?
This section combines portions of the ``scope'' section in the
existing 12 CFR 303.220 and the introduction part of the SOP. Paragraph
(a) reflects the scope provisions. Paragraph (b) sets out the
application of section 19 to insured depository institutions, including
the conditional offers of employment that FDIC-supervised institutions
may make. The substance of this paragraph comes from the SOP. Paragraph
(c) also comes from the SOP and addresses the need for an application.
2. Section 303.221 Who is covered by section 19?
This section describes who is covered by section 19 and comes
mainly from the existing SOP. Paragraph (a) defines ``institution-
affiliated parties'' and others who may fall within section 19.
Paragraph (b) defines the term ``person'' under section 19 as an
individual, not a legal entity. Paragraph (c) concerns individuals who
file an application with the FDIC under section 19 and who also seek to
participate in the affairs of a bank or savings and loan holding
company, noting that such individuals may have to comply with any
filing requirements of the Board of the Governors of the Federal
Reserve System under 12 U.S.C. 1829(d) and (e). Paragraph (d) defines
when ``ownership'' or ``control'' results in the application of section
19 to an individual or individuals who may be deemed in control of, or
be deemed to be an owner of, an IDI.
3. Section 303.222 What offenses are covered under section 19?
This section addresses covered criminal offenses under section 19.
It comes mainly from the SOP. Paragraph (a) notes that section 19
applies to any person who has been convicted of any criminal offense
involving dishonesty, breach of trust, or money laundering, or who has
agreed to enter into a pretrial diversion or similar program in
connection with a prosecution for any such offense. This paragraph also
describes the restrictions that section 19 places upon such
individuals. Paragraph (b) requires that, to determine whether the
criminal offense is one of dishonesty, breach of trust, or money
laundering, the FDIC will look to the statutory elements of the
criminal offense or to court decisions in the relevant jurisdiction.
Paragraph (c) requires an application for all drug offenses, except
for simple possession, unless the criminal offense meets the criteria
in Sec. 303.227 for not filing an application. The FDIC has declined
to adopt a commenter's proposal that the FDIC eliminate all drug-
related convictions from being considered covered offenses under
section 19, or significantly narrow the scope of covered drug offenses.
The FDIC maintains that an application is required for it to determine
the nature of the offense and elements of the crime and therefore it
will continue the current requirement that an application be filed,
unless the offense is de minimis.
4. Section 303.223 What constitutes a conviction under section 19?
This section comes mainly from the SOP, but clarifies the status of
convictions reversed on appeal and expands and simplifies the exclusion
for expungements. The current SOP notes that a conviction or program
entry that has been completely expunged is not subject to section 19
and does not require an application. For the expungement to be
considered ``complete'' under the current SOP, the jurisdiction
granting the expungement must not allow the conviction or program entry
to be used for any subsequent purpose, including but not limited to an
evaluation of a person's fitness or character. This constraint has been
a source of confusion for the industry and individual applicants, and
the FDIC has twice undertaken to clarify this term in prior SOP
revisions. The public comments to the NPR make it clear that the
confusion remains.
Paragraph (a) states that there must have been a conviction of
record for section 19 to apply, and that section 19 does not apply to
arrests, pending cases not brought to trial (unless the person has a
program entry as set out in Sec. 303.224), or any conviction reversed
on appeal unless the reversal was for the purpose of re-sentencing.
This revised
[[Page 51314]]
language is in response to one commenter's request that the FDIC
clarify its position on appellate decisions as they pertain to the
scope of section 19. The FDIC notes, however, that covered offenses
that have been pardoned--and which are not otherwise excluded by the
SOP--will still require an application.
Paragraph (b) clarifies that, absent a program entry, when an
individual is charged with a covered offense but is subsequently
convicted of an offense that is not a covered offense, that conviction
is not subject to section 19.
Paragraph (c) excludes covered offenses that have been expunged or
sealed by a court of competent jurisdiction or by operation of law. Six
commenters asked that the FDIC significantly revise its policy on the
expungement of criminal records, including proposals to eliminate the
requirement of complete expungement. To support this view, commenters
highlighted the variance in expungement practices between jurisdictions
and the significant ambiguity for applicants and banks that are tasked
with interpreting unfamiliar state law. In fact, only a few states and
jurisdictions have expungement processes that result in a ``complete
expungement'' under the standards set forth in the current SOP. After
considering these comments, the FDIC has agreed to expand the scope of
the SOP's expungement language. The FDIC believes that these revisions
will reduce regulatory burden upon banks and potential applicants by
decreasing the number of required applications and reducing the time
spent interpreting the expungement laws of various jurisdictions.
Paragraph (d) excludes ``youthful offender'' judgments for minors
from the scope of section 19.
5. Section 303.224 What constitutes a pretrial diversion or similar
program under section 19?
This section comes mainly from the SOP. Paragraph (a) defines what
constitutes a pretrial diversion or similar program (a program entry),
and excludes program entries that occurred prior to November 29, 1990.
Paragraph (b) clarifies that when a covered offense either is
reduced by a program entry to an offense that would otherwise not be
covered by section 19 or is dismissed upon successful completion of a
program entry, the offense remains a covered offense for purposes of
section 19. The covered offense will require an application unless it
is de minimis as provided by Sec. 303.227.
Paragraph (c) states that expungements or sealings of program entry
records will be treated the same as expungements or sealings of
convictions.
6. Section 303.225 What are the types of applications that can be
filed?
This section is a combination of the existing Sec. Sec. 303.221
and 308.158 and the SOP. Paragraph (a) establishes the institution-
filing requirement (bank-sponsored applications). Paragraph (b)
establishes the procedure to apply when an IDI will not file an
application for an individual (individual waiver applications).
7. Section 303.226 When is an application to be filed?
This section states when an application is to be filed, excepting
from its requirement those covered offenses which are considered de
minimis under subpart L. An application will not be considered by the
FDIC until all sentencing requirements associated with a conviction
have been met or all requirements of the program entry have been
completed.
8. Section 303.227 When is an application not required for a covered
conviction or program entry (de minimis offenses)?
This section comes mainly from the SOP but has been expanded. Under
the current SOP, certain minor offenses are deemed to present low risk
to insured institutions. Currently, an individual's covered offense may
be considered de minimis only when there is one conviction or program
entry, and the conviction or program entry occurred at least five years
before the date on which an application would be required. For
applicants whose underlying misconduct occurred when they were 21 years
of age or younger, the waiting period is reduced to 30 months. Certain
individuals may also be required to complete all sentencing or program
requirements before qualifying for the de minimis exception.
Eight commenters supported the expansion of the de minimis
exception to filing as it currently exists, and seven of the commenters
provided specific proposals for the expansion, clarification, or
modification, of this exception. Three commenters proposed that the
FDIC reduce the waiting period to qualify under the de minimis
framework. Three commenters also proposed that the FDIC increase the
simple-theft threshold to $1,000 to align with the ``bad-check'' or
insufficient-funds threshold under the de minimis framework. Moreover,
three commenters proposed that the FDIC include additional minor crimes
under the de minimis exception, regardless of the maximum punishment
for those crimes.
Paragraph (a) establishes the general criteria for convictions or
program entries to be considered de minimis, if the criteria are met.
If the de minimis conditions are satisfied, the person is deemed
automatically approved and no application will be required. The general
criteria have been expanded, in response to comments, in two
significant ways: (1) An individual with two convictions or program
entries for covered offenses may be eligible for the de minimis
exception, provided the other criteria are satisfied with respect to
both convictions or program entries; and (2) the five-year waiting
period has been eliminated when the individual has only one de minimis
offense, and the waiting period has been reduced to three years when
the individual has two de minimis offenses (or 18 months if the actions
that resulted in both convictions or program entries all occurred when
the individual was 21 years of age or younger).
The FDIC continues to process a number of applications from
individuals who are low risk, and these applications are generally
approved. FDIC review of these applications revealed that many include
multiple convictions or program entries for minor offenses, or
convictions or program entries that occurred less than 5 years (or 30
months) ago. Because these applications are considered low risk and are
generally approved, the FDIC is expanding the de minimis criteria to
include individuals with up to two convictions or program entries, each
of which offenses would, by themselves, qualify under the de minimis
exception.
Paragraph (b) establishes certain other specific exceptions to the
filing requirement, which exceptions, if met, will result in a
potential application being deemed automatically approved. Partly in
response to the comments, the FDIC has made substantive changes to
paragraphs (b)(1), (3), and (4). Paragraph (b)(1) shortens the 30-month
waiting period under the general criteria to 18 months when all the
elements of the offense(s) occurred when the person was age 21 or
younger. Paragraph (b)(2) establishes the criteria for when certain
convictions or program entries for bad or insufficient-funds checks
will not require an application. Paragraph (b)(3) establishes the
criteria for when certain small-dollar simple theft convictions or
program entries of $1,000 or less will not require an application. The
small-dollar, simple theft de minimis criteria was added to the SOP by
the FDIC
[[Page 51315]]
Board in July 2018. The FDIC continues to process section 19
applications for convictions or program entries involving small-dollar,
simple theft. These covered offenses are relatively low-risk and
generally result in approval of an application following a reasonable
period of rehabilitation. The rule increases the dollar limit to
$1,000--from the current $500--based on some commenters' suggestions to
better align this threshold with the limit for ``bad'' or insufficient
funds check(s), and to reduce the number of low-risk applications that
have historically been approved. Excluded from this exception to filing
are convictions or program entries for burglary, forgery, identity
theft, and fraud. Paragraph (b)(4) establishes the criteria for when
the creation or possession of a fake or false identification by a
person under the age of 21, or the use of a fake or false
identification by a person to circumvent age-based restrictions on
purchases, activities, or entry will not require an application. This
exception was expanded beyond the use of a fake or false identification
to purchase alcohol or to enter a premises where alcohol is served. The
FDIC believes that this provision can be expanded to provide additional
regulatory relief without significantly increasing risk to the
financial system.
Paragraph (c) requires that, for any case where the person is able
to avail themselves of the de minimis exception to filing, she or he
must disclose the conviction(s) or program entry(ies) to an IDI and
must qualify for a fidelity bond to the same extent as others in a
similar position.
Paragraph (d) states that any conviction or program entry for
criminal offenses under Title 18 of the U.S. Code, as set out in 12
U.S.C. 1829(a)(2), cannot qualify under the de minimis exception to
filing an application.
9. Section 303.228 How To File an Application
This section comes from the SOP and requires that an IDI is
required to file an application on behalf of an individual under
section 19 to participate in its affairs unless the FDIC grants the
individual a waiver for good cause shown to file on her or his own
behalf. IDIs should file with the FDIC's regional office where the
institution's home office is located, and any individual waiver and
application should be filed with the FDIC's regional office where the
person lives.
10. Section 303.229 How an Application is Evaluated
This section comes from a combination of Sec. 308.157 and the SOP.
Paragraph (a) sets out the ultimate determination the FDIC will make as
to the level of risk the applicant poses to an IDI and whether it will
consent to allow the person to participate in an IDI's affairs. In
evaluating the risk posed by the person's participation, the FDIC has
established nine factors that it will consider, including other factors
that might be relevant to a particular application. Paragraph (b)
states that the question of whether a person was guilty of the offense
for which the person was convicted, or had a program entry for, is not
an issue for part 303, subpart L or for part 308, subpart M. Paragraph
(c) states that the FDIC will apply the factors and determination used
in paragraph (a) when evaluating an application that is made to
terminate the ten-year ban under 12 U.S.C. 1829(a)(2). Paragraph (d)
provides that a person must be bonded the same as others in that
position, and the person must disclose the covered conviction or
program entry to any IDI in which she or he intends to participate.
Paragraphs (e) and (f) pertain to bank-sponsored applications.
Paragraph (e) provides that FDIC approval to work pertains to a
specific job at a specific IDI. The IDI may be required to seek
permission from the FDIC before there may be a significant change in a
person's duties or responsibilities, and the FDIC regional director may
request a new application. Paragraph (f) states that approval to work
at a specific IDI is limited to that institution--or to a successor
institution (for instance, as a result of the IDI's merger with or
acquisition by another IDI)--and a new application is required to work
at another IDI.
11. Section 303.230 What will the FDIC do if the application is denied?
This section is a combination of current Sec. Sec. 303.223,
308.157, and 308.159. Paragraph (a) provides that the FDIC will provide
a written denial of an application, which will summarize or cite the
relevant factors from Sec. 303.229. Paragraph (b) provides that the
applicant can file a written request for a hearing under part 308,
subpart M within 60 days of the denial.
12. Section 303.231 Waiting Time for a Subsequent Application if an
Application is Denied
This section comes mainly from Sec. 308.158 and was clarified so
that an applicant will need to wait one year from the date of the
denial or decision of the FDIC Board or its designee.
B. Revised Provisions of 12 CFR Part 308, Subpart M
1. Section 308.156 Scope
This section has been revised to reflect its application to denials
that are issued under 12 CFR part 303, subpart L.
2. Section 308.157 Relevant Considerations
This section will be rescinded.
3. Section 308.158 Filing Papers and Effective Date
This section will be rescinded.
4. Section 308.159 Denial of Application
This section has been revised to reflect the outcome of the
application process in part 303, subpart L and to clarify the procedure
by which a hearing may be requested. It will be renumbered as Sec.
308.157.
5. Section 308.160 Hearings
This section will remain as it currently exists, but will be
renumbered as Sec. 308.158.
After renumbering, Sec. Sec. 308.159 and 309.160 will be reserved.
C. Expected Effects
The changes adopted will provide immediate relief to IDIs, as well
as to individuals who represent a low risk to the Deposit Insurance
Fund and who would otherwise be required under section 19 to file
waiver applications, if they wish to be employed by an IDI. Moreover,
these applications would very likely be approved under existing
practices. Based on the FDIC's analysis of applications submitted
between January 1, 2017, through April 30, 2020, the changes would not
have altered the outcome of any applications that were controversial or
ultimately denied.
Overall, the FDIC expects the rule to have relatively small
effects, in the aggregate, on the public and insured institutions. The
FDIC currently insures 5,186 depository institutions, which could be
affected by the rule.\5\ Additionally, as discussed previously, the
rule will apply to certain persons covered by the provisions of section
19 who are or wish to become employees, officers, directors or
shareholders of an IDI. In the period from 2014 through 2019, the FDIC
received 69 bank-sponsored section 19 applications, an average of about
12 per year. Additionally, the FDIC received 654
[[Page 51316]]
individual section 19 applications during the same period, an average
of 109 per year.\6\ Therefore, the FDIC estimates that the rule would
affect at least 12 FDIC-insured depository institutions, and 109
individuals per year. The FDIC acknowledges that these estimates do not
fully capture the full effect of the rule; most notably, the estimates
do not take into account any individuals or institutions who choose not
to apply rather than go through the application process.
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\5\ FDIC Call Report Data, December 31, 2019.
\6\ Application Tracking System.
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One commenter made this point, suggesting that the FDIC is likely
underestimating the number of ex-offenders affected by the rule.
Specifically, this commenter suggested that the number of section 19
applications received does not take into account the number of
individuals or institutions who choose not to apply because of the
complexity of the application process. The FDIC agrees that this is one
reason the estimates chosen do not fully reflect the impact of the
rule.
As described previously, the rule incorporates and revises the
current content of the SOP into the FDIC's regulations. The FDIC
believes the codification is unlikely to have substantive effects on
most covered entities and individuals. The FDIC already considers
individuals who have been convicted of a crime of dishonesty, breach of
trust, or money laundering, who participate in the affairs of an IDI
without the prior written consent of the FDIC, to be subject to section
19, and will continue to do after the SOP becomes codified.
To the extent that the revised consideration of expungements,
reduction in waiting periods, increase in the threshold for certain
small-dollar simple-theft convictions, or other items provide relief to
certain institutions or individuals, the FDIC believes that such
effects are likely to be relatively small. As discussed previously,
some of these changes are being adopted to establish better alignment
with other regulatory limits or more-consistent treatment of
individuals. Other revisions are intended to reduce regulatory burden
on individuals and IDIs by decreasing the number of applications that
would otherwise be required under section 19. The FDIC believes that
such changes more accurately reflect the risk of dishonesty and breach
of trust posed by the potential employment of certain individuals to
institutions. As noted earlier, the FDIC has received on average about
109 section 19 applications per year since 2014, relative to a
population of insured institutions of over 5,000, suggesting that the
effects of the rule are likely to be relatively small.
In short, the rule will benefit covered entities and individuals by
further clarifying the FDIC's interpretation of section 19 and the
application process, expanding regulatory relief, and reducing the
number of applications required under section 19.
IV. Alternatives Considered
The FDIC considered the other proposals that were submitted by the
commenters but believes that the final amendments represent the most
appropriate option for covered entities and individuals.
A. Application Process
Two commenters requested that the FDIC reduce the section 19
application burden. One commenter provided this recommendation without
specifying the proposed changes. The other commenter asked that the
FDIC continually streamline and simplify the application process and
not require court documentation from an applicant because the FDIC
already has access to criminal ``rap sheets.'' The FDIC notes that it
has periodically revised the SOP over the past several decades, and it
anticipates that it will revise its section 19 regulations, as needed,
in the future. The FDIC revises its application instructions as
warranted to improve clarity--such as by noting that bank-sponsored
applications and individual-waiver applications are distinct
application processes, rather than a two-step process--but a regulation
is not the appropriate method to amend the application form. The FDIC
declines to adopt the proposal concerning court records. Rap sheets
generally do not contain the level of detail needed to adequately
assess the circumstances surrounding a crime and sentencing, especially
with regard to pretrial diversions. Moreover, the court documentation
is used to confirm the information provided by the applicant.
Two commenters made recommendations concerning the FDIC's approval
rate of section 19 applications. The two commenters asked that the FDIC
simplify the application process to encourage a higher number of
applicants, and one commenter asked that the FDIC commit to
significantly increasing its application approval-rate. The FDIC does
clarify aspects of the application instructions, as noted above. The
FDIC anticipates that the expansion of the de minimis framework and the
exclusion of all expungements and sealed-records orders from the scope
of section 19 will reduce the number of applications required. The
FDIC, however, declines to commit to an increase in approval rates,
since doing so would be arbitrary, and applications are reviewed on a
case-by-case basis.
One commenter asked that the FDIC relax approval conditions for
bank-sponsored applications. The FDIC declines to adopt this proposal,
because the approval conditions are meant to address the specific
position being sought at a particular IDI.
One commenter proposed that the FDIC not require the repayment of
fees or fines before the submission of an application. The FDIC
declines to adopt this proposal in full. Rehabilitation is a
significant factor that is evaluated during the application process,
and completion of all sentencing requirements is an integral part of
rehabilitation. As such, the case must be considered final by the
procedures of the applicable jurisdiction. The FDIC notes, however,
that an individual is not required to have completed all sentencing
requirements in order to qualify for the de minimis exceptions
pertaining to convictions or program entries for (i) ``bad'' or
insufficient funds checks, and (ii) the creation, possession, or use of
a fake, false, or altered identification to circumvent age-based
restrictions.
One commenter asked that the FDIC delegate more authority to
process section 19 applications to FDIC regional offices. The FDIC
believes that the current delegations are appropriate and provide more
consistency and uniformity in decision-making. Moreover, the FDIC
anticipates that the expansion of the de minimis framework will result
in more decision-making at the regional-office level, as regional
office staff typically respond to inquiries as to whether the de
minimis exception applies to particular offenses.
Two commenters requested that the FDIC commit to reducing
application-processing times by certain amounts. In response, the FDIC
notes that while the agency tries to process applications quickly, the
establishment of such a timeline would be an internal-processing matter
and would not fall within the purpose or intent of the rule. Moreover,
application processing is dependent upon receipt of background
investigation materials from other agencies, whose timeframes for
action the FDIC does not control.
One commenter made several proposals concerning an applicant's
rehabilitation, requesting that the FDIC do the following: provide a
checklist of rehabilitation factors, assess rehabilitation relative to
the position
[[Page 51317]]
sought by the applicant, set maximum limits on rehabilitation time, and
relax rehabilitation standards. The FDIC may provide additional
information in the application instructions and in the publication Your
Complete Guide to Section 19, but the rule is not the appropriate forum
to provide this information. The FDIC declines to adopt the other
proposals. For bank-sponsored applications, the FDIC already considers
rehabilitation relative to the position sought by the applicant.
However, individual waivers allow a person to work in any position, so
this proposal is not feasible for such applications. Rehabilitation, in
the context of individual waivers, is not assessed relative to any
potential position but rather to the nature of the covered offense. The
FDIC does not adopt the proposal concerning setting maximum limits on
rehabilitation time because the agency believes that such limits would
be arbitrary. Nor does the FDIC adopt the proposal concerning the
relaxation of rehabilitation standards. Rehabilitation in relation to
the nature of the offense is one of the standards that is assessed when
the FDIC processes applications, and the de minimis exception, as
amended, provides sufficient flexibility.
Three commenters made proposals concerning transparency, asking
that the FDIC improve its web resources, issue written denials (rather
than ask an applicant to withdraw an application), and publicize more
application data. The FDIC believes that its website, www.fdic.gov,
specifically the brochure Your Complete Guide to Section 19, available
at https://www.fdic.gov/regulations/applications/resources/brochure-section-19.pdf, provides sufficient and convenient resources in a
single location. The FDIC also notes that a regulation is not the
appropriate mechanism to apply such a requirement on the FDIC. As for
the request concerning written denials, the FDIC cannot issue a denial
if an individual chooses not to proceed with an application. The FDIC
already publishes the orders for approvals and denials of section 19
applications on its website--specifically, on the FDIC Enforcement
Decisions and Orders page (https://orders.fdic.gov/s/searchform), which
is searchable--and aggregates numbers of all section 19 applications
processed in its annual report. A regulation is not the appropriate
method to apply such a requirement on the FDIC.
B. Bank Hiring Practices
Four commenters suggested that the FDIC revise policies concerning
bank hiring practices. Two commenters asked that the FDIC clarify that
banks are allowed to delay inquiry into an applicant's criminal history
until after a job offer is extended. The FDIC notes that this approach
is already stated as permissible in the SOP for FDIC-supervised banks.
To the extent that the commenters request that the FDIC direct IDIs to
follow this practice, the FDIC declines to make this change for several
reasons. First, the FDIC does not have primary supervisory authority
over IDIs that are subject to the supervisory authority of other
Federal banking agencies (FBAs). Therefore, it is within the
supervisory authority of the other FBAs to determine what is
satisfactory to them in reviewing which policies and procedures their
respective institutions adopt to ensure compliance with section 19.
Second, the FDIC's authority under section 19 focuses on the review
needed to provide consent to remove the bar imposed by section 19 and
allow an individual to participate in the affairs of an IDI. It does
not grant the FDIC rulemaking authority to impose conditions or
requirements on an IDI other than to note that the IDI faces a criminal
penalty for acting in violation of the statute.
Two commenters asked that the FDIC clarify what constitutes a
``reasonable inquiry'' for a bank background check. The FDIC declines
to adopt this proposal. The procedures that constitute a reasonable
inquiry will vary from bank to bank, and the FDIC believes that this
determination is best left to the business judgments of these
institutions.
C. Coverage of Section 19
Five commenters requested that the FDIC change its interpretation
of the coverage of section 19. One commenter asked that the SOP note
that Federal law preempts state and local law concerning section 19.
The FDIC believes that it is inappropriate to include such a statement
in this regulation but notes that section 19 applies to all IDIs, as
defined under Title 12 of the U.S. Code.
One commenter asked that the FDIC further clarify whether
independent contractors and other individuals are considered
institution-affiliated parties (IAPs), for section 19 purposes. The
FDIC believes that additional clarification is unnecessary because the
FDIC's revised section 19 regulations, 12 U.S.C. 1813(u) and its
related caselaw, as well as other statutory and regulatory provisions,
provide ample clarification as to who qualifies as an IAP under Title
12 of the U.S. Code.
Two commenters asked that the FDIC recommend changes to section 19
to Congress. This request is outside the scope of this rulemaking.
Four commenters requested that the FDIC establish a time limit on
covered offenses, whereby offenses would be ``washed out,'' for section
19 purposes, after a certain period of time has passed. The FDIC notes
that certain covered offenses--such as money laundering--have a
mandatory 10-year prohibition period, absent court approval, under 12
U.S.C. 1829(a)(2). Therefore, the FDIC could not grant a section 19
waiver for an applicant convicted under a crime listed in section
1829(a)(2) without Congress amending section 19. For covered offenses
that are not specifically listed under section 1829(a)(2), the FDIC
declines to provide a blanket washout rule. Section 19 has no maximum
time limit for how long an individual is prohibited from participation
at an IDI. Congress would have to change section 19 for the FDIC to
implement such a proposal. However, the FDIC notes that the expanded de
minimis framework provides significant regulatory relief.
D. Covered Offenses
One commenter requested that the FDIC narrow the definition of
``pretrial diversion'' in the SOP. The FDIC declines to adopt this
proposal and believes that the existing SOP language adequately and
fairly describes pretrial diversion program entries.
Two commenters proposed that the FDIC reduce the type of offenses
covered by the SOP. The FDIC declines to adopt these proposals. The
types of offenses covered by section 19 are broadly defined in the
statute as those involving dishonesty, breach of trust, or money
laundering. The FDIC determines whether certain crimes involve such
elements under section 19 when the FDIC processes applications. A
change to the text of section 19 would require legislation. Moreover,
the regulation will codify certain minor crimes as de minimis, which
will exclude such crimes from requiring an application.
E. De minimis Exception
Two commenters asked that the time actually served in jail
component of the de minimis exception be amended to exclude instances
where the applicant only served pretrial detention. The FDIC declines
to adopt this proposal because pretrial detention is typically
incorporated into the ultimate sentence as time served.
One commenter proposed that the maximum time served be increased to
three years, and that other restrictions on the freedom of movement
(such as probation), be excluded from being considered actual time
served. The FDIC notes that the ``time served'' factor does
[[Page 51318]]
not apply to individuals on probation or parole who may be restricted
to a particular jurisdiction, or who must report occasionally to an
individual or to a specified location. The FDIC further notes that the
``time served'' factor does not apply to individuals who are restricted
to a substance abuse treatment program facility for part or all of the
day. The ``time served'' factor applies to individuals confined to a
psychiatric treatment center in lieu of a jail, prison, or house of
correction on mental-competency grounds, but not to individuals ordered
to attend outpatient psychiatric treatment. The FDIC declines to
further expand the time-served component, because the FDIC believes
that this proposal is too expansive.
Two commenters asked that the FDIC expand the de minimis exception
for offenses committed by persons aged 21 or younger. One proposal
called for the elimination of the maximum-punishment factor. The FDIC
declines to expand the de minimis framework beyond the significant
revisions outlined in Section III, which revisions pertain, in part, to
offenses committed by persons 21 years of age or younger.
One commenter asked that the FDIC exclude entirely from
consideration all offenses that occurred before a certain, relatively
young age. The FDIC believes that this request is too expansive and
declines to adopt the proposal.
Three commenters recommended that the FDIC increase the actual
jail-time-served factor. The FDIC declines to further expand the de
minimis framework beyond the significant revisions outlined in Section
III.
One commenter suggested that the FDIC increase the ``bad'' or
insufficient funds check(s) threshold from $1,000 to $2,500. The FDIC
declines to expand the de minimis framework as proposed, because the
FDIC considers the current threshold appropriate.
One commenter asked that the FDIC expand the maximum potential
incarceration period for a covered offense from one year to three
years, under the de minimis framework. The FDIC declines to further
expand the de minimis exception beyond the significant revisions
outlined in Section III and believes that the current threshold is
appropriate.
F. Status Quo, or Issuing the Rule as Originally Proposed
The FDIC also considered the status quo alternative of retaining
the existing section 19 SOP and regulations, as well as issuing the
rule as originally proposed.\7\ The FDIC, however, believes that the
rule further clarifies the FDIC's application of section 19 and the
application process for IDIs and individuals who seek relief from its
provisions, while posing no substantive costs, relative to the status
quo alternative. Additionally, the FDIC believes that the changes
adopted more accurately reflect the risk of dishonesty, breach of
trust, and money laundering posed by the potential employment of
certain individuals to institutions. None of the commenters advocated
for the status quo alternative. Moreover, the revisions made between
the proposal and the final rule should result in significant regulatory
relief for IDIs and individuals.
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\7\ 12 CFR part 303, subpart L and 12 CFR part 308, subpart M.
---------------------------------------------------------------------------
V. Regulatory Analysis
The Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
(PRA),\8\ the FDIC may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently valid Office of Management and Budget (OMB)
control number.
---------------------------------------------------------------------------
\8\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The rule includes clarification of reporting requirements in an
existing FDIC information collection entitled Application Pursuant to
Section 19 of the Federal Deposit Insurance Act (3064-0018) that should
result in a decrease in the number of applications filed. However, the
FDIC does not currently have access to data that would enable it to
accurately estimate what the actual decrease may be. As such, the FDIC
does not believe that a change to the number of respondents or the PRA
burden in its existing information collection is necessary at this
time. The FDIC will continue to monitor the number of applications
received going forward, and will incorporate any changes in future
submissions, including the next information-collection renewal.
Therefore, no information collection request will be submitted to the
OMB for review.
The Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires an agency,
in connection with a proposed rule, to prepare and make available for
public comment an initial regulatory flexibility analysis that
describes the impact of a rule on small entities.\9\ However, a
regulatory flexibility analysis is not required if the agency certifies
that the rule will not have a significant economic impact on a
substantial number of small entities. The Small Business Administration
(SBA) has defined ``small entities'' to include banking organizations
with total assets of less than or equal to $600 million that are
independently owned and operated or owned by a holding company with
less than or equal to $600 million in total assets.\10\ Generally, the
FDIC considers a significant effect to be a quantified effect in excess
of 5 percent of total annual salaries and benefits per institution, or
2.5 percent of total noninterest expenses. The FDIC believes that
effects in excess of these thresholds typically represent significant
effects for FDIC-supervised institutions. As discussed further below,
the FDIC certifies that this rule will not have a significant economic
impact on a substantial number of FDIC-supervised small entities.
---------------------------------------------------------------------------
\9\ 5 U.S.C. 601 et seq.
\10\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 84 FR 34261 (July 18, 2019), effective August 19,
2019). In its determination, the ``SBA counts the receipts,
employees, or other measure of size of the concern whose size is at
issue and all of its domestic and foreign affiliates.'' See 13 CFR
121.103. Following these regulations, the FDIC uses a covered
entity's affiliated and acquired assets, averaged over the preceding
four quarters, to determine whether the covered entity is ``small''
for the purposes of RFA.
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The FDIC insures 5,186 depository institutions, of which 3,815 are
defined as small banking organizations according to the RFA.\11\ In the
period from 2014 through 2019, the FDIC received 33 bank-sponsored
section 19 applications from small, FDIC-insured institutions, an
average of about 6 per year. Additionally, the FDIC received 654
section 19 applications from individuals during the same period, an
average of 109 per year.\12\ To determine the maximum number of small,
FDIC-supervised institutions who could be affected by the rule, this
analysis assumes that each applicant is seeking employment at a
different bank; each bank is a small, FDIC-insured institution; and no
FDIC-insured institutions or individuals are affected except those who
have submitted section 19 applications. Based on these assumptions, 115
(3.0 percent of) small, FDIC-insured institutions on average, annually,
would be affected by the rule.\13\ However, in the FDIC's experience,
section 19 applications from individuals are compelled by the
applicant's intent to seek employment at
[[Page 51319]]
FDIC-insured institutions that are generally not small. Therefore, the
FDIC believes that the number of small, FDIC-insured institutions
affected by the rule could be less than 115.
---------------------------------------------------------------------------
\11\ FDIC Call Report, December 31, 2019.
\12\ Application Tracking System.
\13\ (115/3,815) * 100 = 3.01 percent.
---------------------------------------------------------------------------
As described previously, the rule incorporates and revises the
current content of the SOP into the FDIC's regulations. The FDIC
considers individuals who have been convicted of a crime of dishonesty,
breach of trust, or money laundering, who participate in the affairs of
an IDI without the prior written consent of the FDIC, to be subject to
section 19, and will continue to do so under the rule. The rule will,
however, expand the scope of the de minimis exception and, therefore,
expand the number of offenses that will not require an application
under section 19. Both of these changes will likely result in a
reduction in section 19 applications.
To the extent that the current content of the SOP conveys any
ambiguity as to the FDIC's application of section 19 or the application
process, the rule will benefit covered entities by further clarifying
this topic and process. Based on the FDIC's estimate, mentioned
earlier, that the rule could affect about 3 percent of small FDIC-
insured institutions per year, such effects are likely to be relatively
small.
To the extent that the revised consideration of expungements,
reduction in waiting periods, increases in certain small-dollar simple-
theft convictions, or other items provide relief to certain small
institutions or individuals, the FDIC believes that such effects are
likely to be relatively small. As discussed previously, some of these
changes are being adopted to establish better alignment with other
regulatory limits or more-consistent treatment of individuals. Other
revisions are intended to reduce regulatory burden on individuals and
IDIs by decreasing the number of applications that would otherwise be
required under section 19. The FDIC believes that such changes more
accurately reflect the risk of dishonesty and breach of trust posed by
the potential employment of certain individuals to small institutions.
Again, based on the FDIC's estimate, mentioned earlier, that the rule
could affect about 3 percent of small FDIC-insured institutions per
year, such effects are likely to be relatively small.
Based on the information above, the FDIC certifies that the rule
will not have a significant economic impact on a substantial number of
small entities.
Plain Language
Section 722 of the Gramm-Leach-Bliley Act \14\ requires each FBA to
use plain language in all of its proposed and final rules published
after January 1, 2000. The FDIC has sought to present the rule in a
simple and straightforward manner. The FDIC did not receive any
comments on the use of plain language.
---------------------------------------------------------------------------
\14\ 12 U.S.C. 4809.
---------------------------------------------------------------------------
Riegle Community Development and Regulatory Improvement Act of 1994
Under section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\15\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
IDIs, each FBA must consider, consistent with principles of safety and
soundness and the public interest, any administrative burdens that such
regulations would place on depository institutions, including small
depository institutions, and customers of depository institutions, as
well as the benefits of such regulations. In addition, section 302(b)
of the RCDRIA requires new regulations and amendments to regulations
that impose additional reporting, disclosures, or other new
requirements on IDIs generally to take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\16\
---------------------------------------------------------------------------
\15\ 12 U.S.C. 4802(a).
\16\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
The FDIC has determined that the final rule would not impose
additional reporting, disclosure, or other requirements on IDIs;
therefore, the requirements of the RCDRIA do not apply. Therefore, in
conjunction with the RCDRIA, the rule will be effective on September
21, 2020.
The Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major''
rule.\17\ If a rule is deemed a ``major rule'' by the OMB, the
Congressional Review Act generally provides that the rule may not take
effect until at least 60 days following its publication.\18\
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\17\ 5 U.S.C. 801 et seq.
\18\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------
The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in: (A)
An annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions; or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.\19\
---------------------------------------------------------------------------
\19\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------
The OMB has determined that the final rule is not a major rule for
purposes of the Congressional Review Act, and the FDIC will submit the
final rule and other appropriate reports to Congress and the Government
Accountability Office for review.
List of Subjects
12 CFR Part 303
Administrative practice and procedure.
12 CFR Part 308
Rules of practice and procedure.
Authority and Issuance
For the reasons stated in the preamble and under the authority of
12 U.S.C. 1819 (Seventh and Tenth), the FDIC amends 12 CFR parts 303
and 308 as follows:
PART 303--FILING PROCEDURES
0
1. The authority citation for part 303 continues to read as follows:
Authority: 12 U.S.C. 378, 1464, 1813, 1815, 1817, 1818, 1819(a)
(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1,
1831w, 1835a, 1843(l), 3104, 3105, 3108, 3207, 5414, 5415, and 15
U.S.C. 1601-1607.
0
2. Revise subpart L to read as follows:
Subpart L--Section 19 of the FDI Act (Consent to Service of Persons
Convicted of, or Who Have Program Entries for, Certain Criminal
Offenses)
Sec.
303.220 What is section 19 of the FDI Act?
303.221 Who is covered by section 19?
303.222 What offenses are covered under section 19?
303.223 What constitutes a conviction under section 19?
303.224 What constitutes a pretrial diversion or similar program
(program entry) under section 19?
303.225 What are the types of applications that can be filed?
303.226 When must an application be filed?
303.227 When is an application not required for a covered offense or
program entry (de minimis offenses)?
303.228 How to file an application.
303.229 How an application is evaluated.
303.230 What will the FDIC do if the application is denied?
[[Page 51320]]
303.231 Waiting time for a subsequent application if an application
is denied.
Subpart L--Section 19 of the FDI Act (Consent to Service of Persons
Convicted of, or Who Have Program Entries for, Certain Criminal
Offenses)
Sec. 303.220 What is section 19 of the FDI Act?
(a) This subpart covers applications under section 19 of the
Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1829. Under section
19, any person who has been convicted of any criminal offense involving
dishonesty, breach of trust, or money laundering, or has agreed to
enter into a pretrial diversion or similar program (program entry) in
connection with a prosecution for such offense, may not become, or
continue as, an institution-affiliated party (IAP) of an insured
depository institution (IDI); own or control, directly or indirectly,
any IDI; or otherwise participate, directly or indirectly, in the
conduct of the affairs of any IDI without the prior written consent of
the FDIC.
(b) In addition, the law bars an IDI from permitting such a person
to engage in any conduct or to continue any relationship prohibited by
section 19. IDIs should therefore make a reasonable inquiry regarding
an applicant's history to ensure that a person who has a conviction or
program entry covered by the provisions of section 19 is not hired or
permitted to participate in its affairs without the written consent of
the FDIC issued under this subpart. FDIC-supervised IDIs may extend a
conditional offer of employment contingent on the completion of a
background check satisfactory to the institution and to determine if
the applicant is barred under section 19, but the job applicant may not
work for, be employed by, or otherwise participate in the affairs of
the IDI until the IDI has determined that the applicant is not barred
under section 19.
(c) If there is a conviction or program entry covered by the bar of
section 19, an application under this subpart must be filed seeking the
FDIC's consent to become, or to continue as, an IAP; to own or control,
directly or indirectly, an IDI; or to otherwise participate, directly
or indirectly, in the affairs of the IDI. The application must be
filed, and consented to, prior to serving in any of the foregoing
capacities unless such application is not required under the subsequent
provisions of this subpart. 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
IDI 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.
Sec. 303.221 Who is covered by section 19?
(a) Section 19 covers IAPs, as defined by 12 U.S.C. 1813(u), and
others who are participants in the conduct of the affairs of an IDI.
Therefore, all employees of an IDI that fall within the scope of
section 19, including 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 IAPs are
covered depends upon their degree of influence or control over the
management or affairs of an IDI. In the context of the FDIC's
application of section 19, coverage would apply to an IDI's holding
company's directors and officers to the extent that they have the power
to define and direct the management or affairs of an IDI. Similarly,
directors and officers of affiliates, subsidiaries or joint ventures of
an IDI or its holding company will be covered if they participate in
the affairs of the IDI or are in a position to influence or control the
management or affairs of the insured institution. Typically, an
independent contractor does not have a relationship with the IDI other
than the activity for which the institution has contracted. An
independent contractor who influences or controls the management or
affairs of the IDI would be covered by section 19.
(b) The term ``person,'' for purposes of section 19, means an
individual, and does not include a corporation, firm, or other business
entity.
(c) Individuals who file an application with the FDIC under the
provisions of section 19 who also seek to participate in the affairs of
a bank holding company or savings and loan holding company may have to
comply with any filing requirements of the Board of the Governors of
the Federal Reserve System under 12 U.S.C. 1829(d) and (e).
(d) Section 19 specifically prohibits a person subject to its
provisions from owning or controlling an IDI. The terms ``control'' and
``ownership'' under section 19 shall have the meaning given to the term
``control'' 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
an IDI (or 10 percent of the voting shares if no other person has more
shares) or the ability to direct the management or policies of the
institution. Under the same standards, a person will be deemed to
``own'' an IDI if that person owns 25 percent or more of the
institution's voting stock, or 10 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 control or
ownership of shares above the foregoing limits.
Sec. 303.222 What offenses are covered under section 19?
(a) 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 includes offenses that 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 that
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.
(b) Whether a crime involves dishonesty, breach of trust, or money
laundering will be determined from the statutory elements of the
offense itself or from court determinations that the statutory
provisions of the offense involve dishonesty, breach of trust, or money
laundering.
(c) All convictions or program entries for offenses concerning the
illegal manufacture, sale, distribution of, or trafficking in
controlled substances shall require an application unless no
application is required under this subpart. Convictions or program
entries for criminal offenses involving the simple possession of a
controlled substance are not covered under section 19.
Sec. 303.223 What constitutes a conviction under section 19?
(a) Convictions requiring an application. There must be a
conviction of record. Section 19 does not cover arrests or pending
cases not brought to trial, unless the person has a program entry as
set out in Sec. 303.224. Section 19 does not cover acquittals or any
conviction that has been reversed on
[[Page 51321]]
appeal, unless the reversal was for the purpose of re-sentencing. A
conviction with regard to which an appeal is pending requires an
application. A conviction for which a pardon has been granted will
require an application.
(b) Convictions not requiring an application. When an individual is
charged with a covered offense and, in the absence of a program entry
as set out in Sec. 303.224, is subsequently convicted of an offense
that is not a covered offense, the conviction is not subject to section
19.
(c) Expungements. If an order of expungement or an order to seal
has been issued in regard to a conviction, or if a record has been
otherwise expunged by operation of law, then the conviction shall not
be considered a conviction of record and shall not require an
application.
(d) Youthful offenders. An adjudication by a court against a person
as a ``youthful offender'' under any youth-offender law applicable to
minors as defined by state law, or any judgment as a ``juvenile
delinquent'' by any court having jurisdiction over minors as defined by
state law, does not require an application. Such an adjudication does
not constitute a matter covered under section 19 and is not a
conviction or program entry for determining the applicability of Sec.
303.227.
Sec. 303.224 What constitutes a pretrial diversion or similar program
(program entry) under section 19?
(a) A program entry is characterized by a suspension or eventual
dismissal or reversal of charges or criminal prosecution upon
agreement, whether formal or informal, by the accused to treatment,
rehabilitation, restitution, or other non-criminal or non-punitive
alternatives. Whether the outcome of a case constitutes a program entry
is determined by relevant Federal, State, or local law, and, if not so
designated under applicable law, then the determination of whether a
disposition is a program entry will be made by the FDIC on a case-by-
case basis. Program entries prior to November 29, 1990, are not covered
by section 19.
(b) When a covered offense either is reduced by a program entry to
an offense that would otherwise not be covered by section 19 or is
dismissed upon successful completion of a program entry, the covered
offense remains a covered offense for purposes of section 19. The
covered offense will require an application unless it is de minimis as
provided by Sec. 303.227 of this subpart.
(c) Expungements or sealings of program entries will be treated the
same as those for convictions.
Sec. 303.225 What are the types of applications that can be filed?
(a) Institution filing requirement (bank-sponsored applications).
Applications are required to be filed by the IDI, which intends for a
person covered by the provisions of section 19 to participate in its
affairs. Bank-sponsored applications shall be filed with the
appropriate FDIC Regional Office, as required by this subpart.
(b) Waiver applications. If an IDI does not file an application
regarding an individual, the individual may file a request for a waiver
of the institution filing requirement. Such a waiver application shall
be filed with the appropriate FDIC Regional Office and shall set forth
substantial good cause why the application should be granted.
Sec. 303.226 When must an application be filed?
Except for situations in which no application is required under
this subpart, an application must be filed when 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 when such person has a
program entry regarding that offense. Before an application is
considered by the FDIC, all of the sentencing requirements associated
with a conviction, or conditions imposed by the program entry,
including but not limited to, imprisonment, fines, condition of
rehabilitation, and probation requirements, must be completed, and the
case must be considered final by the procedures of the applicable
jurisdiction. The FDIC's application forms as well as additional
information concerning section 19 can be accessed at the FDIC's
regional offices or on the FDIC's website.
Sec. 303.227 When is an application not required for a covered
offense or program entry (de minimis offenses)?
(a) In general. Approval is automatically granted and an
application will not be required where all of the following de minimis
criteria are met.
(1) The individual has been convicted of, or has program entries
for, no more than two covered offenses, including those subject to
paragraph (b) of this section; and for each covered offense, all of the
sentencing requirements associated with the conviction, or conditions
imposed by the program entry, have been completed (the sentence- or
program-completion requirement does not apply under paragraphs (b)(2)
and (4) of this section);
(2) Each covered offense was punishable by imprisonment for a term
of one year or less and/or a fine of $2,500 or less, and the individual
served three days or less of jail time for each covered offense. The
FDIC considers jail time to include any significant restraint on an
individual's freedom of movement which includes, as part of the
restriction, confinement to a specific facility or building on a
continuous basis where the person may leave temporarily only to perform
specific functions or during specified times periods or both. Jail time
includes confinement to a psychiatric treatment center in lieu of a
jail, prison, or house of correction on mental-competency grounds. The
definition is not intended to include any of the following:
(i) Persons on probation or parole who may be restricted to a
particular jurisdiction, or who must report occasionally to an
individual or to a specified location;
(ii) Persons who are restricted to a substance-abuse treatment
program facility for part or all of the day; and
(iii) Persons who are ordered to attend outpatient psychiatric
treatment;
(3) If there are two convictions or program entries for a covered
offense, each conviction or program entry was entered at least three
years prior to the date an application would otherwise be required,
except as provided in paragraph (b)(1) of this section; and
(4) Each covered offense was not committed against an IDI or
insured credit union.
(b) Other types of offenses for which the de minimis exception
applies and no application is required--(1) Age of person at time of
covered offense. If there are two convictions or program entries for a
covered offense, and the actions that resulted in both convictions or
program entries all occurred when the individual was 21 years of age or
younger, then the de minimis criteria in paragraph (a)(3) of this
section shall be met if the convictions or program entries were entered
at least 18 months prior to the date an application would otherwise be
required.
(2) Convictions or program entries for insufficient funds checks.
Convictions or program entries of record based on the writing of
``bad'' or insufficient funds check(s) shall be considered de minimis
offenses under this provision if the following conditions apply:
(i) The aggregate total face value of all ``bad'' or insufficient
funds check(s) cited across all the conviction(s) or program entry(ies)
for ``bad'' or
[[Page 51322]]
insufficient funds checks is $1,000 or less;
(ii) No IDI or insured credit union was a payee on any of the
``bad'' or insufficient funds checks that were the basis of the
conviction(s) or program entry(ies); and
(iii) The individual has no more than one other de minimis offense
under this section.
(3) Convictions or program entries for small-dollar, simple theft.
Convictions or program entries based on the simple theft of goods,
services, or currency (or other monetary instrument) shall be
considered de minimis offenses under this provision if the following
conditions apply. Simple theft excludes burglary, forgery, robbery,
identity theft, and fraud.
(i) The value of the currency, goods, or services taken is $1,000
or less;
(ii) The theft was not committed against an IDI or insured credit
union;
(iii) The individual has no more than one other de minimis offense
under this section; and
(iv) If there are two de minimis offenses under this section, each
conviction or program entry was entered at least three years prior to
the date an application would otherwise be required, or at least 18
months prior to the date an application would otherwise be required if
the actions that resulted in the conviction or program entry all
occurred when the individual was 21 years of age or younger.
(4) Convictions or program entries for the use of a fake, false, or
altered identification. A conviction or program entry for the creation
or possession of a fake, false, or altered form of identification by a
person under the age of 21, or the use of a fake, false, or altered
form of identification by such a person to circumvent age-based
restrictions on purchases, activities, or premises entry, shall be
considered a de minimis offense under this provision if the following
conditions apply.
(i) The individual has no more than one other de minimis offense
under this section; and
(ii) If there are two de minimis offenses under this section, each
conviction or program entry was entered at least three years prior to
the date an application would otherwise be required; or at least 18
months prior to the date an application would otherwise be required if
the actions that resulted in the conviction or program entry all
occurred when the individual was 21 years of age or younger.
(c) Fidelity bond coverage and disclosure to institutions. Any
person who meets the criteria under this section shall be covered by a
fidelity bond to the same extent as others in similar positions, and
shall disclose the presence of the conviction(s) or program entry(ies)
to all IDIs in the affairs of which he or she intends to participate.
(d) Non-qualifying convictions or program entries. No conviction or
program entry for a violation of the Title 18 sections set out in 12
U.S.C. 1829(a)(2) can qualify under any of the de minimis exceptions
set out in this section.
Sec. 303.228 How to file an application.
Forms and instructions should be obtained from the FDIC's website
(www.fdic.gov), and the application must be filed with the appropriate
FDIC Regional Director. The application must be filed by an IDI on
behalf of a person (bank-sponsored) unless the FDIC grants a waiver of
that requirement (individual waiver). Individual waivers will be
considered on a case-by-case basis where substantial good cause for
granting a waiver is shown. A person may request an individual waiver
and file an application on her or his own behalf within the same
application. The appropriate Regional Office for a bank-sponsored
application is the office covering the state where the IDI's home
office is located. The appropriate Regional Office for an individual
filing for a waiver of the institution filing requirement is the office
covering the state where the person resides. States covered by each
FDIC Regional Office can be located on the FDIC's website.
Sec. 303.229 How an application is evaluated.
(a) The ultimate determinations in assessing an application are
whether the person has demonstrated his or her fitness to participate
in the conduct of the affairs of an IDI, and whether the affiliation,
ownership, control, or participation by the person in the conduct of
the affairs of the institution may constitute a threat to the safety
and soundness of the institution or the interests of its depositors or
threaten to impair public confidence in the institution. In determining
the degree of risk, the FDIC will consider:
(1) Whether the conviction or program entry is for a criminal
offense involving dishonesty, breach of trust, or money laundering and
the specific nature and circumstances of the offense;
(2) Whether the participation directly or indirectly by the person
in any manner in the conduct of the affairs of the IDI constitutes a
threat to the safety and soundness of the institution or the interests
of its depositors or threatens to impair public confidence in the
institution;
(3) Evidence of rehabilitation including the person's age at the
time of the covered offense, the amount of time that has elapsed since
the occurrence of the conviction or program entry, and the person's
employment history and full legal history;
(4) The position to be held or the level of participation by the
person at an IDI;
(5) The amount of influence the person will be able to exercise
over the operation, management, or affairs of an IDI;
(6) The ability of management of the IDI to supervise and control
the person's activities;
(7) The level of ownership or control the person will have at an
insured depository institution;
(8) The applicability of the IDI's fidelity bond coverage to the
person; and
(9) Any additional factors in the specific case that appear
relevant to the application or the applicant including, but not limited
to, the opinion or position of the primary Federal or State regulator.
(b) The question of whether a person, who was convicted of a crime
or who agreed to a program entry, was guilty of that crime shall not be
at issue in a proceeding under this subpart or under 12 CFR part 308,
subpart M.
(c) The foregoing factors 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 under 12 U.S.C.
1829(a)(2) for certain Federal offenses.
(d) All approvals and orders will be subject to the condition that
the person 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 also be conditioned upon that person disclosing the
presence of the conviction(s) or program entry(ies) to all IDIs in the
affairs of which he or she wishes to participate.
(e) When deemed appropriate, bank-sponsored applications are to
allow the person to work in a specific job at a specific bank and may
also be subject to the additional conditions, including that the prior
consent of the FDIC will be required for any proposed significant
changes in the person's duties or responsibilities. In the case of
bank-sponsored applications, such proposed changes may, in the
discretion of the Regional Director, require a new application.
[[Page 51323]]
(f) In situations in which an approval has been granted for a
person to participate in the affairs of a particular IDI and the person
subsequently seeks to participate at another IDI, another application
must be submitted and approved by the FDIC prior to the person
participating in the affairs of the other IDI.
Sec. 303.230 What will the FDIC do if the application is denied?
(a) The FDIC will inform the applicant in writing that the
application has been denied and summarize or cite the relevant
considerations specified in Sec. 303.229 of this subpart.
(b) The denial will also notify the applicant that a written
request for a hearing under 12 CFR part 308, subpart M, may be filed
with the Executive Secretary within 60 days after the denial. The
request for a hearing must include the relief desired, the grounds
supporting the request for relief, and any supporting evidence.
Sec. 303.231 Waiting time for a subsequent application if an
application is denied.
An application under section 19 may be made in writing at any time
more than one year after the issuance of a decision denying an
application under section 19. If the original denial is subject to a
request for a hearing, then the subsequent application may be filed at
any time more than one year after the decision of the Board of
Directors, or its designee, denying the application. The prohibition
against participating in the affairs of an IDI under section 19 shall
continue until the individual has been granted consent in writing to
participate in the affairs of an IDI by the Board of Directors or its
designee.
PART 308--RULES OF PRACTICE AND PROCEDURE
0
3. The authority citation for part 308 continues to read as follows:
Authority: 5 U.S.C. 504, 554-557; 12 U.S.C. 93(b), 164, 505,
1464, 1467(d), 1467a, 1468, 1815(e), 1817, 1818, 1819, 1820, 1828,
1829, 1829(b), 1831i, 1831m(g)(4), 1831o, 1831p-1, 1832(c), 1884(b),
1972, 3102, 3108(a), 3349, 3909, 4717, 5412(b)(2)(C), 5414(b)(3); 15
U.S.C. 78(h) and (i), 78o(c)(4), 78o-4(c), 78o-5, 78q-1, 78s, 78u,
78u-2, 78u-3, 78w, 6801(b), 6805(b)(1); 28 U.S.C. 2461 note; 31
U.S.C. 330, 5321; 42 U.S.C. 4012a; Pub. L. 104-134, sec. 31001(s),
110 Stat. 1321; Pub. L. 109-351, 120 Stat. 1966; Pub. L. 111-203,
124 Stat. 1376; Pub. L. 114-74, sec. 701, 129 Stat. 584.
0
4. Revise subpart M to read as follows:
Subpart M--Procedures Applicable to the Request for and Conduct of a
Hearing after Denial of an Application Under Section 19 of the FDI Act
Sec.
308.156 Scope.
308.157 Denial of applications.
308.158 Hearings.
308.159-308.160 [Reserved]
Subpart M--Procedures Applicable to the Request for and Conduct of
a Hearing after Denial of an Application under Section 19 of the
FDI Act
Sec. 308.156 Scope.
The rules and procedures set forth in this subpart shall apply to
an application filed under section 19 of the FDI Act, 12 U.S.C. 1829
(section 19), and 12 CFR part 303, subpart L, by an insured depository
institution (IDI) or an individual, which individual has been convicted
of any criminal offense involving dishonesty, a breach of trust, or
money laundering, or who has agreed to enter into a pretrial diversion
or similar program in connection with the prosecution of such offense,
to seek the prior written consent of the FDIC for the individual to
become or continue as an institution-affiliated party (IAP) with
respect to an IDI; to own or control directly or indirectly an IDI; or
to participate directly or indirectly in any manner in the conduct of
the affairs of an IDI; and shall apply only after such application has
been denied under part 12 CFR part 303, subpart L.
Sec. 308.157 Denial of applications.
If an application is denied under 12 CFR part 303, subpart L, then
the applicant may request a hearing under this subpart. The applicant
will have 60 days after the date of the denial to file a written
request with the Executive Secretary. In the request, the applicant
shall state the relief desired, the grounds supporting the request for
relief, and provide any supporting evidence that the applicant believes
is responsive to the grounds for the denial.
Sec. 308.158 Hearings.
(a) Hearing dates. The Executive Secretary shall order a hearing to
be commenced within 60 days after receipt of a request for hearing on
an application filed under Sec. 308.157. Upon the request of the
applicant or FDIC enforcement counsel, the presiding officer or the
Executive Secretary may order a later hearing date.
(b) Burden of proof. The burden of going forward with a prima facie
case shall be upon the FDIC. The ultimate burden of proof shall be upon
the person proposing to become or continue as an IAP with respect to an
IDI; to own or control directly or indirectly an IDI; or to participate
directly or indirectly in any manner in the conduct of the affairs of
an IDI.
(c) Hearing procedure. (1) The hearing shall be held in Washington,
DC, or at another designated place, before a presiding officer
designated by the Executive Secretary.
(2) The provisions of Sec. Sec. 308.6 through 308.12, 308.16, and
308.21 of the Uniform Rules (subpart A of this part) and Sec. Sec.
308.101, 308.102, and 308.104 through 308.106 the Local Rules (subpart
B of this part) shall apply to hearings held under this subpart.
(3) The applicant may appear at the hearing and shall have the
right to introduce relevant and material documents and oral argument.
Members of the FDIC enforcement staff may attend the hearing and
participate as a party.
(4) There shall be no discovery in proceedings under this subpart.
(5) At the discretion of the presiding officer, witnesses may be
presented within specified time limits, provided that a list of
witnesses is furnished to the presiding officer and to all other
parties prior to the hearing. Witnesses shall be sworn, unless
otherwise directed by the presiding officer. The presiding officer may
ask questions of any witness. Each party shall have the opportunity to
cross-examine any witness presented by an opposing party. The
transcript of the proceedings shall be furnished, upon request and
payment of the cost thereof, to the applicant afforded the hearing.
(6) In the course of or in connection with any hearing under this
paragraph, the presiding officer shall have the power to administer
oaths and affirmations; to take or cause to be taken depositions of
unavailable witnesses; and to issue, revoke, quash, or modify subpoenas
and subpoenas duces tecum. Where the presentation of witnesses is
permitted, the presiding officer may require the attendance of
witnesses from any state, territory, or other place subject to the
jurisdiction of the United States at any location where the proceeding
is being conducted. Witness fees shall be paid in accordance with Sec.
308.14 of the Uniform Rules (subpart A of this part).
(7) Upon the request of the applicant afforded the hearing, or FDIC
enforcement staff, the record shall remain open for five business days
following the hearing for the parties to make additional submissions to
the record.
(8) The presiding officer shall make recommendations to the Board
of Directors, where possible, within 20
[[Page 51324]]
days after the last day for the parties to submit additions to the
record.
(9) The presiding officer shall forward his or her recommendation
to the Executive Secretary who shall promptly certify the entire
record, including the recommendation to the Board of Directors or its
designee. The Executive Secretary's certification shall close the
record.
(d) Written submissions in lieu of hearing. The applicant or the
IDI may in writing waive a hearing and elect to have the matter
determined on the basis of written submissions.
(e) Failure to request or appear at hearing. Failure to request a
hearing shall constitute a waiver of the opportunity for a hearing.
Failure to appear at a hearing in person or through an authorized
representative shall constitute a waiver of a hearing. If a hearing is
waived, the person shall remain barred under section 19.
(f) Decision by Board of Directors or its designee. Within 60 days
following the Executive Secretary's certification of the record to the
Board of Directors or its designee, the Board of Directors or its
designee shall notify the affected person whether the person shall
remain barred under section 19. The notification shall state the basis
for any decision of the Board of Directors or its designee that is
adverse to the applicant.
Sec. Sec. 308.159-308.160 [Reserved]
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on July 24, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.
[FR Doc. 2020-16464 Filed 8-19-20; 8:45 am]
BILLING CODE 6714-01-P
