[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DATES: Proposed Part 356 is withdrawn on December 28, 1994.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