BACKGROUND
The Financial Institutions
Regulatory and Interest Rate Control
Act of 1978 (FIRIRCA) gave the FDIC
and OCC authority to prospectively
assess civil money penalties (CMPs)
against BOTH banks and individuals (IAP’s
Institution Affiliated Persons).
tiered penalties have been
established:
-
Tier One:
$5,500 per day may be assessed
for most violations
-
Tier Two:
$27,500 per day for a violation,
reckless, unsafe or unsound
practice or breaches a fiduciary
duty that is part of a pattern
of misconduct and causes more
than minimal loss to the
institution or results in a
pecuniary gain to such party
-
Tier
Three: The lessor of
$1,100,000 or 1% of total assets
may be assessed if a violation,
unsafe or unsound practice, or
breach of fiduciary duty is
knowingly committed and causes a
substantial loss to the
institution or a substantial
pecuniary gain to the violator
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information.
SHOULD
COMMUNITY BANK DIRECTORS BE
CONCERNED ABOUT CIVIL MONEY
PENALTIES?
Yes. The issue that should trouble
them relative to CMP’s is that they
are brought against the trustees,
directors and officers individually,
and regulators are becoming more
aggressive in using them.
Civil Money Penalties can be brought
while banks remain open, and
penalties can be assessed for “any
violation of law, rule or
regulation. IAP’s have the right to
due process (i.e. hearings), but
there are attending costs associated
with defense as well.
The dollar cost of civil money
penalties can range from very small
amounts to millions. A statistical
review of CMP activity indicates
that most assessments range from
$500 to about $30,000 against IAP’s.
Much higher penalties have been
issued in the most egregious cases.
Here’s some profile data …
CMP BY THE
NUMBERS
-
1,300+:
OCC has filed approximately
1300 CMP’s since 1991
-
76%
of OCC CMPS’s settled for
$10,000 or less
-
92%
of OCC CMPS’s settled for
$30,000 or less
INSURANCE
AND BANKING REGULATIONS
Both the FDIC and OCC have clearly
expressed the written point that
insurance coverage or
indemnification to pay for fines and
penalties must be excluded from bank
insurance policies and
indemnification agreements.
INSURANCE CARRIER RESPONSE
The issue with civil money penalties
insurance under the banks D&O policy
is Part 359 of the FDIC Regulations.
This provision prohibits banks from
providing insurance policies that
cover civil penalties. Translated,
that means the FDIC can prohibit
insurers from paying coverage for
civil penalties, even if banks have
coverage the address this section,
The typical D&O policy excludes
civil money penalties coverage.
There are a few exceptions under
which insurers offer coverage to
qualified banks, but there are
issues notwithstanding:
-
$0 Cost
Approach: Insurers claim that no
additional premiums are charged
for CMP
Issue: Regulations
do not appear to sanction this
approach because CMP coverage is
included in the bank’s insurance
contract. FDIC officials make no
distinction between the bank
paying premium for coverage
directly or director’s
reimbursing the bank for the
corresponding bank cost.
Regulators will frown on any D&O
insurance contracts with CMP
provisions.
-
Separate
premium charges for each
director/officer: Under this
scenario, insurers require that
the bank collect premium from
each director, creating the
appearance that they pay for
their own CMP coverage.
Issue: Existing
regulations do not clearly
sanction this approach, because
CMP coverage remains part of the
bank’s insurance contract, not a
director’s or officer’s
individual policy of insurance.
PROPOSAL
FOR A RISK MANAGEMENT SOLUTION
A low-cost insurance policy issued
directly to the IAP -
Director, Trustee, or Officer -
would avoid the integration and
linking issues described in the
previous section. A study is
currently being conducted towards
development of a product that
addresses this gap and exposure in
conventional coverage. If you’d like
to be amongst the first to obtain
breaking details on this products
release, add your name to our
proprietary and confidential
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