Banking StandardsWritten evidence from the Office of the Comptroller of the Currency
SANCTIONS FOR BANK DIRECTORS
The Parliamentary Commission on Banking Standards was established to consider and report on professional standards and culture of the UK banking sector. One element of the Commission’s work is to consider the sanctions (criminal, civil and regulatory) that can be imposed on bank directors and make recommendations for any legislative or regulatory changes that may be required.
The Commission is keen to better understand the regime that applies in the US and identify different areas that could guide the Commission on possibilities for reform in the UK framework. As a result, the Commission would welcome responses to the following questions by 18 January 2013.
Enforcement Actions
The Commission understands that the OCC has the authority to bring a broad range of enforcement actions against certain banking organizations and their Institution-Affiliated Parties (IAP).
1. Has the OCC historically brought more civil suits (pursuant to 12 USC § 93) or formal enforcement actions against bank directors as IAPs?
While the OCC has authority to bring civil suits against bank directors under 12 USC 93, that authority is rarely used. Historically, actions against bank directors as IAPs have been initiated almost exclusively under the OCC’s administrative enforcement authority because that authority provides the OCC with a more efficient process and more options in terms of the scope of the relief the OCC can seek against an IAP.
2. Are formal enforcement actions usually preceded by informal enforcement actions or warnings by the OCC?
Each decision to bring a formal enforcement is based on the particular facts of the case. If the facts warrant a formal action, nothing precludes the OCC from bringing a formal action even if there has been no prior warning or informal action.
3. Of the various types of enforcement actions (including civil money penalties, cease and desist orders (both permanent and temporary) and removal, prohibition and suspension orders), which has been the most effective tool for the OCC?
Each enforcement tool has been effective at remedying violations, unsafe or unsound practices and other misconduct. Removal, prohibition and suspension orders are the most severe actions and are effective for getting bad actors out of the banking system. They are usually reserved to address the most egregious misconduct such as serious violations of law that result in loss to the bank or financial benefit to the IAP. CMPs are an effective tool for punishing IAPs for less severe misconduct and acting as a deterrent for future misconduct. Cease and desist orders, both permanent and temporary, are effective at getting banks and IAPs to take corrective action to fix unsafe or unsound banking practices and take other affirmative action to remedy past problems
4. In your view is the threat of a formal enforcement action taken seriously by bank directors?
Yes. Bank directors and other IAPs are very much aware that their failure to obey laws, rules and regulations, conduct the bank’s affairs in a safe and sound manner, and act at all times in the best interest of the bank is likely to subject them to formal enforcement actions by the OCC.
5. Do you think that the possibility of enforcement actions deters capable individuals from working in the banking industry?
No. Capable, qualified, and experienced individuals know that the OCC does not abuse its enforcement authority and that it is very unlikely they will be subject to a formal enforcement action unless they engage in violations of laws, rules or regulations, unsafe or unsound practices or breach their fiduciary duties to the bank.
6. Does the OCC have broad rule-making authority? If so, can the violation of a rule by an IAP lead to an enforcement action?
The OCC has broad rulemaking authority as part of its mission to oversee the US national banking system. Violations of OCC rules provide a basis for formal enforcement actions as set forth in 12 USC 1818.
Civil Money Penalties
The Commission understands that three tiers of civil money penalties can be assessed by the OCC against an IAP after written notice and, if requested, a hearing.
Tier I civil money penalties can be assessed for a (i) violation of any law or regulation, (ii) violation of certain final and temporary orders issued by the OCC, (iii) violation of written conditions imposed by the OCC and (iv) violation of written agreements entered into between the banking organization and the OCC.
Tier II civil money penalties can be assessed if the IAP has committed a Tier 1 violation and recklessly engages in an unsafe or unsound practice in conducting the affairs of the banking organization or breaches any fiduciary duty. Tier II also requires that the violation, practice or breach was part of a pattern of misconduct, caused or was likely to cause more than a minimal loss to such banking organization or resulted in pecuniary gain or other benefit to the IAP.
Tier III civil money penalties are assessed for knowingly committing a Tier I violation or engaging in unsafe or unsound practices or breaking a fiduciary duty.
7. In respect of the various Tier I violations listed above, which occur most frequently in your experience?
While the OCC has initiated Tier I CMP actions based on all of the types of violations listed, the vast majority of our Tier I cases are based on violations of law or regulation.
8. Does the OCC frequently enter into written agreements with banking organizations?
Yes. Formal written agreements are an integral part of the OCC’s enforcement strategy. Usually, such agreements are entered into when the bank’s condition is not critical or the practices being addressed are not egregious and bank management is cooperative and capable of remedying the problems. Formal written agreements are generally viewed as a less severe action than a cease and desist action even though their legal significance is similar to a consent cease and desist order.
9. In your experience, are breaches of a fiduciary duty by the IAP often the basis for Tier II and Tier III penalties?
Breaches of fiduciary duty are often used as the basis for Tier II CMPs when the facts of a particular case support such an action. Because of the effectiveness of Tier I and Tier II CMP actions, and because a Tier III action requires the OCC to prove knowing and wilful conduct, Tier III CMP actions are rare.
10. How often are civil money penalties assessed against IAPs with the consent of the banking organization?
CMP actions against IAPs are separate and apart from actions against banks. The actions against the IAPs are personal actions in which the IAPs are personally liable for the amounts assessed. By regulation, banks are not allowed to pay CMP assessments on behalf of IAPs. Under certain circumstances, banks may indemnify IAPs for legal fees and other expenses incurred in CMP actions brought against the IAPs, but the IAPs are responsible for repaying the bank for the amounts indemnified if a final outcome results in a judgement against the IAP.
11. Do the “Interagency Guidelines Establishing Standards for Safety and Soundness” provide the basis for what practices may be considered “unsafe and unsound”?
The Interagency Guidelines were issued by the US bank regulatory agencies to provide guidance to banking organizations in specific areas. A failure to comply with the guidelines may require the submission of a safety and soundness compliance plan which, if violated, is a basis for a safety and soundness order, which is the legal equivalent of a cease and desist order. Practices that may be considered unsafe and unsound for enforcement action purposes extend to all aspects of a bank’s operations.
Cease and Desist Orders
The Commission understands that the OCC, upon consent or notice and a hearing, can issue cease and desist orders against any IAP when that party has engaged or is about to engage in an unsafe or unsound banking practice, a violation of a law, rule, or regulation, any condition imposed in writing by the OCC in connection with the granting of an application, or formal written agreement entered into between the banking organization and the OCC. Cease and desist orders can also require that certain affirmative acts be taken by the IAP including to pay restitution to or to reimburse, indemnify or guarantee the banking organization against the loss.
12. Are cease and desist orders only issued when an IAP has declined to enter into a consent order?
Generally, yes. When the OCC makes a decision to initiate a cease and desist action against a party (a bank or an IAP), the party has two options. The party can consent to the action, which results in a consent order, or the party can contest the action which results in litigation. If the OCC prevails, a cease and desist order is issued against the party. There is no legal distinction between the two documents; a consent order is a cease and desist order issued by consent.
13. Can cease and desist orders be combined with other enforcement actions?
Yes. In many cases, cease and desist actions are combined with CMP actions. The cease and desist action are directed at remedying the underlying practices or conduct while the CMP actions are punitive.
14. Are temporary cease and desist orders frequently accompanied by asset freezes and prejudgment attachments?
In the overwhelming majority of cases, cease and desist actions are initiated well before the bank’s condition deteriorates to the point where the underlying violations or unsafe or unsound practices are likely to cause insolvency of the bank, or a significant dissipation of the bank’s assets or earnings. These conditions must be present for the OCC to issue a temporary cease and desist order. Asset freezes and prejudgment attachments are extraordinary actions for the OCC to initiate and they are not common,
Removal and Prohibition Authority
The Commission understands that the OCC has the authority to issue orders removing or suspending bank directors from office and prohibiting them from participating in any banking organization. In addition to a violation similar to the other enforcement actions discussed above, a removal, suspension or prohibition order requires a showing that (i) the bank has suffered or will suffer a financial loss, (ii) the interests of the bank’s depositors have been or could be prejudiced or (iii) such bank director has received financial gain or other benefit by reason of the violation, practice or breach, and (iv) the violation, practice or breach involved dishonesty or (v) demonstrates wilful or continuing disregard by such party for the safety and soundness of such bank.
15. Do removal and prohibition orders always result in the bank director being prevented from working in the banking industry in the future?
Yes. Removal and prohibition actions under 12 USC 1818 and 1829 always result in a lifetime ban on employment in the banking industry. IAPs subject to such a ban may petition for relief as section 1818 provides, but absent a grant of relief, employment in the banking industry while under a prohibition or removal subjects the IAP and the banking organization employing the IAP to severe criminal penalties.
16. Is it usual for the board of directors of the banking organization to dismiss the culpable director before the OCC issues a removal order?
Generally speaking, the term “prohibition action” refers to an action against an IAP who is no longer working in the banking industry, while the term “removal action” refers to an action against an IAP still working in a bank. In the vast majority of these types of cases, the IAPs are no longer working at the bank when the OCC initiates such an action having either resigned or been dismissed by the bank.
17. If the OCC is unable to obtain a removal and prohibition order but can bring another formal enforcement action against the bank director, is there a way to ensure that the culpable bank director will not be reemployed by the banking industry in the future?
No. A prohibition/removal action under 12 USC 1818, or a prohibition by operation of law under 12 USC 1829 is the only way the OCC can ensure an IAP will be banned from future employment in the banking industry. When a prohibition or removal action is not possible, the OCC can use its other enforcement tools such as a personal cease and desist order, to specifically address the underlying conduct, but a personal cease and desist order cannot serve as a “backdoor removal” in contravention of the requirements for obtaining a lawful removal or prohibition. As a general practice, however, the OCC routinely includes a term in all personal cease and desist orders that requires the IAP to disclose and show a copy of the order to any prospective employer in the banking industry. The OCC can also use its Prompt Corrective Action authority under 12 USC 1831o to direct a bank to dismiss a bank officer, but such a directive does not prevent the officer from working for another bank.
18. Does the OCC have the authority to approve the appointment of senior bank directors and officers?
A bank is required to file a notice of changes in directors or senior executive officers when the institution is in troubled condition; is not in compliance with minimum capital requirements; or the OCC determines, in connection with its review of a capital restoration plan required pursuant to 12 USC 1831o (prompt corrective action) or otherwise, that prior notice is appropriate. The OCC may either disapprove or not object to a candidate for a director or senior executive officer position. The OCC determines whether the competence, experience, character, and integrity of a candidate, and all other relevant information necessary to evaluate the candidate, indicate that it would not be in the best interest of the depositors of the bank or of the public for the candidate to be employed by or associated with the bank.
Civil Suits
19. Does the OCC frequently institute civil suits against bank directors?
As discussed above in #1, while the OCC has authority to institute civil suits against bank directors under 12 USC 93 but the overwhelming majority of cases instituted against bank directors and other IAPs are administrative enforcement actions under 12 USC 1818.
20. Can the OCC bring a common law cause of action against a bank director for breach of a fiduciary duty?
The OCC does not have specific authority to bring a common law cause of action against a bank director seeking damages for breach of fiduciary duty. A breach of fiduciary duty by a bank director can serve, however, as the basis for administrative enforcement actions under both 12 USC 93(b) and 12 USC 1818.
21. What steps can the OCC take when a bank director is suspected of committing a crime?
When a bank director is suspected of committing a crime, the OCC can make sure the Bank files a Suspicious Activity Report to alert US law enforcement agencies to the possible crime. Alternatively, the OCC can file such a report itself. The OCC may also have a basis to take an administrative action against the director.
Other
22. How are enforcement actions or civil suits by the OCC funded? All OCC expenses are funded by assessments on the regulated banking entities.
The costs of enforcement actions are funded from the agency’s budget.
23. Please could you give us an indication of the average internal (for example, staffing) and external (for example, legal fees) costs for bringing an enforcement action against an IAP.
OCC does not use outside counsel in connection with its enforcement actions. OCC has a dedicated staff of attorneys and professional staff assigned to its Enforcement & Compliance Division who work closely with the OCC’s national bank examiners to investigate and bring enforcement actions against national banks and IAPs.
24. Please could you give us an indication of the average internal (for example, staffing) and external (for example, legal fees) costs for bringing a civil suit against an IAP.
The OCC does not have authority to bring civil suits against IAPs. The OCC’s authority to bring actions against IAPs is limited to its administrative enforcement authority.
25. Does the OCC conduct periodic on-site examinations of banking organizations? If so, how frequently?
The frequency of on-site examinations of insured depository institutions is prescribed by 12 USC 1820(d). The OCC applies this statutory examination requirement to all types of national banks and federal saving associations (collectively “banks”), regardless of FDIC-insured status. See, 12 CFR 4.6.12. Banks must receive a full-scope, on-site examination at least once during each 12-month period. The OCC may extend this requirement to 18 months if the following conditions are satisfied:
The bank has total assets of less than $500 million;
The bank is well capitalized as defined in 12 CFR 6;
At its most recent examination, the OCC:
Assigned the bank a rating of one or two for management under the Uniform Financial Institutions Rating System (UFIRS), and
Assigned the bank a composite rating of one or two under the UFIRS;
The bank currently is not subject to a formal enforcement proceeding or order by the FDIC, OCC, or Federal Reserve System; and
No person acquired control of the bank during the preceding 12-month period in which a full-scope, on-site examination would have been required but for this exception.
The statutory requirement sets a maximum amount of time between full-scope, on-site examinations. OCC supervisory offices may schedule examinations more frequently under certain circumstances—for example, when potential or actual deterioration requires prompt attention, when a change in control of the institution has taken place, or when there is a supervisory office scheduling conflict.
26. Are banking organizations required to submit periodic reports to the OCC? Is there a penalty for failing to produce the required reports?
All banks are required to submit periodic reports of income and condition (“Call Reports”) on a quarterly basis. The OCC is authorized to assess civil money penalties for late or inaccurate filings.
16 January 2013