Alert October 26, 2010

FDIC Issues Guidance on Golden Parachute Applications

The FDIC issued Financial Institution Letter 66-2010 (“FIL-66-2010”), which provides guidance on regulatory expectations with respect to applications to make permissible golden parachute payments.  Golden parachute payments, which are certain termination payments to an institution-affiliated party (“IAP”) as defined by 12 C.F.R. Part 359 (“Part 359”), are subject to restrictions for “troubled” institutions (institutions with a composite rating of “4” or “5” or meeting other criteria) and their holding companies, even if such holding company is healthy.  Part 359 provides certain exceptions to the restrictions on golden parachute payments.  FIL-66-2010 clarifies the golden parachute application process for troubled institutions, specifies the type of information necessary to satisfy the certification requirements, and highlights factors considered by supervisory staff when determining whether to approve a golden parachute payment.

FIL-66-2010 provides detailed guidance on the type of information required and the factors considered by supervisory staff when evaluating a golden parachute application and any proposed payment amount.  Under the filing procedures set forth in FIL-66-2010, a troubled institution must demonstrate that: (1) the IAP has not committed any fraudulent act or omission, or breach of trust or fiduciary duty or insider abuse, that has had a material adverse effect on the institution or covered company; (2) that the IAP is not “substantially responsible” for the insolvency or troubled condition of the institution or covered company; and (3) that the IAP has not committed a violation of any applicable federal or state banking law that has had or is likely to have a material effect on the institution or covered company.  Pursuant to FIL-66-2010, an application should also identify the responsibilities and specific areas of the institution that report to and are supervised by the IAP as well as major policy and operational programs initiated or managed by the IAP.  A troubled institution must provide a certification of such information for each IAP as part of the application.  FIL-66-2010 states that golden parachute applications made on behalf of senior management will be subject to heightened scrutiny that will include an evaluation of the individual’s performance as well as his or her influence and involvement over major corporate initiatives and policy decisions, especially any actions that may have facilitated high-risk banking strategies.  If such an executive served as a voting member of any Board committees, FIL-66-2010 states that the executive can expect to be viewed as being accountable for those decisions.  When approving an application for a golden parachute payment, FIL-66-2010 provides that the FDIC may either require a staged dispersal of payments or a claw back provision.  FIL-66-2010 further states that the FDIC is unlikely to approve golden parachute payments for institutions that are in a precarious financial position, unless the institution can demonstrate near-term benefits that outweigh the cost of the payments and the payment is otherwise not contrary to the intent of the golden parachute restrictions.

FIL-66-2010 establishes a de minimis golden parachute payment for lower-level employees of up to $5,000 per individual without a supervisory application in most cases.  A troubled institution making such payments would be required to maintain a record of the individuals receiving the payments together with a signed and dated certification of the amounts received.  FIL-66-2010 also states that combined applications are also permitted in situations where a troubled institution seeks to pay relatively small amounts to lower-level employees with similar responsibilities and salary levels or implement a reduction-in-force or reorganization.