FDIC Works With States, Considers Section 19 Rule Adjustments

Financial Services Law

Is the Federal Deposit Insurance Corporation (FDIC) moving to work more closely with the state regulators with whom it shares so much prudential authority? So it seems. The FDIC has created a new advisory committee featuring state regulators and released a proposal to tweak the rules prohibiting individuals with certain types of criminal convictions from working in the banking industry. Here are all the details you need to know.

What happened

Advisory Committee: The new Advisory Committee of State Regulators will discuss “a variety of current and emerging issues that have potential implications on the regulation and supervision of state-chartered financial institutions,” the FDIC said, with topics ranging from safety and soundness to the creation of new banks to the protection of the financial system from risks such as cyberattacks or money laundering.

As part of the nation’s so-called dual banking system, the FDIC (created in 1933) supervises all state banks that do not become members of the Federal Reserve System. As such, the FDIC acknowledges that “[s]tate regulators are an important link in our regulatory ecosystem and the FDIC appreciates their input and feedback,” as FDIC Chair Jelena McWilliams said in a statement. “This Advisory Committee will facilitate and increase dialogue between the FDIC and our state regulatory partners on a host of important regulatory issues.”

Members of the Advisory Committee will include the regulators of state-chartered financial institutions from across the country (including territories) as well as other individuals with expertise in the regulation of state-chartered financial institutions.

FDIA Section 19: In other FDIC news, the regulator requested public comment on changes to Section 19 of the Federal Deposit Insurance Act. The provision prohibits, without the prior written consent of the FDIC, any person who has been convicted of certain types of crimes from working at a bank.

The FDIC issued a statement of policy (SOP) in 1998, last revised in August 2018, that among other things provided relief from Section 19 for individuals with convictions for certain low-risk crimes. For those crimes judged to be de minimis crimes, individuals were not required to submit an application for a waiver of Section 19.

Examples of such de minimis offenses include single convictions, convictions punishable by less than one year in prison and/or a $2,500 fine and convictions related to the presentation of false or altered identification by individuals under the age of 21 under certain circumstances.

Seeking to codify the SOP, the FDIC published a Notice of Proposed Rule-making (NPRM) asking for input on whether and how the criteria for what constitutes a de minimis offense should be expanded. In particular, the FDIC seeks comment on what additional low-risk convictions should be part of the FDIC’s de minimis category.

“The application of Section 19 should not be a barrier to entry for individuals who have committed minor crimes in the past, paid their debt to society, reformed their conduct and are now seeking to gain employment with a financial institution,” McWilliams said in a statement about the proposal, adding her support for possible changes.

“At the same time, the rulemaking will not undermine the intent of the statute—which is to ensure that individuals convicted of certain types of crimes related to dishonesty, breach of trust or money laundering should not be employed in the banking industry,” she added.

Comments are due within 60 days.

For more about the new committee, click here.

To read the FDIC’s proposed rule, click here.

Why it matters

McWilliams continues to impress as FDIC chair. As state regulators step up their enforcement, the FDIC’s creation of a new committee will allow for joint oversight of financial institutions, while the proposal to expand the list of de minimis offenses under Section 19 could open the doors slightly to additional individuals—including, importantly, individuals entering the workplace for the first time who are seeking employment in the financial services industry.



pursuant to New York DR 2-101(f)

© 2024 Manatt, Phelps & Phillips, LLP.

All rights reserved