Section 210(s)(3) of the Dodd-Frank Act directed the FDIC to promulgate regulations with respect to recoupment of compensation from senior executives or directors materially responsible for the failed condition of a covered financial company. Unfortunately, the final rules do not make any significant changes to the draconian provisions of the proposed rules.
Despite heavy criticism by commenters, the final rule adopts a rebuttable presumption that certain senior executives or directors are "substantially responsible" for the failed condition of a financial entity company that is placed into receivership under the orderly liquidation authority of the Dodd-Frank Act. A senior executive or director would be subject to this rebuttable presumption, if he or she:
- served as the chairman of the board of directors, chief executive officer, president, chief financial officer, or in any other similar role (regardless of title) if in this role he or she had responsibility for the strategic, policymaking, or company-wide operational decisions of the financial entity prior to the date that it was placed into receivership under the orderly liquidation authority of the Dodd-Frank Act;
- was adjudged liable by a court or tribunal of competent jurisdiction for having breached his or her duty of loyalty to the covered financial company; or
- was removed from the management or board of directors of the covered financial entity under 12 U.S.C. 5386(4) or (5).
The senior executive or director would only be able to rebut the presumption by evidence that the senior executive or director
- conducted his or her responsibilities with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances, or
- did not cause a loss to the financial entity that materially contributed to the failure of the entity under the facts and circumstances.
However, the final rules emphasize that (i) the burden of proof will be on the former senior executive or director to establish that he or she exercised his or her business judgment, and (ii) state "business judgment rules" and "insulating statutes" will not shift the burden of proof to the FDIC or increase the standard of care under which the FDIC as receiver may recoup compensation. So much for the presumption of innocence under American Jurisprudence over the last 225 years. The rebuttable presumption does not apply to a senior executive hired by, or a director who joined the board of directors of, the financial entity during the two years prior to the FDIC's appointment as receiver, to assist in preventing further deterioration of the entity.
Finally, the rules define the compensation that FDIC may recoup very broadly to include "any direct or indirect financial remuneration received from the covered financial company, including, but not limited to, salary; bonuses; incentives; benefits; severance pay; deferred compensation; golden parachute benefits; benefits derived from an employment contract, or other compensation or benefit arrangement; perquisites; stock option plans; post-employment benefits; profits realized from a sale of securities in the covered financial company; or any cash or noncash payments or benefits granted to or for the benefit of the senior executive or director."
The only positive thing I can say about these incredible rules is that they only apply to failed institutions in the process of liquidation. However, by fall, we expect to have final rules on the governing all incentive compensation paid by financial institutions, under Dodd-Frank Act Section 956.
On April, 18, 1945, the famous, fearless and internationally known war correspondent Ernie Pyle died on Ie Island, just west of Okinawa, like so many of the soldiers he had written about. He was killed instantly by Japanese machine-gun fire when he went forward to observe the advance of a well-known division of the Twenty-fourth Army Corps. So respected was Pyle that the commanding general of the troops on the island reported his death to the nation as follows: "I regret to report that War Correspondent Ernie Pyle, who made such a great contribution to the morale of our foot soldier, was killed in the battle of Ie Shima today."