On December 2 the Federal Deposit Insurance Corporation (FDIC) publicly released its Formal and Informal Enforcement Actions Manual (Enforcement Manual). The Enforcement Manual provides direction for FDIC staff in pursuing formal and informal enforcement actions against insured depository institutions and their institution-affiliated parties.

The FDIC noted in their Financial Institution Letter that the Enforcement Manual does not:

  • (i) Interpret any law or regulation;
  • (ii) Establish supervisory requirements; or
  • (iii) Establish industry guidance.

Rather, it is intended to support the application of laws and regulations to allow FDIC staff to develop and pursue “concerns, violations and other actionable misconduct.” In the same way the Enforcement Manual instructs the FDIC staff in pursuing, processing, and monitoring enforcement actions, it can also assist the banking industry in preparing for and understanding those actions.

Propriety of Informal Resolutions

Among the topics covered by the Enforcement Manual, the FDIC provides guidance on the two types of informal actions most commonly used by the agency: bank board resolutions (BBRs) and memoranda of understanding (MOUs) (See Chapter 2).

The FDIC finds these informal actions to be particularly appropriate when the FDIC has communicated with institution management regarding supervisory concerns and has determined that the institution and its management are committed to and capable of addressing these concerns with some direction, but without the initiation of a formal enforcement action.

The FDIC reiterates that the use of an informal action does not prevent the FDIC from pursuing formal enforcement action if required by law or if the FDIC believes the informal action has not resulted in sufficient resolution of the identified concerns.

Use of Supervisory Guidance

Interestingly, the FDIC also highlights the agency’s ongoing efforts to clarify the role of supervisory guidance (See Chapter 3). The FDIC maintains that supervisory guidance does not have the force of law like statutes and regulations, echoing previous statements by the FDIC and other federal banking regulators cautioning against reliance on supervisory guidance.

However, the FDIC mentions in the Enforcement Manual certain benefits and goals of supervisory guidance. These include:

  • Providing insight into the FDIC’s expectations for institutions to operate in a safe and sound manner and in compliance with applicable laws and regulations;
  • Ensuring that the FDIC’s standards and supervisory expectations are well understood by institutions;
  • Providing general principles and practices that have proven to aid in compliance and to promote consistency in supervision;
  • Aiding institutions in identifying and mitigating risks and reducing the risk of consumer harm; and
  • Helping institutions to direct resources to areas representing the highest potential risks.

Imposing Penalties 

In addition, the Enforcement Manual delves into the grounds, policy, and other considerations for staff in determining when and if restitution and/or civil money penalties are appropriate to impose (See Chapter 9). As a basis for restitution, the FDIC looks for evidence of “unjust enrichment” and “reckless disregard” without providing additional information about those cases.

Unjust enrichment generally takes place when “one party receive[s] a benefit at the expense of another in circumstances where it is unjust to allow retention of the benefit without adequate compensation.” Reckless disregard may occur when (1) a party clearly neglects or acts in plain indifference to requirements of law, regulation, or agency orders the party should have been aware of; and (2) the party either knows or should have been aware of the loss, harm, or damage that could occur.

In discussing the grounds and policy for a civil money penalty, the Enforcement Manual describes criteria for recommending the assessment of a civil money penalty and three tiers of increasing severity for violations. The FDIC will recommend a civil money penalty based in part on criteria such as: weaknesses in the insured depository institution’s third-party risk oversight that causes harm to consumers or the institution, or failure to maintain a satisfactory Bank Secrecy Act and anti-money laundering compliance program.

  • Tier 1 violations are the lowest severity and simply include violations of law, regulation, order, condition, or written agreement between an institution and the FDIC. (Tier 2 and 3 violations include an additional layer of culpability.)
  • Tier 2 includes violations listed under Tier 1, recklessly engaging in unsafe and unsound practices, or any breach of fiduciary duty if the breach is part of a pattern of misconduct, causes or is likely to cause more than a minimal loss to the institution, or results in financial gain or other benefit to an institution-affiliated party (IAP) or insured depository institution (IDI).
  • Tier 3 represents cases with the “most egregious” misconduct and includes violations listed under Tiers 1 and 2 that are knowingly committed and knowingly or recklessly causing substantial loss to an institution or substantial financial gain or other benefit to an IAP or IDI.

Limited Guidance about Investigations

With regard to formal investigations, the FDIC merely references its authority to conduct such investigations and lists the actions that may be performed to conduct the investigation (e.g., take evidence and examine witnesses) (See Chapter 11).

Per Section 10(c) of the Federal Deposit Insurance Act (FDIA ), an investigation is appropriate when the following conditions are present:

  • Examiners believe matters are being misrepresented or inadequate documentation exists to determine the amount of risk to the Depository Insurance Fund;
  • Affiliates or institution-affiliated parties have information required to establish whether potential unsafe or unsound practices, breaches of fiduciary duties, or violations of law/regulation exist; and/or
  • Unaffiliated third parties have documentation or other information that relates to the affairs of an insured depository institution.

In addition to the chapters highlighted above, other notable topics in the Enforcement Manual include:

  • Chapter 4. Cease-and-Desist Actions – Includes but is not limited to topics such as evidence required, issuing cease-and-desist orders, temporary cease-and-desist orders, and restitution.
  • Chapter 5. Prompt Corrective Action – Includes but is not limited to topics such as mandatory and other discretionary supervisory actions, reclassifying a capital category, dismissing directors or senior executive officers, and appointing the FDIC as receiver or conservator.
  • Chapter 6. Removal, Prohibition, and Suspension Actions – Includes but is not limited to topics such as removals based on specific violations of law, temporary suspension or prohibition, suspension or prohibition pending criminal proceedings, and conviction.

The full list table of contents can be found here.

Those familiar with the financial services regulatory landscape may not find anything novel or surprising about the contents of the Enforcement Manual. But the manual may offer a useful lodestar when an institution is confronted with an FDIC enforcement investigation or demand for restitution or penalties.