The Federal Deposit Insurance Corporation (“FDIC”) has approved a final rule authorizing it to clawback any compensation senior executives and directors received within two years of the FDIC being appointed receiver, if the FDIC finds they were “substantially responsible” for the failed condition of a covered financial company. Of particular concern, the rule (implementing section 210(s) of the Dodd-Frank Act):
- Provides a negligence standard (in contrast to the gross negligence standard under many state laws), under which the FDIC will deem an executive or director “substantially responsible” for the company’s failed condition if he or she “failed to conduct his or her responsibilities with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances.”
- Creates a presumption of culpability, placing the burden upon certain senior executives and directors (e.g. high level executives or anyone who “had responsibility for the strategic, policy making, or company wide operational decisions”) to demonstrate that they exercised the requisite standard of care or, if unable to do so, to prove that their conduct did not “individually or collectively” result in a loss that materially contributed to the company’s failure.
- Authorizes the FDIC to recoup “any” compensation received by the senior executive or director (current or former) in the past two years, including not only salary and bonuses but also other forms of compensation. In the case of fraud, no time limit applies.
To what extent these provisions will withstand judicial scrutiny remains to be seen.