On July 6, 2011, the Federal Deposit Insurance Corporation unanimously approved a final rule allowing it to “claw back” compensation from senior executives and directors who were substantially responsible for a financial company’s failure.

The final rule, amending part 380 of the FDIC’s rules and regulations, stems from the expanded authority of the FDIC under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FDIC, under Title II of the Dodd-Frank Act, serves as receiver of “covered companies” that are being liquidated. A covered company is determined by Section 203(b) of the Dodd-Frank Act and essentially relates to financial companies, other than insured depository institutions, whose failure would present serious adverse effects on the stability of the U.S. financial system.

Senior executives or directors will be deemed “substantially responsible” for a covered company’s failure if they failed to conduct their responsibilities with “the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances.” The final rule expressly clarifies that the standard of care for triggering the clawback is a negligence standard and that a higher standard, such as gross negligence, is not required. Under the final rule, senior executives or directors are rebuttably presumed to be substantially responsible for the company’s failure if they served as chairman of the board of directors, chief executive officer, president, chief financial officer, or in a similar position, prior to the date the company was placed in receivership.

The final rule authorizes the FDIC to recoup executive compensation for the two years preceding its appointment as receiver, or, if some type of fraud is linked to the company’s collapse, for an unlimited amount of time. The final rule broadly defines “compensation” to include any direct or indirect financial remuneration received from the 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.

Click here to read the full text of the final rule.