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FINANCIAL INSTITUTIONS

ANSWER BOOKLAW • GOVERNANCE • COMPLIANCE

2017 Edition

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PLI’S COMPLETE LIBRARY OF TREATISE TITLES

ART LAWArt Law: The Guide for Collectors, Investors, Dealers & Artists

BANKING & COMMERCIAL LAWAsset-Based Lending: A Practical Guide to Secured FinancingDocumenting Secured Transactions: Effective Drafting and LitigationEquipment Leasing–Leveraged LeasingHillman on Commercial Loan DocumentationMaritime Law Answer Book

BANKRUPTCY LAWBankruptcy DeskbookPersonal Bankruptcy Answer Book

BUSINESS, CORPORATE & SECURITIES LAWAccountants’ LiabilityAnti-Money Laundering: A Practical Guide to Law and ComplianceAntitrust Law Answer BookBroker-Dealer RegulationConducting Due Diligence in a Securities OfferingConsumer Financial Services Answer BookCorporate Compliance Answer BookCorporate Legal Departments: Practicing Law in a CorporationCorporate Political Activities DeskbookCorporate Whistleblowing in the Sarbanes-Oxley/Dodd-Frank EraCovered Bonds HandbookCybersecurity: A Practical Guide to the Law of Cyber RiskDerivatives Deskbook: Close-Out Netting, Risk Mitigation, LitigationDeskbook on Internal Investigations, Corporate Compliance, and White Collar IssuesDirectors’ and Officers’ Liability: Current Law, Recent Developments, Emerging IssuesDoing Business Under the Foreign Corrupt Practices ActEPA Compliance and Enforcement Answer BookExempt and Hybrid Securities OfferingsFashion Law and Business: Brands & RetailersFinancial Institutions Answer Book: Law, Governance, ComplianceFinancial Product Fundamentals: Law, Business, ComplianceFinancial Services Regulation DeskbookFinancially Distressed Companies Answer BookGlobal Business Fraud and the Law: Preventing and Remedying Fraud and CorruptionHedge Fund RegulationInitial Public Offerings: A Practical Guide to Going PublicInsider Trading Law and Compliance Answer BookInsurance and Investment Management M&A DeskbookInternational Corporate Practice: A Practitioner’s Guide to Global SuccessInvestment Adviser Regulation: A Step-by-Step Guide to Compliance and the LawLife at the Center: Reflections on Fifty Years of Securities RegulationMergers, Acquisitions and Tender Offers: Law and StrategiesMutual Funds and Exchange Traded Funds RegulationOutsourcing: A Practical Guide to Law and BusinessPrivacy Law Answer BookPrivate Equity Funds: Formation and OperationProskauer on Privacy: A Guide to Privacy and Data Security Law in the Information AgePublic Company Deskbook: Complying with Federal Governance & Disclosure

RequirementsSEC Compliance and Enforcement Answer BookSecurities Investigations: Internal, Civil and Criminal

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Securities Law and Practice HandbookThe Securities Law of Public FinanceSecurities Litigation: A Practitioner’s GuideSocial Media and the LawSoderquist on Corporate Law and PracticeSovereign Wealth Funds: A Legal, Tax and Economic PerspectiveA Starter Guide to Doing Business in the United StatesTechnology Transactions: A Practical Guide to Drafting and Negotiating Commercial

AgreementsVariable Annuities and Variable Life Insurance Regulation

COMMUNICATIONS LAWAdvertising and Commercial Speech: A First Amendment GuideSack on Defamation: Libel, Slander, and Related ProblemsTelecommunications Law Answer Book

EMPLOYMENT LAWEmployment Law YearbookERISA Benefits Litigation Answer BookLabor Management Law Answer Book

ESTATE PLANNING AND ELDER LAWBlattmachr on Income Taxation of Estates and TrustsEstate Planning & Chapter 14: Understanding the Special Valuation RulesInternational Tax & Estate Planning: A Practical Guide for Multinational InvestorsManning on Estate PlanningNew York Elder LawStocker on Drawing Wills and Trusts

HEALTH LAWFDA Deskbook: A Compliance and Enforcement GuideHealth Care Litigation and Risk Management Answer BookHealth Care Mergers and Acquisitions Answer BookMedical Devices Law and Regulation Answer BookPharmaceutical Compliance and Enforcement Answer Book

IMMIGRATION LAWFragomen on Immigration Fundamentals: A Guide to Law and Practice

INSURANCE LAWBusiness Liability Insurance Answer BookInsurance Regulation Answer BookReinsurance Law

INTELLECTUAL PROPERTY LAWCopyright Law: A Practitioner’s GuideFaber on Mechanics of Patent Claim DraftingFederal Circuit Yearbook: Patent Law Developments in the Federal CircuitHow to Write a Patent ApplicationIntellectual Property Law Answer BookKane on Trademark Law: A Practitioner’s GuideLikelihood of Confusion in Trademark LawPatent Claim Construction and Markman HearingsPatent Law: A Practitioner’s GuidePatent Licensing and Selling: Strategy, Negotiation, FormsPatent LitigationPharmaceutical and Biotech Patent LawPost-Grant Proceedings Before the Patent Trial and Appeal BoardSubstantial Similarity in Copyright LawTrade Secrets: A Practitioner’s Guide

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LITIGATIONAmerican Arbitration: Principles and PracticeClass Actions and Mass Torts Answer BookElectronic Discovery DeskbookEssential Trial Evidence: Brought to Life by Famous Trials, Films, and FictionExpert Witness Answer BookEvidence in Negligence CasesFederal Bail and Detention HandbookHow to Handle an AppealMedical Malpractice: Discovery and TrialProduct Liability Litigation: Current Law, Strategies and Best PracticesSinclair on Federal Civil PracticeTrial Handbook

REAL ESTATE LAWCommercial Ground LeasesFriedman on Contracts and Conveyances of Real PropertyFriedman on LeasesHoltzschue on Real Estate Contracts and Closings: A Step-by-Step Guide to Buying and

Selling Real EstateNet Leases and Sale-Leasebacks

TAX LAWThe Circular 230 Deskbook: Related Penalties, Reportable Transactions, Working FormsThe Corporate Tax Practice Series: Strategies for Acquisitions, Dispositions, Spin-Offs,

Joint Ventures, Financings, Reorganizations & RestructuringsForeign Account Tax Compliance Act Answer BookInternal Revenue Service Practice and Procedure DeskbookInternational Tax & Estate Planning: A Practical Guide for Multinational InvestorsInternational Tax Controversies: A Practical GuideInternational Trade Law Answer Book: U.S. Customs Laws and RegulationsLanger on Practical International Tax PlanningThe Partnership Tax Practice Series: Planning for Domestic and Foreign Partnerships,

LLCs, Joint Ventures & Other Strategic Alliances Private Clients Legal & Tax Planning Answer BookTransfer Pricing Answer Book

GENERAL PRACTICE PAPERBACKSAnatomy of a Mediation: A Dealmaker’s Distinctive Approach to Resolving Dollar

Disputes and Other Commercial ConflictsAttorney-Client Privilege Answer BookDrafting for Corporate Finance: Concepts, Deals, and DocumentsPro Bono Service by In-House Counsel: Strategies and PerspectivesSmart Negotiating: How to Make Good Deals in the Real WorldThinking Like a Writer: A Lawyer’s Guide to Effective Writing & EditingWorking with Contracts: What Law School Doesn’t Teach You

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FINANCIAL INSTITUTIONS

ANSWER BOOKLAW • GOVERNANCE • COMPLIANCE

2017 Edition

Edited by Stuart G. Stein, Richard A. Schaberg,

and Laura R. Biddle

Practising Law Institute New York City

#205893

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This work is designed to provide practical and useful information on the subject matter covered. However, it is sold with the understanding that neither the publisher nor the author is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

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For general information about Practising Law Institute, please visit www.pli.edu.

Legal Editor: Carol Benedicto

Copyright © 2017 by Practising Law Institute. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Practising Law Institute.

ISBN: 978-1-4024-2855-5LOC: 20119425751st P

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About the Editors

Stuart G. Stein is a partner at Hogan Lovells U.S. LLP and is the global co-head of the firm’s Corporate practice group. His practice primarily involves representing clients in corporate, securities, and legislative and regulatory matters, with a particular industry focus on financial services. He has extensive experience in representing financial ser-vices companies in a variety of corporate and regulatory matters, including mergers and acquisitions, initial and follow-on public offer-ings, and other public and private financing transactions.

Mr. Stein also advises corporate directors in connection with governance and fiduciary responsibility issues. He assists boards of directors, directors’ committees (both customary and special com-mittees), and individual directors as they define and perform their obligations. He advises on director fiduciary duties, general obliga-tions, and liabilities; corporate governance, compliance, and ethics; transactional considerations; and crisis management, special investi-gations, and events.

Mr. Stein received his B.B.A.-Accounting from the George Washington University and his J.D. from the University of Virginia.

Richard A. Schaberg is a partner at Hogan Lovells U.S. LLP and advises financial institutions and other financial services providers on corporate and securities matters. He has experience in initial and secondary debt and equity offerings, mergers and acquisitions, the formation of stock and no-stock holding companies, going private transactions, and mutual-to-stock conversions and credit union con-versions. He received a B.A. from Bucknell University and a J.D. from the George Washington University Law School.

Laura R. Biddle is counsel at Hogan Lovells U.S. LLP. She focuses on the representation of banks, thrifts, credit unions, and non-depository lenders as well as their holding companies, subsidiaries, affiliates, and investors in connection with a broad range of regulatory and transactional matters. She has significant regulatory experience with financial institution strategic planning, mergers and acquisitions, 1s

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holding company formation and activities, charter selection, forma-tion and conversion, controlling and non-controlling private equity investments, reorganization, recapitalization, and acquisitions of trou-bled banks through the FDIC’s receivership process, and compliance with margin lending regulations. Ms. Biddle received her B.B.A. from the College of William and Mary, and her J.D., magna cum laude, from the Catholic University of America, Columbus School of Law.

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About the Contributors

Laura R. Biddle (chapters 1, 2, 5–10, 12–15) is counsel at Hogan Lovells U.S. LLP. She focuses on the representation of banks, thrifts, credit unions, and non-depository lenders as well as their holding compa-nies, subsidiaries, affiliates, and investors in connection with a broad range of regulatory and transactional matters. She has significant regulatory experience with financial institution strategic planning, mergers and acquisitions, holding company formation and activi-ties, charter selection, formation and conversion, controlling and non-controlling private equity investments, reorganization, recapi-talization, and acquisitions of troubled banks through the FDIC’s recei-vership process, and compliance with margin lending regu lations. Ms. Biddle received her B.B.A. from the College of William and Mary, and her J.D., magna cum laude, from the Catholic University of America, Columbus School of Law.

Christian H. Chandler (chapter 4) is a partner at Hogan Lovells U.S. LLP and advises financial institutions and other companies, their boards of directors and compensation committees, and indi-vidual executives on a wide variety of executive compensation and employee benefits matters including the negotiation and documen-tation of executive employment and change of control agreements, supplemental executive retirement programs (SERPs), equity compen-sation programs, and tax-qualified benefit plans with a special focus on all aspects of executive compensation related to mergers and acqui-sitions, such as golden parachute issues. He also advises on compli-ance with the regu latory requirements applicable to compensation matters at financial institutions (including TARP) and, in the case of public companies, the securities law disclosure requirements imposed upon compensation arrangements. Mr. Chandler received his B.A., cum laude, from Duke University, and his J.D., cum laude, from Boston College Law School.

Bret S. Cohen (chapter 11) is an associate at Hogan Lovells U.S. LLP and practices in the areas of privacy, information management, antitrust, and consumer protection. He has represented clients in consumer 1s

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protection and antitrust litigation and in investigations by various government agencies, including the Federal Trade Commission, the U.S. Department of Justice, and state Attorneys General. Mr. Cohen counsels clients on a wide variety of privacy and other consumer pro-tection matters, including compliance with the FTC Act, Fair Credit Reporting Act, computer fraud and wiretapping statutes, state data breach notification laws, CAN-SPAM, and state common law privacy protections. He counsels on workplace privacy; advises companies how to address social media and other new technologies; and drafts social media, electronic communications, and other employee-facing policies. Mr. Cohen has conducted comprehensive audits of client websites, information systems, and other privacy and data secu-rity policies and practices. He has also reviewed online and offline advertising campaigns for compliance with federal and state truth-in-advertising regulations and the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising. Mr. Cohen received his B.S., cum laude, with honors, from the University of Maryland, Col-lege Park, and his J.D., with high honors, Order of the Coif, from the George Washington University Law School.

Loyal T. Horsley (chapters 3 & 15) is an associate at Hogan Lovells U.S. LLP and focuses on a broad range of regulatory and corporate mat ters for the financial services industry. She works with financial institutions, large and small, both bank and non-bank, to ensure com-pli ance with the complex and expanding regulatory framework. Ms. Horsley works with financial institutions to bring more innovative, fintech tools to customers while maintaining compliant structures, policies, and procedures. She works with clients to safeguard compli-ance, while promoting business growth and development. In addition to advising on regulatory compliance, Ms. Horsley provides guidance on corporate governance, transactions, and control issues. While in law school, she gained experience in the financial services industry with internships at FINRA, the Mortgage Bankers Association, and the American Association of Bank Directors. Prior to joining Hogan Lovells, she was an associate at an AmLaw 200 firm in Washington, D.C. Ms. Horsley received her B.A. from the University College London; and her J.D., with honors, from the George Washington University Law School.1s

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Andrew Keller (chapter 10) is a partner at Hogan Lovells U.S. LLP and counsels and represents clients on a broad range of international trade and regulatory matters. He leverages his extensive legal and for-eign policy experience to advance and protect their business inter-ests in relation to sanctions, export controls, counter-threat finance, and other national security matters. Mr. Keller has engaged with com-panies around the world and across almost all major industry sectors to explain how U.S. sanctions and sanctions relief impact their busi-ness. He combines a deep understanding of the internal workings of the Executive Branch and Congress with the ability to deliver practi-cal and timely solutions to complex problems. Before joining Hogan Lovells, Mr. Keller served as Deputy Assistant Secretary in the Bureau of Economic and Business Affairs at the U.S. Department of State. He also served as Deputy Legal Adviser at the State Department and was Chief Counsel to the U.S. Senate Committee on Foreign Relations (SFRC). Mr. Keller received his B.A. from Swarthmore College; and his J.D., with honors, from the University of Texas School of Law.

Gregory C.J. Lisa (chapter 10) is a partner at Hogan Lovells U.S. LLP and uses his extensive firsthand experience in anti-money laundering and consumer protection to help financial institution clients navigate the complex regulations and expectations of regulators, examination teams, and law enforcement agencies, civil and criminal. In addition to work-ing with established financial institutions, such as banks and credit unions, casinos, and money services businesses, Mr. Lisa also repre-sents and counsels financial services innovators, including emerging payment and finance systems, virtual currency companies, and other new financial services companies, particularly in the FinTech space. Before joining Hogan Lovells, he was the Interim Director of the Office of Compliance and Enforcement at the Financial Crimes Enforcement Network (FinCEN), and also served as the Chief of the Money Services Businesses and Casinos Section within FinCEN’s Enforcement Divi-sion. Prior to his work at FinCEN, Mr. Lisa also served in the Office of Enforcement at the Consumer Financial Protection Bureau (CFPB). He was also a Trial Attorney at the U.S. Department of Justice for twelve years, first in the Civil Division, and then for almost ten years in the Crim-inal Division’s Organized Crime and Racketeering Section as a federal prosecutor, investigating and litigating a number of cases involving money laundering, fraud, RICO, public corruption, and other violations. 1s

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Mr. Lisa received his B.A., cum laude, from Georgetown University, his M.A., cum laude, from the University of Pennsylvania; and his J.D., cum laude, from Georgetown University Law Center.

Margaret R. McIntyre (chapter 4) is an associate at Hogan Lovells U.S. LLP and advises a wide range of clients on tax, employee benefits, and executive compensation matters. Her experience includes advising clients with respect to employee benefit and executive compensation compliance issues, including identifying and addressing such issues in the context of mergers and acquisitions and, in the case of public companies, counseling on the securities law disclosure requirements imposed on compensation arrangements. She also assists clients with the design and implementation of executive employment, change in control, retention, severance, and other compensation-related plans, agreements, and arrangements, as well as equity and incentive bonus plans, agreements, and programs. Additionally, she counsels clients on the design and administration of qualified retirement plans, nonqualified deferred compensation plans, welfare benefit plans, and other employee-related arrangements, including matters involving plan audits and applications to the U.S. Internal Revenue Service and U.S. Department of Labor for determination letters, prohibited transaction exemptions, and voluntary corrections. Ms. McIntyre received her B.A., summa cum laude, from Wake Forest University; her J.D., with high honors, from the George Washington University Law School; and her LL.M. (in Taxation) from New York University School of Law.

Richard A. Schaberg (chapters 1, 3, 5, 6 & 12) is a partner at Hogan Lovells U.S. LLP, and advises financial institutions and other financial services providers on corporate and securities matters. He has expe-rience in initial and secondary debt and equity offerings, mergers and acquisitions, the formation of stock and no-stock holding companies, going private transactions, and mutual-to-stock conversions and credit union conversions. He received a B.A. from Bucknell University and a J.D. from the George Washington University Law School.

Stuart G. Stein (chapters 7, 8 & 13–15) is a partner at Hogan Lovells U.S. LLP and is the global co-head of the firm’s Corporate practice group. His practice primarily involves representing clients in corporate, 1s

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securities, and legislative and regulatory matters, with a particular industry focus on financial services. He has extensive experience in representing financial services companies in a variety of corporate and regulatory matters, including mergers and acquisitions, initial and follow-on public offerings, and other public and private financing transactions.

Mr. Stein also advises corporate directors in connection with gov-ernance and fiduciary responsibility issues. He assists boards of direc-tors, directors’ committees (both customary and special committees), and individual directors as they define and perform their obligations. He advises on director fiduciary duties, general obligations, and liabilities; corporate governance, compliance, and ethics; transac-tional considerations; and crisis management, special investigations, and events.

Mr. Stein received his B.B.A.-Accounting from the George Washington University and his J.D. from the University of Virginia.

Timothy P. Tobin (chapter 11) is a partner at Hogan Lovells U.S. LLP and concentrates on consumer protection matters, with a particular focus on privacy and data security law, and he regularly counsels clients on data breach incidents, both large and small. Mr. Tobin also counsels businesses on various Internet and e-commerce issues, including copyright and trademark matters. Internationally, he advises clients on appropriate mechanisms for the legal cross- border transfer of personal information worldwide. As to transfers from the European Union, Mr. Tobin has helped clients obtain certi-fications under the Department of Commerce’s safe harbor program and to select from other alternatives such as model contractual clauses or binding corporate rules. Mr. Tobin has written and lec-tured on cross-border data transfer issues in the United States and abroad, including on the unique issues presented by e-discovery of data held abroad in U.S.-based litigation. He received his B.A. from Michigan State University and his J.D., magna cum laude, from George Mason University School of Law.

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Table of Chapters

Chapter 1 Regulatory Structure and Charter ChoiceChapter 2 BranchingChapter 3 Corporate GovernanceChapter 4 Executive CompensationChapter 5 Change in Bank ControlChapter 6 Mergers and AcquisitionsChapter 7 Deposit ActivitiesChapter 8 Deposit InsuranceChapter 9 Insider and Affiliate TransactionsChapter 10 Anti-Money Laundering and U.S. Trade SanctionsChapter 11 Privacy and Data SecurityChapter 12 Examination and AuditChapter 13 CapitalChapter 14 Prudential Regulator EnforcementChapter 15 Problem Banks and Failures

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Table of Contents

About the Editors ........................................................................................... viiAbout the Contributors .................................................................................ixTable of Chapters ............................................................................................xvTable of Contents ......................................................................................... xviiIntroduction ....................................................................................................... liii

Chapter 1 Regulatory Structure and Charter ChoiceRichard A. Schaberg & Laura R. Biddle

Organization and Charters ��1-3

Q 1.1 What is an IDI? .....................................................................................1-3Q 1.2 Is a financial institution the same as an IDI? ....................................1-3

Q 1.2.1 What is the “business of banking”? ........................................1-3Q 1.2.2 Why is the business of banking highly regulated in

the United States? ....................................................................1-4Q 1.3 What is a charter? ...............................................................................1-4

Q 1.3.1 What different types of charters are available? ...................1-4Q 1.3.2 What factors are involved in choosing one type of

charter over another? ..............................................................1-5

Banks .......................................................................................................................1-5

Q 1.4 What is a bank? ....................................................................................1-5Q 1.5 What are CEBA banks? ........................................................................1-6Q 1.6 What are the types of CEBA banks? ..................................................1-6

National Banks .......................................................................................................1-8

Basics of National Banks ......................................................................................1-8

Q 1.7 What is a national bank? .....................................................................1-8Q 1.8 Who regulates national banks? ..........................................................1-8Q 1.9 Do national bank activities enjoy preemption from state law? ......1-8

National Bank Activities .......................................................................................1-9

Q 1.10 What activities are permissible for national banks to engage in directly? ..............................................................................1-91s

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Q 1.11 What activities may national banks engage in through a subsidiary? ...........................................................................................1-9

Q 1.12 In what activities may a national bank’s financial subsidiary engage? ............................................................................1-10

Q 1.13 What types of investments may national banks make? ................1-11

State (Member and Nonmember) Banks ..........................................................1-12

Q 1.14 What types of IDIs may be state chartered? ..................................1-12Q 1.15 What is a state member bank? .........................................................1-12Q 1.16 What is the Federal Reserve System? .............................................1-12Q 1.17 Who regulates state member banks? ..............................................1-12Q 1.18 Can a national bank be a member of the Federal Reserve

System? ...............................................................................................1-12Q 1.19 What is a state nonmember bank? ..................................................1-12Q 1.20 Who regulates state nonmember banks? .......................................1-13Q 1.21 Why would a bank choose (not) to be a member of

the Federal Reserve System? ...........................................................1-13Q 1.22 What activities are permissible for state banks? ..........................1-13

Bank Service Companies ....................................................................................1-14

Q 1.23 What is a bank service company? ...................................................1-14Q 1.24 Are bank service companies regulated and examined

like IDIs? ..............................................................................................1-14Q 1.25 Are companies that perform these same services for

banks subject to regulation and examination? ..............................1-14

Bank Holding Companies ...................................................................................1-15

Basics of Bank Holding Companies ..................................................................1-15

Q 1.26 What is a bank holding company? ..................................................1-15Q 1.27 What is a “company”? .......................................................................1-15Q 1.28 Can a natural person be a BHC? ......................................................1-15Q 1.29 What is “control” for purposes of the BHC Act? ...........................1-15Q 1.30 Who regulates BHCs? ........................................................................1-16

Q 1.30.1 What does it mean for a BHC to serve as a “source of strength” to its IDI subsidiaries? ......................................1-16

Q 1.30.2 What happens if a BHC fails to serve as a source of strength? .............................................................................1-161s

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Bank Holding Company Activities ....................................................................1-16

Q 1.31 What types of activities are permissible for a BHC? .....................1-16Q 1.31.1 Which activities are considered to be

“so closely related to banking as to be a proper incident thereto”? ...................................................................1-17

Q 1.32 Is a bank holding company permitted to own a thrift as well as a bank? ..............................................................................1-18

Financial Holding Companies ...........................................................................1-19

Q 1.33 What is a financial holding company? ............................................1-19Q 1.34 What benefits does FHC status provide a BHC? ............................1-19Q 1.35 What steps must a BHC take in order to qualify as a FHC? ..........1-19Q 1.36 Who regulates FHCs? ........................................................................1-20Q 1.37 What are the consequences of a FHC failing to meet the

well capitalized and well managed standards? .............................1-20Q 1.38 What are the consequences of a subsidiary IDI failing to

maintain the required CRA rating? ..................................................1-21Q 1.39 Are there any downsides to being a FHC? ......................................1-21

Financial Holding Company Activities .............................................................1-21

Q 1.40 What types of activities can FHCs engage in that other BHCs cannot? .....................................................................................1-21

Q 1.40.1 What activities are “financial in nature”? ............................1-21Q 1.40.2 Can additional activities be added to the list of

activities that are “financial in nature”? ..............................1-22Q 1.40.3 What activities are complementary to a financial

activity? ...................................................................................1-22

Thrifts .....................................................................................................................1-23

Basics of Thrifts .....................................................................................................1-23

Q 1.41 What is a thrift? .................................................................................1-23Q 1.42 Can a thrift be federally chartered or state chartered? ...............1-24Q 1.43 Who regulates thrifts? .......................................................................1-24Q 1.44 Why choose to be a thrift versus a bank? ......................................1-24

Thrift Activities ......................................................................................................1-24

Q 1.45 What types of activities are permissible for thrifts? .....................1-24

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Savings and Loan Holding Companies .............................................................1-26

Basics of Savings and Loan Holding Companies ...........................................1-26

Q 1.46 What is a savings and loan holding company? ..............................1-26Q 1.46.1 What is a “company” under the HOLA?...............................1-27Q 1.46.2 What is “control” under the HOLA? .....................................1-27

Q 1.47 Will a holding company that owns both a bank and a thrift be considered a BHC or a SLHC? ........................................1-27

Q 1.48 Who regulates SLHCs? ......................................................................1-27Q 1.49 What is the practical difference between a BHC and a SLHC? .......1-27Q 1.50 What is the 10(l) election? ...............................................................1-28

Savings and Loan Holding Company Activities ..............................................1-28

Q 1.51 What types of activities are permissible for SLHCs? ....................1-28

Foreign Banking Organizations .........................................................................1-29

Q 1.52 What is a foreign banking organization? ........................................1-29Q 1.53 Who regulates FBOs? ........................................................................1-29Q 1.54 What is a qualifying foreign banking organization? ......................1-30

International Activities of Domestic Banks ........................................................1-30

Q 1.55 Are domestic IDIs permitted to operate internationally? ............1-30Q 1.56 Can domestic IDIs engage in the same activities

internationally as they can domestically? ......................................1-30Q 1.57 Who regulates the international activities of domestic IDIs? .......1-32

Charter Conversions ............................................................................................1-32

Q 1.58 What is the process for one type of IDI to convert to another type? .....................................................................................1-32

Q 1.59 How does a credit union convert to a bank? .................................1-33Q 1.59.1 Can a bank or thrift convert to a credit union? ..................1-33Q 1.59.2 Why would an IDI want to convert to a credit union? .........1-34

Q 1.60 What is a mutual-to-stock conversion? ..........................................1-34Q 1.60.1 Why choose a mutual-to-stock conversion? .......................1-34

Q 1.61 What is a minority stock mutual holding company conversion? ........................................................................................1-35

Q 1.61.1 Why choose a minority stock MHC conversion? ...............1-35Q 1.61.2 What is a second-step conversion?......................................1-36Q 1.61.3 What is a no-stock MHC reorganization? ............................1-361s

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Chapter 2 BranchingLaura R. Biddle

Basics of Branching................................................................................................2-2

Q 2.1 What is a branch? ................................................................................2-2Q 2.2 What is considered a “branch” of a national bank? ........................2-2Q 2.3 What is considered a “branch” of a federal savings

association? ..........................................................................................2-2Q 2.4 What is considered a “branch” of a state chartered insured

depository institution? .......................................................................2-3

Intrastate and Interstate Branching .....................................................................2-4

Q 2.5 Where are national banks allowed to branch? ................................2-4Q 2.6 Where are state member banks allowed to branch? ......................2-5Q 2.7 Where are state nonmember banks allowed to branch? ................2-5Q 2.8 Where are federal savings associations allowed to branch? .........2-6

Regulatory Considerations When Opening, Moving, or Closing a Branch ....................................................................................................2-6

Q 2.9 Is regulatory approval required before opening a branch? ...........2-6Q 2.10 Is regulatory approval required before moving a branch? ............2-7Q 2.11 Is regulatory approval required before closing a branch? .............2-7

Trade Names ..........................................................................................................2-7

Q 2.12 Can branches operate under trade names? .....................................2-7

Chapter 3 Corporate GovernanceRichard A. Schaberg & Loyal T. Horsley

Federal and State Corporate Governance Requirements .................................3-2

Q 3.1 What corporate governance requirements apply to an IDI or its holding company? ..........................................................................3-2

Q 3.2 Can an IDI or IDI holding company organize in the state whose corporate laws it wants to use? ............................................3-4

Q 3.3 Are IDIs or IDI holding companies subject to the Sarbanes-Oxley Act of 2002? ..............................................................3-41s

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Directors and Officers ...........................................................................................3-5

Q 3.4 Is there a required number of directors or officers an IDI or holding company must have? ............................................................3-5

Q 3.5 Do new directors or officers need to be approved by regulators? ............................................................................................3-6

Q 3.6 Do regulators need to be notified whenever a director or officer resigns? .....................................................................................3-6

Q 3.7 What does it mean for a director to be “independent”? ................3-7Q 3.7.1 Is there a requirement that a certain number of

directors be “independent” directors? ..................................3-8Q 3.8 Are there certain board policies or practices regulators

look for when examining an IDI? ........................................................3-8Q 3.9 What potential liability does a director or officer of a failed

IDI face? .................................................................................................3-8Q 3.10 Are there specific regulatory functions the board of

directors of an IDI are required to complete? ..................................3-9Q 3.11 Are there specific areas of risk an IDI’s board of directors

should focus on and adopt policies and procedures to address? .........................................................................................3-10

Management Interlocks .......................................................................................3-10

Q 3.12 Are there prohibitions against management officials serving at more than one IDI or IDI holding company? ...............3-10

Q 3.12.1 What is a “management official” for purposes of the DIMIA? ...............................................................................3-11

Q 3.13 Are there exemptions from the prohibition against interlocks? ..........................................................................................3-11

Chapter 4 Executive CompensationChristian H. Chandler & Margaret R. McIntyre

Restrictions on Compensation Paid to Executives by Insured Depository Institutions (IDIs) and Their Holding Companies ................................................4-3

Q 4.1 What restrictions apply to compensation paid to executives by insured depository institutions? ..................................................4-3

Q 4.2 What restrictions apply to compensation paid to executives by IDI holding companies? .................................................................4-41s

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Restrictions on Severance Benefits for Executives by IDIs and Their Holding Companies .....................................................................................4-5

Q 4.3 What restrictions apply to severance benefits paid by IDIs to executives? ...............................................................................4-5

Q 4.4 What restrictions apply to severance benefits paid by IDI holding companies to executives? ..............................................4-5

Interagency Guidelines Establishing Standards for Safety and Soundness ...............................................................................................................4-6

Q 4.5 What are the Interagency Guidelines Establishing Standards for Safety and Soundness? ...............................................4-6

Q 4.6 What institutions must comply with the executive compensation provisions of the Interagency Guidelines? .............4-6

Q 4.7 What safeguards should institutions subject to the Interagency Guidelines establish and maintain regarding compensation, fees, and benefits? ....................................................4-6

Q 4.8 When is compensation considered excessive? ...............................4-7Q 4.8.1 What institutions are considered comparable

institutions? ..............................................................................4-8Q 4.9 What additional considerations should institutions

consider regarding postemployment benefits? ...............................4-8

Interagency Guidance on Sound Incentive Compensation Policies .................4-8

Basics of Restrictions on Incentive Compensation Policies ..............................4-8

Q 4.10 What restrictions apply to incentive compensation arrangements at banking organizations? .........................................4-8

Q 4.11 What incentive compensation arrangements are subject to the Guidance on Sound Incentive Compensation Policies? ............4-9

Internal Reviews ...................................................................................................4-10

Q 4.12 What internal reviews should banking organizations perform to ensure compliance with the Guidance on Sound Incentive Compensation Policies? ....................................................................4-10

Q 4.13 What role will findings regarding incentive compensation play in a banking organization’s supervisory and examination process? .......................................................................4-11

Risk-Taking Initiatives ...........................................................................................4-11

Q 4.14 What factors should be considered in determining whether incentive compensation arrangements balance risk-taking incentives? ........................................................4-11

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Q 4.15 Under what circumstances is an incentive compensation arrangement considered to have balanced risk and financial results? ................................................................................4-12

Q 4.16 What risks should a banking organization consider in assessing whether compensation arrangements are balanced? ............................................................................................4-13

Balanced Arrangements .....................................................................................4-13

Q 4.17 How can an unbalanced incentive compensation arrangement be moved toward balance? .......................................4-13

Q 4.18 How should banking organizations account for the differences between Covered Employees within a banking organization and at different banking organizations? ..................4-14

Q 4.19 What factors should banking organizations consider regarding the potential for “golden parachutes” and the vesting arrangements for deferred compensation to affect the risk-taking behavior of Covered Employees? ..........................4-14

Q 4.20 How should a banking organization’s risk management processes and internal controls reinforce and support the development and maintenance of balanced incentive arrangements? ..................................................................4-15

Oversight...............................................................................................................4-16

Q 4.21 How should banking organizations document their controls for establishing and monitoring incentive compensation arrangements? ...................................................................................4-16

Q 4.22 What steps should banking organizations take to ensure that they have strong corporate governance? ..............................4-16

Q 4.23 What role should the board of directors of a banking organization play in monitoring the banking organization’s incentive compensation arrangements? ........................................4-17

Q 4.24 What disclosure practices support safe and sound incentive compensation arrangements? .........................................................4-17

Dodd-Frank Wall Street Reform and Consumer Protection Act .....................4-18

Basics .....................................................................................................................4-18

Q 4.25 How does the Dodd-Frank Wall Street Reform and Consumer Protection Act impact executive compensation at financial institutions? .......................................................................................4-18

Q 4.26 What types of compensation are subject to a shareholder vote under the Dodd-Frank Act? .....................................................4-181s

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Q 4.27 What requirements are applicable to shareholder votes regarding executive compensation? ...............................................4-19

Q 4.28 What requirements are applicable to shareholder votes regarding golden parachutes? .........................................................4-19

Say-on-Pay ............................................................................................................4-20

Q 4.29 Are companies required to disclose the results of the non-binding shareholder votes provided for under the Dodd-Frank Act? ................................................................................4-20

Q 4.30 Where and under what circumstances must companies disclose the results of say-on-pay votes? .......................................4-21

Q 4.31 Where and under what circumstances must companies disclose the results of say-on-frequency votes? ............................4-21

Q 4.32 Are the shareholder votes required by the Dodd-Frank Act binding on the company or its board of directors? ...............4-22

Disclosure of Pay Versus Performance ..............................................................4-22

Q 4.33 What disclosure is required regarding the relationship between executive compensation actually paid by a public company and the financial performance of the public company? ...........................................................................................4-22

Disclosure of Pay Ratio .......................................................................................4-25

Q 4.34 What disclosure is required regarding the ratio of the compensation of a public company’s chief executive officer to the median compensation of the public company’s employees? .........................................................................................4-25

Clawbacks ............................................................................................................4-29

Q 4.35 What policies must public companies develop with respect to the recovery of erroneously-awarded compensation (“clawbacks”)? ...................................................................................4-29

Disclosure of Employee and Director Hedging ...............................................4-33

Q 4.36 What disclosure is required regarding hedging activity by public company employees and directors? ...................................4-33

Compensation Committee Independence ........................................................4-35

Q 4.37 Under what circumstances will a public company compensation committee be considered independent? ..............4-351s

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Independence of Compensation Consultants or Other Compensation Committee Advisers .............................................................................................4-38

Q 4.38 Does the Dodd-Frank Act require that public companies retain independent compensation consultants or other compensation committee advisers? ...............................................4-38

Q 4.39 What factors regarding independence must a public company compensation committee consider in choosing to retain a compensation consultant, legal counsel, or other advisers? ........4-38

Q 4.40 Does a public company compensation committee’s retention of a compensation consultant, legal counsel, or other advisers subject it to any disclosure requirements? .......4-40

Additional Requirements .....................................................................................4-41

Q 4.41 Are certain financial institutions subject to additional requirements under the Dodd-Frank Act? ......................................4-41

Q 4.42 What additional requirements does section 956 of the Dodd-Frank Act impose on all covered financial institutions? .......................................................................................4-41

Q 4.43 What are the key terms and concepts under the Proposed Rule? ....................................................................................................4-42

Q 4.43.1 What is a “Covered Institution”? ..........................................4-42Q 4.43.2 Who is a “Covered Person”? ................................................4-44Q 4.43.3 What is “Incentive Compensation”? .....................................4-44Q 4.43.4 What is “Excessive Compensation”? ....................................4-44Q 4.43.5 What is “Material Financial Loss”? .......................................4-44Q 4.43.6 Who is a “Senior Executive Officer”? ...................................4-44Q 4.43.7 Who is a “Significant Risk-Taker”? ........................................4-45Q 4.43.8 What is the “Relative Compensation Test”? .......................4-45Q 4.43.9 What is the “Exposure Test”? ...............................................4-45Q 4.43.10 What are the three levels of Covered Institutions? ...........4-46

Q 4.44 To whom does the Proposed Rule apply? ......................................4-46Q 4.45 What requirements does the Proposed Rule impose on all

Covered Institutions? ........................................................................4-46Q 4.46 What additional requirements does the Proposed Rule

impose on Level 1 and Level 2 Covered Institutions? ..................4-47Q 4.47 Can an Agency subject a Covered Institution deemed to be

Level 2 or Level 3 to follow the more stringent requirements for either Level 1 or Level 2 Covered Institutions? .......................4-511s

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Sarbanes-Oxley Act .............................................................................................4-51

Q 4.48 What restrictions on IDI and holding company executive compensation are imposed by the Sarbanes-Oxley Act? .............4-51

Q 4.49 What personal loans and extensions of credit from public companies to executive officers and directors are prohibited under the Sarbanes-Oxley Act? ....................................4-51

Q 4.50 What “clawbacks” are required under the Sarbanes-Oxley Act? ......................................................................................................4-52

Indemnifying Directors and Officers of IDIs and Their Holding Companies ............................................................................................................4-53

Q 4.51 What restrictions are imposed by the banking regulators on the indemnification of directors and officers of IDIs and their holding companies? ..........................................................................4-53

Q 4.51.1 What indemnification payments may IDIs and their holding companies make or agree to make?.......................4-54

Office of the Comptroller of the Currency “Unsafe and Unsound” Compensation Practices ......................................................................................4-55

Basics .....................................................................................................................4-55

Q 4.52 What federal bank regulatory agencies impose restrictions on savings associations’ compensation practices? ......................4-55

Q 4.53 What restrictions does the OCC currently impose on savings associations looking to enter into employment agreements or other compensation arrangements with officers or employees? ......................................................................4-56

Q 4.54 Do these OCC restrictions apply to compensation arrangements between a holding company and a holding company executive? ..........................................................................4-56

Terms of Employment Agreements .....................................................................4-57

Q 4.55 What terms of employment agreements are presumed “unsafe and unsound” compensation practices by the OCC? .......4-57

Q 4.55.1 What compensation arrangements are generally considered to provide incentives contrary to the safe and sound operation of a savings association?..........4-58

Q 4.55.2 How are total compensation and average annual compensation calculated for purposes of the general presumption that total compensation paid out upon the departure of an employee should not exceed three times the employee’s average annual compensation? ........4-58

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Q 4.56 What is the most executive-friendly manner in which the term of an employment contract may be structured under OCC restrictions and what practical steps must institutions take to comply with this structure? ................................................4-59

Q 4.57 Are any provisions required to be included in employment contracts subject to OCC jurisdiction? ..........................................4-59

Independent Directors .........................................................................................4-61

Q 4.58 What compensation programs for independent directors are considered not to be commensurate with the duties of an independent director or are considered to jeopardize the independence of an independent director? ............................4-61

Mergers, Consolidations, Transfers of Assets, or Assumptions of Liabilities ...............................................................................................................4-62

Q 4.59 Is OCC approval required prior to an OCC regulated savings institution entering into a merger, consolidation, transfer of assets, or assumption of liabilities and, if so, what information must be provided to the OCC? ...................................4-62

Q 4.60 How will compensation of officers, directors, and controlling persons of the disappearing savings institution by the resulting savings institution or an affiliate be reviewed for purposes of the application for a merger, consolidation, transfer of assets, or assumption of liabilities? .............................4-62

Q 4.61 How will compensation of members of an advisory board of the resulting savings association that consists of officers, directors, or controlling persons of the disappearing institution be reviewed for purposes of the application for a merger, consolidation, transfer of assets, or assumption of liabilities? .......................................................................................4-63

FDIC Restrictions Applicable to Stock Benefit Plans at De Novo Institutions .............................................................................................................4-64

Q 4.62 What federal regulatory agency reviews stock benefit plans of de novo institutions and what types of benefit plans does it examine? ......................................................................4-64

Q 4.63 Will the FDIC review stock benefit plans of a de novo holding company? .............................................................................4-65

Q 4.64 How must stock benefit plans be disclosed to potential subscribers and the FDIC? ...............................................................4-651s

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Q 4.65 Are stock benefit plans that include a cash payment to the recipient based directly on the market value of the depository institution’s stock permissible? ..................................4-65

Q 4.66 What other FDIC restrictions apply to stock benefit plans at de novo institutions? ....................................................................4-65

Q 4.67 What rights are generally considered to encourage the recipient to remain involved in the proposed depository institution? .........................................................................................4-66

Q 4.68 Who can participate in stock benefit plans of de novo institutions? .......................................................................................4-66

Q 4.69 Does the FDIC look more closely at stock benefit plans that provide benefits to incorporators? .........................................4-67

Q 4.69.1 Are these standards applied differently if the incorporator has placed funds at risk or rendered professional services? ........4-67

Q 4.69.2 Are these standards applied differently if the incorporator has guaranteed a loan to finance the institution’s organization? .....................................................4-68

Troubled Asset Relief Program Recipients .........................................................4-68

Basics .....................................................................................................................4-68

Q 4.70 What entities are subject to Troubled Asset Relief Program restrictions? .......................................................................4-68

Q 4.71 What entities related to a TARP recipient are subject to TARP restrictions? .............................................................................4-69

Q 4.72 What about entities that acquire a TARP recipient? .....................4-69

Length of TARP Restrictions .................................................................................4-69

Q 4.73 How long are TARP restrictions in place? ......................................4-69

Basics of TARP Restrictions on Executive Compensation and Corporate Governance ..........................................................................................................4-70

Q 4.74 What executive compensation and corporate governance restrictions apply to TARP recipients? ...........................................4-70

Q 4.75 Which employees of a TARP recipient are subject to the executive compensation limits? ......................................................4-71

Q 4.76 Who are a TARP recipient’s senior executive officers? ................4-71Q 4.77 Who are a TARP recipient’s most highly compensated

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Compensation Committee ..................................................................................4-72

Q 4.78 What rules govern the formation, structure, and duties of the compensation committee? ........................................................4-72

Q 4.79 What steps must the compensation committee take to limit compensation plan features that create unnecessary or excessive risk? ..............................................................................4-73

Q 4.80 What steps must the compensation committee take to limit compensation plan features that encourage the manipulation of reported earnings?................................................4-73

Q 4.81 How does the compensation committee comply with the certification and disclosure requirements? ...................................4-74

Excessive or Luxury Expenditures ......................................................................4-75

Q 4.82 What rules govern the definition and implementation of the excessive or luxury expenditures policy? ...............................4-75

Shareholder Votes ................................................................................................4-75

Q 4.83 What rules govern the shareholder vote on executive compensation? ...................................................................................4-75

Bonus Payments ...................................................................................................4-76

Q 4.84 What bonus payments must a TARP recipient prohibit? .............4-76Q 4.85 Which officers and employees are subject to the prohibition

on bonus payments? .........................................................................4-76Q 4.86 When is a bonus payment accrued? ...............................................4-77Q 4.87 Can an employee currently not prohibited from receiving

a bonus payment receive such a payment based on services performed or compensation received while he or she was a SEO or a most highly compensated employee prohibited from receiving a bonus payment? ...................................................4-77

Q 4.88 What is a bonus? ...............................................................................4-78Q 4.89 What is incentive compensation? ...................................................4-78Q 4.90 What is a retention award?...............................................................4-79Q 4.91 What commission compensation, excluding commission

compensation earned in connection with financial products or similar services, is not considered a bonus payment? ..............4-80

Q 4.92 What commission compensation earned in connection with financial products or similar services is not considered a bonus payment? ................................................................................4-811s

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Q 4.93 What exception to the bonus payment prohibition exists for awards of long-term restricted stock? ............................................4-81

Q 4.93.1 How is annual compensation calculated for the purpose of an award of long-term restricted stock? ..........4-82

Q 4.93.2 What vesting schedule and restrictions on transferability must apply to the long-term restricted stock? ...................4-82

Q 4.94 What exception to the bonus payment prohibition exists for bonus payments required under certain pre-existing employment contracts? ....................................................................4-83

Q 4.95 How does a TARP recipient comply with the requirement that it institute a “clawback” provision for bonus payments? ........4-83

Q 4.95.1 What are material inaccuracies? ..........................................4-84

Golden Parachutes ..............................................................................................4-84

Q 4.96 What golden parachute payments must a TARP recipient prohibit? .............................................................................................4-84

Q 4.97 What payments are not considered golden parachutes? .............4-84Q 4.97.1 When is a payment considered for services

performed or benefits accrued? ...........................................4-85Q 4.97.2 What payments made pursuant to benefit plans and

deferred compensation plans are not considered golden parachute payments?................................................4-85

Gross-Ups ..............................................................................................................4-86

Q 4.98 What gross-ups must a TARP recipient prohibit? .........................4-86

Perquisites .............................................................................................................4-86

Q 4.99 What perquisites must a TARP recipient disclose?.......................4-86

Compliance ..........................................................................................................4-87

Q 4.100 How does the Treasury Department review compliance with these restrictions? ....................................................................4-87

Q 4.101 What reviews does the Special Master conduct? ..........................4-87Q 4.102 How does the Special Master determine compatibility

with the principles of the restrictions and the public interest generally? .............................................................................4-88

Q 4.103 Which TARP recipient executives must certify compliance with these restrictions and how do they do so? ...........................4-89

Q 4.103.1 What deadlines apply to the certifications? .......................4-89Q 4.103.2 What other rules govern the certifications? .......................4-89Q 4.103.3 What are the penalties for an inaccurate certification? ......4-891s

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Bank-Owned Life Insurance ...............................................................................4-90

Basics .....................................................................................................................4-90

Q 4.104 What is bank-owned life insurance? ................................................4-90Q 4.105 What banking institutions are subject to regulations

regarding BOLI? .................................................................................4-90Q 4.106 When and under what circumstances are institutions

permitted to purchase BOLI? ...........................................................4-91Q 4.107 When and under what circumstances are institutions

not permitted to purchase BOLI? ....................................................4-91Q 4.108 How is BOLI used to finance employee benefit liabilities? ..........4-92Q 4.109 What should a banking institution do before entering into

a BOLI contract? ................................................................................4-93

Management and Oversight ..............................................................................4-93

Q 4.110 How do senior management and the board of directors effectively oversee a BOLI policy? ..................................................4-93

Q 4.111 What policies and procedures should be implemented as part of a comprehensive risk management procedure? ............4-94

Pre-Purchase Analysis ..........................................................................................4-94

Q 4.112 What actions should be part of a thorough pre-purchase analysis of BOLI products? ...............................................................4-94

Q 4.113 How should management determine and quantify the need for BOLI? ...................................................................................4-95

Q 4.114 What factors should management consider in assessing vendor qualifications? ......................................................................4-96

Q 4.115 How should an institution review the characteristics of the available insurance products? ..................................................4-96

Q 4.116 How should an institution select a carrier? ...................................4-96Q 4.117 What factors should an institution consider in determining

the reasonableness of compensation provided to the insured employee if the insurance results in additional compensation? ...................................................................................4-97

Q 4.118 What other steps should be included in an institution’s pre-purchase analysis? .....................................................................4-97

Q 4.119 What steps should an institution take to manage risk associated with BOLI? .......................................................................4-98

Q 4.120 What is liquidity risk? .......................................................................4-99Q 4.121 What is transaction/operational risk? ............................................4-991s

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Q 4.122 What is reputation risk? .................................................................4-100Q 4.123 What is credit risk? .........................................................................4-100Q 4.124 What is interest rate risk? ..............................................................4-101Q 4.125 What is compliance/legal risk? ......................................................4-101Q 4.126 What is price risk? ...........................................................................4-102Q 4.127 What are the tax and insurable interest implications of

BOLI and how should institutions comply with these requirements? ..................................................................................4-103

Q 4.128 How should institutions determine the risk weight of their claim on the insurance company for risk-based capital purposes? ............................................................................4-103

Chapter 5 Change in Bank ControlLaura R. Biddle & Richard A. Schaberg

Control .....................................................................................................................5-2

Q 5.1 What is the Change in Bank Control Act of 1978? ..........................................................................................5-2

Q 5.2 What is control? ...................................................................................5-2Q 5.3 What is “acting in concert” and what is its significance? ...............5-3

Q 5.3.1 What are anti-association commitments? .............................5-3Q 5.3.2 Under what circumstances is there a presumption

of concerted action and what is required if one is identified? ..................................................................................5-4

Q 5.4 What is a presumption of control? ....................................................5-5Q 5.4.1 How can the presumption of control be rebutted? ..............5-5Q 5.4.2 What are passivity commitments? .........................................5-5

Exemptions from CBC Act Notice Requirements ................................................5-7

Q 5.5 What actions are specifically exempted from the requirements to file a CBC Act notice? .....................................................................5-7

Change in Control Notice Process .......................................................................5-9

Q 5.6 What is required to obtain a nonobjection for a change in control? .................................................................................................5-9

Q 5.7 What factors do the federal banking agencies consider when evaluating a change in control notice? ..................................5-91s

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State Change in Control Processes ....................................................................5-10

Q 5.8 Do state laws have change in bank control statutes or policies? ..............................................................................................5-10

Chapter 6 Mergers and AcquisitionsRichard A. Schaberg & Laura R. Biddle

IDI Mergers .............................................................................................................6-2

Q 6.1 What is the regulatory process for the merger of IDIs? .................6-2Q 6.2 Are other types of transactions covered by the BMA?...................6-3Q 6.3 Which federal agency or agencies must approve an IDI merger

transaction? .........................................................................................6-3Q 6.4 What is the application process for obtaining approval for an

IDI-level merger? ..................................................................................6-4Q 6.5 What is the time frame for agency approval of an IDI-level

merger? .................................................................................................6-5Q 6.5.1 Is an expedited process available for “emergency”

situations? .................................................................................6-5Q 6.6 What factors will the federal banking agencies consider in

evaluating a transaction under the BMA? ........................................6-6

Bank Holding Company and Savings and Loan Holding Company Mergers and Acquisitions .....................................................................................6-6

Q 6.7 What is the process for obtaining approval for a bank holding company-level merger or acquisition? .............................................6-6

Q 6.8 What types of BHC transactions do not require prior notice or approval? .........................................................................................6-7

Q 6.9 What factors will the Federal Reserve consider in evaluating an application for a BHC transaction? ..............................................6-8

Q 6.10 Are there additional interstate banking factors the Federal Reserve must consider? .....................................................................6-8

Q 6.11 What is the process for obtaining approval for a savings and loan holding company-level merger or acquisition? .......................6-8

Q 6.12 What factors will the Federal Reserve consider in evaluating an application for a SLHC transaction? ............................................6-9

Q 6.13 Are there additional interstate banking factors the Federal Reserve must consider? ...................................................................6-101s

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Q 6.14 What types of SLHC transactions do not require prior approval or notice? ...........................................................................6-10

Q 6.15 What is the “multistate multiples” prohibition? ............................6-10Q 6.16 Do states have their own BHC or SLHC merger or acquisition

requirements? ....................................................................................6-11Q 6.17 Can a company that is not already a BHC, SLHC, or IDI

acquire an IDI? ...................................................................................6-11Q 6.18 If the merger or acquisition is at the holding company level,

does a separate application for approval need to be filed with the federal banking agencies of the IDI subsidiaries under the BMA? .................................................................................6-11

Merger and Acquisition Competitive Factors ...................................................6-12

Q 6.19 What competitive factors do federal banking agencies consider in evaluating a merger or acquisition application? ........6-12

Q 6.20 Does the effect on competition matter if the transaction is purely an internal reorganization? ..............................................6-13

Q 6.21 Does the effect on competition matter if the transaction is purely intrastate? ..............................................................................6-13

Nonbank Acquisitions by BHCs .........................................................................6-13

Q 6.22 What is required for a BHC to acquire control of a nonbank company? ...........................................................................................6-13

Q 6.23 Are there expedited procedures available for nonbank acquisition transactions? .................................................................6-14

Q 6.24 What are the factors considered in a BHC nonbank acquisition notice? ............................................................................6-15

Q 6.25 Are there any BHC nonbank transactions that are exempt from the notice requirements? ........................................................6-15

Non-IDI Acquisitions by SLHCs ...........................................................................6-16

Q 6.26 What is required for a SLHC to acquire control of a non-IDI company? ..............................................................................6-16

Q 6.27 When is prior notice required? ........................................................6-16Q 6.27.1 What is the prior notice process? ........................................6-17Q 6.27.2 Under what circumstances might the Federal

Reserve object to acquisition of a nonbank company engaged in a prescribed activity? ........................................6-18

Q 6.28 When is an application for prior approval required? ...................6-18Q 6.28.1 What is the application and prior approval process? ........6-181s

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Q 6.29 May SLHCs make certain non-IDI acquisitions without prior approval or notice? .................................................................6-19

Q 6.30 What factors does the Federal Reserve consider in a non-IDI acquisition application? ......................................................6-19

Q 6.31 Are there expedited procedures available for nonbank acquisition transactions? .................................................................6-19

Q 6.32 Are any SLHCs exempt from the notice and application requirements? ....................................................................................6-20

Hart-Scott-Rodino Act ..........................................................................................6-20

Q 6.33 What is the Hart-Scott-Rodino Act? ................................................6-20Q 6.34 Are the HSR premerger notification requirements applicable

to BHC, SLHC and IDI transactions? ................................................6-21

Failed Bank Acquisitions .....................................................................................6-21

Q 6.35 How are failed IDIs sold? ..................................................................6-21Q 6.36 Who can bid on failed IDIs? ..............................................................6-22Q 6.37 What additional qualifications and conditions are placed on

private investors? ..............................................................................6-22Q 6.38 What is a failed IDI purchase and assumption transaction? ........6-24Q 6.39 Is it possible to purchase only certain failed IDI assets

rather than all assets and liabilities of the failed IDI? ...................6-25Q 6.40 Are the qualifications different for

bidding on failed IDIs as compared to purchasing assets? ..........6-25Q 6.41 What is a pooled asset sale? ............................................................6-25Q 6.42 What is an FDIC “structured transaction”? ....................................6-25Q 6.43 How do FDIC structured transactions work? .................................6-26

Chapter 7 Deposit ActivitiesStuart G. Stein & Laura R. Biddle

Basics of Deposit Activities ....................................................................................7-2

Q 7.1 What is a deposit? ...............................................................................7-2Q 7.2 What is excluded from the statutory definition of “deposit”? .......7-3

Deposit Production Office .....................................................................................7-3

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Q 7.4 What is the prohibition on the use of interstate branches primarily for deposit production? .....................................................7-4

Q 7.4.1 What is the reason for this prohibition? ...............................7-4

Brokered Deposits ..................................................................................................7-5

Q 7.5 What are brokered deposits? .............................................................7-5Q 7.5.1 Can an IDI be a deposit broker?..............................................7-5

Q 7.6 Have regulators issued any guidance regarding brokered deposits? ..............................................................................................7-6

Q 7.7 What are the limits on an IDI’s ability to accept brokered deposits? ..............................................................................................7-6

Q 7.8 Are there limits on the interest rates that an IDI can pay on its brokered deposits? ........................................................................7-7

Q 7.9 Why are federal banking regulators concerned about brokered deposits? ..............................................................................7-7

Funds Availability ..................................................................................................7-8

Q 7.10 What dictates the time frame in which funds from a deposit must be made available to a customer? ...........................................7-8

Q 7.11 Can an IDI make the funds available sooner than Regulation CC requires? .....................................................................7-9

Electronic Fund Transfers .......................................................................................7-9

Q 7.12 What is an electronic fund transfer? .................................................7-9Q 7.13 What is not included in the definition of EFT? ..............................7-10Q 7.14 What laws govern EFTs? ...................................................................7-11Q 7.15 What types of transfers and products are covered by the

EFT rules? ...........................................................................................7-12Q 7.16 Are gift cards covered by the EFT rules? .......................................7-12Q 7.17 Are credit cards covered by the EFT rules? ...................................7-13Q 7.18 What special provisions apply to overdraft services? .................7-13Q 7.19 Do the EFTA and Regulation E trump NACHA Operating

Rules? ..................................................................................................7-14Q 7.20 Are remittance transfers covered by the EFTA and

Regulation E? ......................................................................................7-14Q 7.20.1 What types of transfers are covered by the EFTA’s

remittance transfer rules? .....................................................7-14Q 7.20.2 What is a remittance transfer provider? .............................7-151s

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Reserves and Regulation D .................................................................................7-15

Q 7.21 Why must IDIs establish reserves? .................................................7-15Q 7.22 What laws or regulations establish the amount of reserves

that IDIs must hold? ..........................................................................7-15Q 7.23 Are reserves the same as capital? ...................................................7-16Q 7.24 Are reserves the same as the Allowance for Loan and

Lease Losses? .....................................................................................7-16Q 7.25 What types of accounts require reserves? .....................................7-16Q 7.26 What are transaction accounts? ......................................................7-16Q 7.27 How must reserves be held? ............................................................7-17Q 7.28 Must reserves be held against the full value of an IDI’s

transaction accounts? .......................................................................7-17Q 7.29 How are required reserves calculated? ..........................................7-17Q 7.30 Is there a limit to the number of transactions that may

occur without converting a savings account to a transaction account? .............................................................................................7-17

Interest on Demand Deposits ..............................................................................7-18

Q 7.31 What is a demand deposit? ..............................................................7-18Q 7.31.1 Are IDIs permitted to pay interest on demand

deposits? .................................................................................7-18

Consumer Compliance ........................................................................................7-18

Q 7.32 What federal consumer protection laws apply to deposit activities? ............................................................................................7-18

Q 7.33 What is required by the Truth in Savings Act? ..............................7-19Q 7.34 What is included in the APY calculation? ......................................7-19

Chapter 8 Deposit InsuranceLaura R. Biddle & Stuart G. Stein

Basics of Deposit Insurance ..................................................................................8-2

Q 8.1 How does federal deposit insurance work? .....................................8-2Q 8.2 Does the FDIC insure deposits held by all depository

institutions? .........................................................................................8-3Q 8.3 What does federal deposit insurance cover? ..................................8-3Q 8.4 What amounts will deposit insurance cover? ..................................8-31s

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Q 8.5 Are escrow or trust accounts covered by deposit insurance? .......8-4Q 8.6 What is pass-through deposit insurance coverage? .......................8-4

Q 8.6.1 What are the requirements for pass-through deposit insurance coverage? ................................................................8-5

Q 8.6.2 What is the amount of pass-through deposit insurance coverage? ..................................................................................8-5

Q 8.6.3 Are stored-value or prepaid cards covered by deposit insurance? .................................................................................8-5

Q 8.7 Can a financial institution operate without deposit insurance? ......8-6Q 8.8 Does the fact that the FDIC insures deposits of an IDI provide

the FDIC with any supervisory authority with respect to that IDI? .................................................................................................8-6

Deposit Insurance Assessments ............................................................................8-7

Q 8.9 How are deposit insurance assessments calculated? ....................8-7Q 8.10 Are Large Institutions treated differently for deposit

insurance assessment purposes? ......................................................8-7

Financing Corporation ...........................................................................................8-8

Q 8.11 What is the Financing Corporation? .................................................8-8

Chapter 9 Insider and Affiliate TransactionsLaura R. Biddle

Extensions of Credit to Insiders ............................................................................9-2

Basics of Extensions of Credit to Insiders ...........................................................9-2

Q 9.1 What laws or regulations restrict extensions of credit to insiders? ...............................................................................................9-2

Q 9.1.1 Will an IDI be in compliance with Regulation O as long as it lends to insiders on the same terms as to other borrowers? ................................................................................9-2

Regulation O Definitions .......................................................................................9-2

Q 9.2 What is an “extension of credit” for purposes of Regulation O? .....9-2Q 9.2.1 What is excluded from the definition of “extension of

credit”? ......................................................................................9-3Q 9.2.2 Is a loan participation an extension of credit? .....................9-5Q 9.2.3 What is the Tangible Economic Benefit Rule? ......................9-51s

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Q 9.2.4 Will an extension of credit to an insider’s spouse or family member be counted as an extension of credit to that insider?..........................................................................9-5

Q 9.2.5 When is an extension of credit considered to have been made? ...............................................................................9-6

Q 9.3 What is an “affiliate” for purposes of Regulation O? .......................9-6Q 9.4 Who is an “insider”? ............................................................................9-6

Q 9.4.1 What is a “principal shareholder”? ........................................9-7Q 9.4.2 What is an “executive officer”? ...............................................9-7Q 9.4.3 What are “major policy-making functions”? .........................9-8Q 9.4.4 Can a board resolution provide that the president is

not an executive officer because she or he does not participate in policy-making functions? ................................9-8

Substantive Provisions of Regulation O ..............................................................9-9

Q 9.5 What limits are there on the terms on which credit may be extended to insiders? ..........................................................................9-9

Q 9.6 How can an IDI give its employees special loan terms without violating Regulation O? ........................................................9-9

Q 9.7 What limits are there on the amount of credit that can be extended to insiders? ........................................................................9-10

Q 9.7.1 What exceptions are there to the aggregate lending limit on loans to insiders as a group? ....................9-10

Q 9.8 What special insider lending limits apply to small institutions? .......................................................................................9-11

Q 9.9 What special restrictions apply to loans to executive officers? ..............................................................................................9-12

Q 9.9.1 What restrictions are there on the amount of credit that may be extended to an IDI’s executive officers? ..........9-12

Q 9.9.2 To qualify for the “residence” exception, must the officer’s residence be a primary residence? ........................9-13

Q 9.9.3 What procedural requirements apply to loans to executive officers? ..................................................................9-14

Q 9.10 What special rules apply to overdrafts? .........................................9-14Q 9.10.1 What makes an overdraft “inadvertent”? ............................9-15

Self-Dealing and Insider Controls ......................................................................9-15

Q 9.11 What is a conflict of interest? ..........................................................9-15Q 9.12 What are the potential regulatory consequences of a

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Q 9.13 How should an IDI deal with potential conflicts of interest involving insiders? ............................................................................9-16

Q 9.13.1 May an insider of an IDI accept anything of value from a person or entity doing business with the IDI, or seeking to do business with the IDI? ...............................9-16

Q 9.14 Are IDIs permitted to purchase assets from or sell IDI assets to their directors, executive officers, or principal shareholders? ....................................................................................9-18

Transactions with Affiliates .................................................................................9-18

Q 9.15 What laws or regulations restrict transactions with affiliates? .............................................................................................9-18

Q 9.16 What is an “affiliate” for purposes of the transactions with affiliates rules? ..........................................................................9-20

Q 9.16.1 Are exemptions possible under section 23A of the FRA? ...................................................................................9-21

Q 9.16.2 Are exemptions possible under section 23B of the FRA? ...................................................................................9-22

Q 9.17 What types of entities are not considered affiliates for purposes of the transactions with affiliates rules? .......................9-22

Q 9.18 Is an operating subsidiary considered an affiliate? ......................9-23Q 9.19 To which types of transactions does section 23A apply? ............9-23Q 9.20 To which types of transactions does section 23B apply? ............9-24

Q 9.20.1 What are “market terms”? .....................................................9-25Q 9.21 What are the quantitative restrictions imposed by

Regulation W? ....................................................................................9-25Q 9.22 What collateral requirements apply to transactions with

affiliates? .............................................................................................9-25Q 9.22.1 What types of collateral may not be used to secure

extensions of credit to affiliates?..........................................9-26Q 9.22.2 What qualifies as a segregated, earmarked deposit

account? ..................................................................................9-26Q 9.23 What asset purchases are prohibited? ...........................................9-27

Q 9.23.1 What is a “low-quality asset”?...............................................9-27Q 9.23.2 If an asset is not currently delinquent, can it safely

be purchased from an affiliate? ............................................9-28Q 9.24 What transactions are exempt? .......................................................9-28Q 9.25 What advertising prohibitions apply? ............................................9-30Q 9.26 What additional restrictions could there be on the ability

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Chapter 10 Anti-Money Laundering and U.S. Trade SanctionsGregory C.J. Lisa, Andrew Keller & Laura R. Biddle

Anti-Money Laundering and the Bank Secrecy Act .........................................10-2

Basics of Anti-Money Laundering and the Bank Secrecy Act........................10-2

Q 10.1 What anti-money laundering laws and regulations apply to IDIs? .....................................................................................10-2

Q 10.2 Who examines IDIs for BSA/AML compliance? ..............................10-2Q 10.3 What are the Bank Secrecy Act requirements? .............................10-3

Customer Identification Program .......................................................................10-4

Q 10.4 What is a Customer Identification Program? .................................10-4Q 10.5 Can an IDI rely on information obtained by another financial

institution under that other institution’s CIP procedures? ..........10-5Q 10.6 Is the CIP program the same as “Know Your Customer” or

customer due diligence? ...................................................................10-6Q 10.6.1 When are Enhanced Due Diligence procedures

appropriate? ............................................................................10-7

Recordkeeping and Reporting Requirements ...................................................10-8

Q 10.7 What recordkeeping requirements are there under the BSA? .....10-8Q 10.8 What reporting requirements are there under the BSA? ..............10-8

Q 10.8.1 When must an IDI file a SAR? ................................................10-9Q 10.8.2 May an IDI disclose that it has filed a SAR? ......................10-10Q 10.8.3 Does a CTR need to be filed for deposits that are

$9,999 in cash? ......................................................................10-10

Office of Foreign Assets Control ......................................................................10-11

Q 10.9 What is OFAC? ..................................................................................10-11Q 10.10 What is OFAC screening? ................................................................10-12Q 10.11 How should an IDI ensure OFAC compliance? .............................10-12

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Chapter 11 Privacy and Data SecurityTimothy P. Tobin & Bret S. Cohen

Privacy Law Framework .....................................................................................11-2

Q 11.1 What are the major federal laws regarding privacy applicable to IDIs? .............................................................................11-2

Q 11.2 What special privacy laws apply to IDIs’ handling of the information of minors? .....................................................................11-4

Q 11.3 Are there state privacy laws applicable to IDIs? ...........................11-5

Gramm-Leach-Bliley Act Privacy ........................................................................11-5

Q 11.4 What do the GLBA privacy rules cover? ........................................11-5Q 11.4.1 If the GLBA privacy rules apply only to disclosure

of information to nonaffiliates, does that mean that information can be freely shared with affiliates without restrictions? ..............................................................11-6

Q 11.5 What are the major exceptions to the requirement for notice and opt-out? ...........................................................................11-7

Q 11.6 Is there a private right of action under GLBA? ..............................11-8

Credit Reporting and Consumer Report Information ......................................11-8

Q 11.7 What is the Fair Credit Reporting Act? ...........................................11-8Q 11.8 What is a “consumer report”?..........................................................11-8

Q 11.8.1 Does the term “consumer reporting agency” in FCRA refer only to a credit bureau like Equifax, Experian, or TransUnion? .......................................................................11-9

Q 11.8.2 How does the definition of “consumer reporting agency” implicate an IDI when an IDI does not engage in a business resembling that of a credit bureau? ...........11-10

Q 11.8.3 Does FCRA apply only to CRAs? .........................................11-10Q 11.8.4 Do IDIs have any responsibility for the accuracy of

the information they report to credit bureaus? ...............11-10Q 11.9 Is there a private right of action under FCRA? ............................11-11

Data Security and Record Retention ................................................................11-11

Q 11.10 What are the major federal laws applicable to IDIs regarding data security? ...................................................................................11-11

Q 11.10.1 What steps are required under the Security Guidelines? ............................................................................11-111st P

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Q 11.11 Are there state data security laws applicable to IDIs? ...............11-12Q 11.12 What is the difference between the Information Security

Guidelines and the GLBA Privacy Rules? .....................................11-14Q 11.13 How long must IDIs keep consumer information? ......................11-15Q 11.14 What is the proper way for IDIs to dispose of consumer

information? .....................................................................................11-15

Identity Theft .......................................................................................................11-16

Q 11.15 What are the major laws and regulations applicable to IDIs regarding identity theft? .........................................................11-16

Q 11.16 To which entities does the Red Flags Rule apply? ......................11-17Q 11.17 What is a “financial institution” for purposes of the

Red Flags Rule? ................................................................................11-17Q 11.18 What is a “creditor” for purposes of the Red Flags Rule? ..........11-17

Q 11.18.1 How has the definition of “creditor” for Red Flags purposes been revised? .......................................................11-18

Q 11.18.2 What is a “covered account” for purposes of the Red Flags Rule? .....................................................................11-19

Q 11.19 What are the major requirements under the Red Flags Rule? ......11-20Q 11.20 How should a financial institution or creditor determine

which red flags should be used? ...................................................11-20Q 11.21 What is the appropriate response to a red flag? .........................11-21Q 11.22 Does a financial institution with a Customer Identification

Program pursuant to the Bank Secrecy Act still need to address the Red Flags Rule? ..........................................................11-22

Q 11.23 Should a credit card issuer be concerned by a customer’s request for a change of address? ..................................................11-22

Right to Financial Privacy Act ...........................................................................11-23

Q 11.24 Can the government have unfettered access to IDI customer records? ..........................................................................11-23

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Chapter 12 Examination and AuditLaura R. Biddle & Richard A. Schaberg

Examination Process and Examination Cycle ..................................................12-2

Basics of Examination Process and Examination Cycle .................................12-2

Q 12.1 How often are IDIs and their holding companies examined? .......12-2Q 12.2 What is a First Day Letter? ...............................................................12-4

Q 12.2.1 Do examination procedures vary by agency? ....................12-4Q 12.3 What materials and information may banking agencies

access as part of an examination? ..................................................12-4

Risks .......................................................................................................................12-5

Q 12.4 What is the “supervision by risk” approach of the Office of the Comptroller of the Currency? ...............................................12-5

Ratings ...................................................................................................................12-6

Q 12.5 What are CAMELS ratings? ...............................................................12-6Q 12.6 Do bank holding companies receive CAMELS ratings? ................12-6Q 12.7 Do savings and loan holding companies receive CAMELS

ratings? ...............................................................................................12-7Q 12.8 What types of ratings are given to foreign IDIs? ............................12-7

Examination Reports ............................................................................................12-8

Q 12.9 What is a Report of Examination? ...................................................12-8Q 12.9.1 What are “Matters Requiring Attention” and

“Matters Requiring Immediate Attention”? .........................12-8Q 12.9.2 Are MRAs and MRIAs enforceable? ......................................12-8

Q 12.10 Is an examination report issued after every examination? ..........12-9Q 12.11 If an examiner cites violations during an examination,

will the IDI or IDI holding company be subject to an enforcement action? .........................................................................12-9

Q 12.12 What are the Interagency Guidelines Establishing Standards for Safety and Soundness? ...............................................................12-9

Appeals of Supervisory Actions ......................................................................12-10

Q 12.13 What recourse does an IDI have for any action an agency or its personnel may take in the course of supervision? ...........12-101s

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Call Reports ........................................................................................................12-10

Q 12.14 What is a Call Report? .....................................................................12-10Q 12.15 What if the IDI does not have all the information needed

to complete the Call Report at the time it is due? ......................12-11

Internal Audit ......................................................................................................12-11

Q 12.16 What is the internal audit function? .............................................12-11Q 12.17 What is the difference between an internal and

external audit? .................................................................................12-11Q 12.18 May the internal audit function be outsourced? .........................12-11Q 12.19 What standards govern the execution of audits? .......................12-12Q 12.20 What are the requirements for, and responsibilities of,

an audit committee? ........................................................................12-12

Confidentiality of Supervisory Information ....................................................12-13

Q 12.21 Which supervisory information is confidential? .........................12-13Q 12.22 Is it possible to obtain permission to disclose confidential

supervisory information? ...............................................................12-14Q 12.23 What should an IDI or holding company do if it is required

by an agency, such as the SEC or some other party, to disclose confidential supervisory information? ..........................12-14

Q 12.24 What are the consequences for unauthorized disclosure of confidential supervisory information? .....................................12-14

Chapter 13 CapitalLaura R. Biddle & Stuart G. Stein

Regulatory Capital Basics ...................................................................................13-2

Q 13.1 What is regulatory capital? ..............................................................13-2Q 13.1.1 Is regulatory capital the same as reserves? ........................13-2

Q 13.2 Is regulatory capital the same as the Allowance for Loan and Lease Losses? .............................................................................13-2

Q 13.3 What types of capital comprise regulatory capital? .....................13-3Q 13.4 What qualifies an instrument to be eligible as regulatory

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Capital Requirements ..........................................................................................13-7

Q 13.5 Are both IDIs and IDI holding companies subject to capital requirements? ....................................................................................13-7

Q 13.6 What types of capital measures apply to IDIs and IDI holding companies? ..........................................................................13-7

Q 13.7 Are IDIs and IDI holding companies subject to the same capital requirements? .......................................................................13-8

Q 13.7.1 What are trust-preferred securities? ....................................13-8Q 13.8 Are IDI holding companies subject to capital requirements? ........13-9Q 13.9 What may a banking organization include as CET1? ....................13-9Q 13.10 What may a banking organization count as Tier 1 capital? .......13-11Q 13.11 What may a banking organization count as Tier 2 capital? .......13-11Q 13.12 What must be deducted from regulatory capital? ......................13-11

Q 13.12.1 What determines whether an intangible asset will have to be deducted from regulatory capital? .................13-12

Risk-Based Capital Requirements ....................................................................13-13

Q 13.13 What is risk-based capital? ............................................................13-13Q 13.13.1 How does risk weighting work? ..........................................13-13Q 13.13.2 What are the risk weights for equity exposures? .............13-14Q 13.13.3 What are the risk weights applicable to claims on

foreign governments, foreign central banks, and foreign banking organizations? ...........................................13-14

Q 13.13.4 What if an asset fits in two different categories for purposes of risk weighting? ................................................13-15

Q 13.13.5 How are off-balance sheet items treated for purposes of risk weighting? .................................................................13-15

Capital Ratio Calculations .................................................................................13-15

Q 13.14 How is the total risk-based capital ratio calculated? ..................13-15Q 13.14.1 How is the CET1 risk-based capital ratio calculated?......13-16Q 13.14.2 How is the Tier 1 risk-based capital ratio calculated? ......13-16Q 13.14.3 How is the Tier 1 leverage ratio calculated? .....................13-16Q 13.14.4 How is the Supplementary Leverage Ratio

calculated? ............................................................................13-16Q 13.15 Do regulators have to be notified before an IDI or

IDI holding company redeems its own stock or otherwise reduces its capital? .........................................................................13-161s

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Capital Adequacy Requirements......................................................................13-18

Q 13.16 How do regulators evaluate whether an IDI or IDI holding company has sufficient regulatory capital? .................................13-18

Q 13.17 What specific capital levels are IDIs and IDI holding companies required to maintain? ..................................................13-19

Chapter 14 Prudential Regulator EnforcementStuart G. Stein & Laura R. Biddle

Basic Enforcement Framework ...........................................................................14-2

Q 14.1 Against which institutions can the Federal Financial Institutions Examination Council (FFIEC) agencies bring enforcement actions? ........................................................................14-2

Q 14.2 Against which individuals can the FFIEC agencies bring enforcement actions? ........................................................................14-2

Q 14.2.1 What is an “institution-affiliated party”? .............................14-3Q 14.3 Are federally chartered IDIs immune from actions by state

authorities? ........................................................................................14-3Q 14.4 Will an enforcement action be taken only after a Report of

Examination is finalized? ..................................................................14-4Q 14.5 Does self-reporting of violations decrease the chance that

regulators will initiate an enforcement action? .............................14-4

Types of Enforcement Actions .............................................................................14-5

Formal and Informal Enforcement Actions .......................................................14-5

Q 14.6 What is the difference between a formal and an informal enforcement action? .........................................................................14-5

Q 14.7 What criteria do the FFIEC agencies consider when deciding whether to take a formal or informal enforcement action? .........14-5

Formal Enforcement Actions ...............................................................................14-6

Q 14.8 What are the types of formal enforcement actions? .....................14-6Q 14.9 What is a cease and desist order? ...................................................14-6

Q 14.9.1 What type of practice is considered “unsafe or unsound”? ...............................................................................14-7

Q 14.10 What is a temporary cease and desist order? ...............................14-71st P

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Q 14.11 What is a formal written agreement? ..............................................14-9Q 14.12 What is a Prompt Corrective Action directive? .............................14-9Q 14.13 What is a safety and soundness order? ..........................................14-9Q 14.14 What is a capital directive? ..............................................................14-9

Q 14.14.1 What is an individual minimum capital ratio and how does it differ from a capital directive? ......................14-10

Q 14.15 What is a prohibition? .....................................................................14-10Q 14.15.1 Under what circumstances is an IAP prohibited? ............14-11Q 14.15.2 Can someone who has been prohibited work for

a BHC? ....................................................................................14-11Q 14.15.3 What is a “backdoor prohibition”?.....................................14-11Q 14.15.4 If a backdoor prohibition has the same effect

as a prohibition order, why not call it a prohibition order? .....................................................................................14-12

Q 14.16 What is a section 19 removal? .......................................................14-12Q 14.17 What is a suspension? ....................................................................14-13

Restitution and Civil Money Penalties .............................................................14-13

Q 14.18 When can restitution be ordered? .................................................14-13Q 14.19 When can a civil money penalty be assessed? ............................14-13Q 14.20 What are the “tiers” of CMPs that may be assessed under

section 8 of the FDI Act? .................................................................14-14Q 14.20.1 Do the maximum CMP amounts in section 8 of

the FDI Act mean that regulators must assess those amounts for each day the violations or practices continue? ...............................................................................14-15

Q 14.20.2 What statutory factors must the regulator consider in deciding the amount of a CMP?......................................14-15

Q 14.21 What other factors do regulators consider in deciding whether to assess a CMP? ..............................................................14-16

Q 14.22 What is the CMP matrix? ................................................................14-17

Informal Enforcement Actions ..........................................................................14-17

Q 14.23 What are the types of informal enforcement actions?................14-17Q 14.24 What is a commitment letter? ........................................................14-18Q 14.25 What is a memorandum of understanding? .................................14-18Q 14.26 What is a safety and soundness plan? ..........................................14-18Q 14.27 What are supervisory letters and letters of reprimand? ............14-18Q 14.28 Are informal enforcement actions enforceable? .........................14-191s

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Disclosure of Enforcement Actions ...................................................................14-19

Q 14.29 Which enforcement actions are matters of public record? .......14-19Q 14.30 Can an order or agreement be obtained to keep the

enforcement document from being made public? ......................14-19Q 14.31 Are there any actions that must not be disclosed? ....................14-19

Restrictions on Activities ....................................................................................14-20

Q 14.32 What does it mean to be in “troubled condition”? ......................14-20Q 14.33 What are the consequences of being

in “troubled condition”? .................................................................14-20Q 14.33.1 What payments are subject to restrictions as

golden parachutes if an institution is in troubled condition? ..............................................................................14-21

Prompt Corrective Action ..................................................................................14-21

Q 14.34 What is Prompt Corrective Action (PCA)? ...................................14-21Q 14.35 What are the PCA categories? ........................................................14-22Q 14.36 What PCA provisions apply to all IDIs? ........................................14-22Q 14.37 What are the consequences of being only “adequately

capitalized” rather than “well capitalized”? .................................14-22Q 14.38 What are the PCA consequences of being

“undercapitalized”? .........................................................................14-23Q 14.38.1 What is a capital restoration plan? ....................................14-23

Q 14.39 What are the consequences of being “significantly undercapitalized”? ..........................................................................14-24

Q 14.40 Is dismissal of a director or officer under PCA a “removal” action? ...............................................................................................14-25

Q 14.41 What are the consequences of being “critically undercapitalized”? ..........................................................................14-25

Q 14.42 Are there other situations where an IDI holding company must provide a guarantee to its subsidiary IDIs? ........................14-26

Q 14.42.1 Are IDI-level affiliates ever required to provide guarantees or contribute capital to each other? .............14-26

Enforcement Process and Appeals ...................................................................14-27

Q 14.43 What procedures do regulators follow for bringing formal enforcement actions? ......................................................................14-27

Q 14.44 Are the standard Federal Rules of Civil Procedure and Federal Rules of Evidence used in this process? ........................14-271s

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Q 14.45 How can an informal action be appealed? ...................................14-28Q 14.45.1 Does every federal banking agency have an

ombudsman? .........................................................................14-28Q 14.45.2 What is a “material supervisory determination”? ...........14-28Q 14.45.3 What types of agency actions are not appealable to

the ombudsman? ..................................................................14-29Q 14.45.4 Are appealed actions stayed pending the outcome

of the appeal to the ombudsman?......................................14-29Q 14.45.5 Are the ombudsman’s decisions binding? ........................14-29

Compliance with Enforcement Actions ............................................................14-30

Q 14.46 What is needed to be deemed in compliance with an enforcement action? .......................................................................14-30

Q 14.47 What if an institution or IAP is found to be in noncompliance with an enforcement action? ..........................................................14-30

Q 14.48 Can the IDI indemnify an IAP for payments he or she is required to make under an enforcement action? ........................14-30

Termination of Enforcement Actions ................................................................14-31

Q 14.49 How can an institution or IAP get an enforcement action lifted? ................................................................................................14-31

Q 14.50 Can an IDI convert charters to get the enforcement action to go away? .......................................................................................14-31

Q 14.51 Can a prohibition order be lifted? .................................................14-32

Chapter 15 Problem Banks and FailuresStuart G. Stein, Laura R. Biddle & Loyal T. Horsley

Supervision of Troubled and Problem Banks ...................................................15-2

Q 15.1 What is a “problem bank”? ...............................................................15-2Q 15.2 Is being a “problem bank” the same as being “in troubled

condition”? .........................................................................................15-3Q 15.3 Is the fact that an IDI is considered a “problem bank” public

information? .......................................................................................15-4Q 15.4 What is the FDIC’s “watch list”? .......................................................15-4

Resolution and Receivership ...............................................................................15-4

Q 15.5 Who closes failing IDIs? ....................................................................15-41st P

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Q 15.6 What are the grounds for appointing a conservator or a receiver of an IDI at risk of failure? .................................................15-4

Q 15.6.1 Must an IDI be closed if it falls under one of the PCA grounds for closure? ..............................................................15-6

Q 15.7 Do regulators use different criteria in deciding whether to close minority IDIs? ...........................................................................15-7

Q 15.8 What is the difference between receivership and conservatorship? ...............................................................................15-8

Q 15.9 Is the FDIC always appointed receiver or conservator? ..............15-8Q 15.10 Is the FDIC allowed to act as receiver and oversee a

receivership estate indefinitely? .....................................................15-9Q 15.11 What is a bridge depository institution? ........................................15-9Q 15.12 Does the FDIC have alternatives to closing an IDI? .....................15-10Q 15.13 How does the FDIC sell failed IDIs? ...............................................15-10

Q 15.13.1 What happens if the FDIC is unable to sell all assets and liabilities of a failed IDI? ...............................................15-11

Q 15.13.2 What is the Title II Orderly Liquidation Authority (OLA)? ....................................................................................15-11

Q 15.13.3 Can the IDI that purchases a failed IDI’s assets and liabilities change the terms of customer accounts? ........15-12

Post-Closing Enforcement Actions ....................................................................15-12

Q 15.14 What types of actions can be brought against IDI personnel after an IDI fails? ..............................................................................15-12

Q 15.15 Will regulators blame directors and/or officers for allowing an IDI to fail? .....................................................................................15-13

Q 15.16 Can directors and/or officers resign in anticipation of an IDI being closed? ........................................................................15-13

Q 15.17 Will directors or officers of a failed IDI be allowed to work in the banking industry again? ......................................................15-13

Index ......................................................................................................................I-1

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Introduction

When the Practising Law Institute first contacted me about a book, the financial institution and related industries around the globe were in a state of great uncertainty and distress. Financial institutions that were still around following the turmoil of late 2007 and 2008 were focused on continued survival and recovery. Opportunists were looking at the industry with a focus on how to take advantage of low market valuations combined with the ability of banks to attract and leverage funding sources. The one thing that was clear was that with all the external economic changes that were impacting the financial industry, there was a greater focus on the need to have what the Practising Law Institute was seeking—a Financial Institutions Answer Book.

Of course, since then, the regulatory template has been completely rewritten. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. Numerous new rules have been written, and are being developed, to implement provisions of the Dodd-Frank Act. Additional rules and regulations were issued to address the financial crisis of 2007 and 2008. Even today, rulemak- ing and reform continues. However, the fundamentals of financial services, and the regulatory foundation of safety and soundness, have not changed.

With this book we address all of the changes in the law, rules, and regulations, and we make sure that the reader knows what the rules really mean beyond just the written word. The Practising Law Institute asked me to create an answer book that would address the practical needs of attorneys, while also serving as an appealing resource for the wider corporate community. I hope you will find that we have satisfied that goal. Of course, as with any regulated industry, this will require constant monitoring and updating.

In creating a practical reference of first resort, we designed a scope that covers the major areas of interest for all of financial insti-tutions and financial services regulation. This includes the basics of establishing a banking company, including structures and powers, to the sale and acquisition of control. In order to address operations, 1s

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we deal with basics, such as governance, capital requirements, and permissible activities, as well as critical regulatory topics, such as insider and affiliate transactions, anti-money laundering, bank secrecy, privacy, and data security. Of course, we also cover examinations and enforcement. In that regard, no answer book is complete without a discussion of problem banks and failures.

As this book goes to press, each of the federal banking agencies, as well as other U.S. regulators, remain very busy with new and revised regulations and policy. In addition, regulators around the world are addressing continuing financial crises in various jurisdictions that still threaten global financial stability. Part of this effort includes a more global approach to financial services regulations. We will remain on top of these issues, but in the meantime, each of the authors hope we have achieved our goal of providing the reader with a practical answer book and an appealing resource.

Stuart G. Stein

June 2017

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