Seyfarth Synopsis: On July 24, 2020, the Federal Deposit Insurance Corporation issued a final rule that codifies the FDIC's Statement of Policy (SOP) related to Section 19 and makes several important changes to the SOP. The changes narrow the scope of crimes subject to Section 19, enabling more individuals to work for regulated institutions without going through the Section 19 application process.
Section 19 and the Existing FDIC Statement of Policy
Section 19 of the Federal Deposit Insurance Act ( 12 U.S.C. Section 1829) ("Section 19") prohibits, without the prior written consent of the Federal Deposit Insurance Corporation ("FDIC"), a person convicted of any criminal offense involving dishonesty or breach of trust or money laundering (covered offenses), or who has agreed to enter into a pretrial diversion or similar program (program entry) in connection with a prosecution for such offense, from becoming or continuing as an institution-affiliated party, owning or controlling, directly or indirectly an insured depository institution (insured institution), or otherwise participating, directly or indirectly, in the conduct of the affairs of the insured institution. In addition, the law forbids an insured institution from permitting such a person to engage in any conduct or to continue any relationship prohibited by Section 19, absent the written consent of the FDIC.
In 1998, the FDIC issued a Statement of Policy ("SOP") (which was modified significantly in both 2012 and 2018), that provides guidance to the public regarding the application of Section 19. The SOP sets forth a set of criteria for providing relief from Section 19 for individuals with convictions for certain low-risk crimes that constituted de minimis crimes, eliminating the need for an application for a waiver of Section 19. Approval is automatically granted and an application will not be required where the covered offense is considered de minimis, which means that it meets all of the following criteria:
- there is only one conviction or program entry of record for a covered offense;
- the offense was punishable by imprisonment for a term of one year or less and/or a fine of $2,500 or less, and the individual served three (3) days or less of jail time;
- the conviction or program was entered at least five (5) years prior to the date an application would otherwise be required; and
- the offense did not involve an insured depository institution or insured credit union.
The FDIC expanded the de minimis exception in 2018 to include insufficient funds checks of aggregate moderate value (less than $1,000); small dollar, simple theft (where the aggregate value of goods, services and/or currency taken is $500 or less); and isolated, minor offenses committed by young adults (21 years old or younger).
Implementation of the Final Rule
On December 16, 2019, the FDIC published a Notice of Proposed Rulemaking to incorporate the SOP into the FDIC's existing Procedure and Rules of Practice. The FDIC proposed to incorporate the current provisions of the SOP into its rules and procedures in order to provide greater transparency into the FDIC's interpretation and application of Section 19, to provide greater certainty concerning the FDIC's application process, and to aid institutions and individuals who may be affected by Section 19 to understand its impact and potentially seek relief from its provisions.
FDIC Chairman Jelena McWilliams previously noted that "application of Section 19 should not be a barrier to entry for individuals who have committed minor crimes in the past, paid their debt to society, reformed their conduct, and are now seeking to gain employment with a financial institution." That said, she also explained that the proposed rules could not "undermine the intent of the statute – which is to ensure that individuals convicted of certain types of crimes related to dishonesty, breach of trust, or money laundering should not be employed in the banking industry."
In sum, the final rule:
- Excludes all offenses that have been expunged or sealed – rather than only certain types of expungements – from the scope of Section 19 prohibitions;
- Allows a person with two, rather than one, minor "de minimis" crimes on a criminal record to qualify for the de minimis exception;
- Eliminates the five-year waiting period following a first de minimis conviction and establishes a three-year waiting period following a second de minimis conviction (or 18 months for individuals whose misconduct occurred when they were 21 or younger);
- Increases the de minimis threshold for small-dollar, simple thefts from $500 to $1,000; and
- Expands the de minimis exception for crimes involving the use of fake identification to circumvent age-based restrictions from only alcohol-related crimes to any such crimes related to purchases, activities, or premises entry.
In implementing the final rule, McWilliams noted: "Since the beginning of 2017, the FDIC has approved every Section 19 application that would qualify for relief under the final rule without controversy. While not major in scope, the changes in the final rule will have a major impact on individuals who no longer need to obtain written consent from the FDIC in order to work for a bank."
The FDIC's existing SOP will be rescinded on the date the Final Rule becomes effective, which will be 30 days after it is published.
Next Steps for FDIC-Regulated Employers
FDIC-insured institutions should review their policies and practices to ensure consideration of Section 19 when assessing candidates.
Originally published 19 August, 2020
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