- The FDIC has proposed revised regulations implementing Section 19 of the Federal Deposit Insurance Act.
- Section 19 generally prohibits individuals convicted of certain offenses from participating in the affairs of an FDIC-insured depository institution.
- The rule would affect approximately 4,680 FDIC-insured depository institutions.
- Comments to the rule are due by January 16, 2024.
On November 14, 2023, the Federal Deposit Insurance Corporation (FDIC) published proposed revised regulations concerning Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. § 1829 (“Section 19”), to conform with the Fair Hiring in Banking Act, which was enacted on and immediately effective as of December 23, 2022.1 Section 19 prohibits a person convicted of any criminal offense involving dishonesty, breach of trust, or money laundering, or who has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such an offense, from directly or indirectly owning, controlling, or otherwise participating in the affairs of an FDIC-insured depository institution without prior written consent from the FDIC. Insured depository institutions may not permit any such person to engage in any conduct or continue any relationship prohibited by Section 19.2
From 1998 to 2020, the FDIC relied upon a Statement of Policy, revised from time to time, “to provide the public with guidance relating to Section 19 and the FDIC’s application thereof.” In July 2020, following notice to and comment from the public, the FDIC revised and codified the Statement of Policy into a final rule regarding Section 19 under 12 CFR Part 303, Subpart L and 12 CFR Part 308, Subpart M (the “Final Rule”). The Final Rule relaxed hiring restrictions for individuals with criminal backgrounds, thereby expanding the potential applicant pool for FDIC-insured banks and National Credit Union Administration (NCUA)-insured credit unions.
On December 23, 2022, the president signed into law the “James M. Inhofe National Defense Authorization Act for Fiscal Year 2023” (the “NDAA 2023”), thereby also codifying the Fair Hiring in Banking Act (FHBA), which appears at Section 5705 of the NDAA 2023. The FHBA, which became effective immediately, significantly revised both Section 19 and Section 205(d), by creating several categories of exceptions or exemptions to the prohibition on individuals with criminal histories participating in banking. More specially, the FHBA excluded or exempted from the Section 19 prohibition:
- Certain older offenses: (1) if it has been seven years or more since the offense occurred; (2) if the individual was incarcerated with respect to the offense and it has been five years or more since the individual was released from incarceration; or (3) for individuals who committed an offense when they were 21 years of age or younger, if it has been more than 30 months since the sentencing for that offense.
- Offenses for which an order of expungement, sealing or dismissal has been issued in regard to the conviction for such offense and it is intended by the language in the order itself, or in the legislative provisions under which the order was issued, that the conviction should be destroyed or sealed from the individual’s record even if exceptions allow the record to be considered for certain character and fitness evaluation purposes.
- Designated lesser offenses, including the use of fake identification, shoplifting, trespass, fare evasion, driving with an expired license or tag (and such other low-risk offenses as the FDIC may designate), if one year or more has passed since the applicable conviction or program entry.
- Misdemeanor criminal offenses involving dishonesty if the offense was committed more than one year before the date on which an individual files a “consent application” with the FDIC (i.e., an application seeking written consent of the FDIC for an individual to become employed or otherwise participate in banking), excluding any period of incarceration.
- A criminal offense involving dishonesty that also “involve[es] the possession of controlled substances.”
The FHBA clarified several undefined terms in Section 19, including “criminal offense involving dishonesty” and “pretrial diversion or similar program.” The FHBA also provided conditions regarding de minimis offenses to the extent the FDIC provides such exemptions by regulation, and codified procedures for consent applications filed with the FDIC (including requiring the FDIC to rely primarily upon Federal Bureau of Investigation criminal history fingerprint records when evaluating consent applications).
The Proposed Amendments to the FDIC’s Section 19 Regulations3
The FDIC’s proposed amendments to the Section 19 regulations are primarily intended to align the regulations with the provisions of the FHBA. Indeed, the FDIC considers most of the proposed amendments to be required by the FHBA and only certain regulations to reflect the FDIC’s interpretation of Section 19 in light of the FHBA. Significant proposed revisions include the following:
- Reasonable documented inquiry required
The Section 19 regulations currently provide in 12 CFR § 303.220 that an FDIC-insured depository institution “should make a reasonable inquiry” regarding an applicant’s criminal record history to ensure that an individual with a conviction or program entry for a covered offense is not hired or permitted to participate in its affairs without the written consent of the FDIC. The FDIC proposes to revise 12 CFR § 303.220 to make clear that insured depository institutions must make a “reasonable, documented inquiry” to verify an applicant’s criminal history to ensure that a person with a covered offense on their record is not hired or permitted to participate in its affairs without the written consent of the FDIC.
- Many “older” offenses will no longer be considered “Covered Offenses” under Section 19
The FDIC proposes to revise 12 CFR § 303.222 to conform to the new language in the FHBA excepting certain older offenses from the scope of Section 19. For example, the FHBA states that the Section 19 prohibition on participation will not apply to an offense if it has been seven years or more since the offense occurred,4 or if the individual was incarcerated with respect to the offense and it has been five years or more since the individual was released from incarceration. The FDIC interprets the phrase “offense occurred” to mean the “last date of the underlying misconduct” (or, in instances with multiple offenses, the last date of any of the underlying misconduct or offenses). Moreover, if an individual committed a covered offense when the individual was 21 years of age or younger, Section 19 will not apply if it has been more than 30 months since the sentencing for that offense occurred. The FDIC interprets “sentencing occurred” to mean the date on which a court imposed the sentence (not the date on which all conditions of sentencing were completed). In essence, these revisions mean that all state offenses and the vast majority of federal offenses would be exempted from the Section 19 prohibition after seven years, at the latest, except for certain federal offenses specifically made subject to a “minimum 10-year prohibition” under Section 19 and Section 205(d)5.
- Criminal offenses involving dishonesty
The FDIC also proposes to revise 12 CFR § 303.222 to reflect the new statutory definition in the FHBA of “criminal offenses involving dishonesty,” which expressly excludes from the scope of such offenses: (1) misdemeanor criminal offenses committed more than one year before the date on which an individual files a consent application, excluding any period of incarceration; and (2) “an offense involving the possession of controlled substances.”6 With respect to the “misdemeanor criminal offense” exclusion, the FDIC interprets the phrases “offense committed” and “offense occurred” to mean the “last date of the underlying misconduct” (or, in instances with multiple offenses, the last date of any of the underlying offenses or misconduct).7 With respect to the “controlled substances” exclusion, the FDIC interprets the exception to exclude, at a minimum, all criminal offenses involving the simple possession of controlled substances and also those involving possession with the intent to distribute a controlled substance, and specifically notes that the exclusion may also apply to other drug-related offenses depending on the statutory elements of the offenses or court determinations that the statutory provisions of the criminal offenses do not involve dishonesty, breach of trust or money laundering. This revision would mark a shift from the FDIC’s current Section 19 regulations, which presume all convictions and pretrial diversions for drug-related offenses (other than mere possession offenses) to be covered offenses (and disqualifying) under Section 19, and align the FDIC’s interpretation more closely with other federal banking regulators in favor of considering the statutory elements of each drug offense.
- Convictions and pretrial diversions in foreign jurisdictions
The FDIC also proposes to add paragraph (e) to 12 CFR § 303.222 to codify the FDIC’s long-held position that individuals who are convicted of, or enter into a pretrial diversion program for, a criminal offense involving dishonesty, breach of trust, or money laundering in foreign jurisdictions are subject to Section 19 unless the offense is otherwise excluded under the regulations.
- Expunged, sealed, and dismissed criminal records
The FDIC proposes to revise its interpretative language in 12 CFR § 303.223 regarding expunged, sealed or dismissed convictions to reflect that the FHBA now provides that convictions that are expunged, sealed or dismissed by court order are statutorily excluded from the scope of Section 19 if it is intended by the language in the order or in the legislative provisions under which the order was issued that the conviction should be destroyed or sealed, even if exceptions allow the record to be considered for certain character and fitness evaluations. The FDIC’s proposed revisions would modestly broaden the statutory language in the FHBA (which does not address expungements, sealings or dismissals by operation of law) by providing that expungements and sealings by operation of law are excluded from the scope of Section 19.
- “Designated Lesser Offenses”
The FDIC also proposes to add paragraph (d) to 12 CFR § 303.222 to codify that Section 19 does not apply to the following “designated lesser offenses” so long as one year or more has passed since the applicable conviction or program entry: using fake identification; shoplifting; trespassing; fare evasion; driving with an expired license or tag; and any other low-risk offenses designated by the FDIC.
- “De Minimis Offenses”
The FDIC also proposes to revise the regulations to avoid confusion between “designated lesser offenses,” which are excluded from the scope of Section 19, and “de minimis offenses,” which are considered covered offenses for which no application for consent is required because the application is deemed to be automatically granted. For example, convictions for the use of fake identification are now statutorily excluded from the Scope of Section 19 (and no longer a de minimis offense).
Additionally, the FDIC proposes to revise the de minimis requirement related to the aggregate total face value of all “bad” or insufficient funds checks from $1,000 to $2,000, meaning that convictions for passing bad checks in the amount of $2,000 in the aggregate (across all convictions or program entries) would be exempt from Section 19.
- Standards for review of consent applications
The proposed revised regulations reflect the new statutory requirements in the FHBA with respect to the FDIC’s standards for reviewing consent applications, including requiring that the FDIC primarily rely on the FBI criminal history record (i.e., rap sheet) in conducting its review and provide the FBI record to the applicant to review for accuracy. Additionally, the proposed regulations mandate that the FDIC must conduct an “individualized assessment” of consent applications considering:
- Whether the conviction or program entry is subject to Section 19, and the specific nature and circumstances of the offense;
- Whether the participation directly or indirectly by the person in any manner in the conduct of the affairs of the insured depository institution constitutes a threat to the safety and soundness of the institution or the interests of its depositors or threatens to impair public confidence in the institution;
- Evidence of rehabilitation, including the applicant’s age at the time of the conviction or program entry, the time that has elapsed since the conviction or program entry, and the relationship of the individual’s offense to the responsibilities of the applicable position;
- The individual’s employment history, letters of recommendation, certificates documenting participation in substance-abuse programs, successful participating in job preparation and educational programs, and other relevant evidence;
- The ability of management of the insured depository institution to supervise and control the individual’s activities;
- The level of ownership or control the individual will have of an insured depository institution;
- The applicability of the insured depository institution’s fidelity bond coverage to the individual; and
- Any additional factors in the specific case that appear relevant to the application or the applicant including, but not limited to, the opinion or position of the primary federal or state regulator.
Finally, when approved by the FDIC, consent applications sponsored by insured depository institutions shall allow the individual to work for the same employer, without restrictions on location, and across positions, except that prior consent of the FDIC will be required for any “proposed significant changes in the individual’s security-related duties or responsibilities, such as promotion to an officer or other positions that the insured depository institution determines require higher security screening requirements.”
Request for Comments
The FDIC’s request for comments on the proposed revised regulations, specifically seeks submissions addressing these questions:
- Is the FDIC’s proposed interpretation of the phrases “offense occurred” and “offense committed” as the “last date of the underlying misconduct” appropriate given the text of particular statute? The FDIC acknowledges that there may be other, supportable interpretations of the phrases (such as the date of conviction or program entry).
- Is the FDIC’s proposed interpretation of the phrase “sentencing occurred” appropriate? The FDIC proposes to interpret “sentencing occurred” to mean the date on which a court imposed the sentence, not the date on which all conditions of sentencing were completed.
- Whether Section 19 encompasses foreign convictions and pretrial diversions? The FDIC’s position has been that foreign convictions and pretrial diversions are included within the scope of Section 19.
- Is the FDIC’s expansive interpretation of expungement – to include records that have been expunged by operation of law (even though the FHBA does not mention expungements “by operation of law” and mentions only expungements through a court order) – appropriate?
- Is the FDIC’s expansive interpretation of “offense[s] involving the possession of controlled substances” as applying, at a minimum, to convictions for simple possession and convictions with intent to distribute, appropriate?
- Is the FDIC’s current approach to de minimis offenses appropriate?
As of March 31, 2023, there were 4,681 FDIC-insured depository institutions covered by Section 19 and, therefore, impacted by the proposed revised regulations. Insured depository institutions should review their applicant screening and onboarding policies, practices, and forms to ensure they are compliant with Section 19 as amended by the FHBA (which took effect on December 23, 2022). The penalties for knowingly violating Section 19 include a fine of $1,000,000 per day.8
We will monitor developments regarding the proposed revised Section 19 regulations and provide updates as information becomes available. As noted above, comments regarding the proposed revised regulations must be submitted to the FDIC on or before January 16, 2024.
1 78 Fed. Reg. 77906 (November 14, 2023 (to be codified at 12 CFR Parts 303 and 308). Comments regarding the proposed revised regulations must be submitted on or before January 16, 2024.
2 Section 205(d) of the Federal Credit Union Act, 12 USC § 1785(d) (“Section 205(d)”), contains a similar bar restricting participation in the affairs of credit unions insured by the National Credit Union Administration (NCUA).
3 In developing the proposed amendments, the FDIC consulted and coordinated with the NCUA, the Board of Governors of the Federal Reserve System (Federal Reserve Board), and the Office of the Comptroller of the Currency (OCC), to promote consistent implementation of the FHBA, where appropriate.
4 Currently, FDIC legal staff defines “offense occurred” as the “last date of the underlying misconduct.” Regarding multiple offenses, “offense occurred” means the last date of any underlying offenses.
5 The specifically enumerated federal offenses include: receipt of commissions or gifts for procuring loans; theft, embezzlement or misapplication by bank officer or employee; filing or making false/misleading bank entries, reports and transactions; filing or making false/misleading federal credit institution entries, reports and transactions; concealment of assets from conservator, receiver or liquidating agent of financial institution; bank fraud; obstructing examination of financial institution; laundering of monetary instruments; engaging in monetary transactions in property derived from specified unlawful activity; frauds and swindles; and fraud by wire, radio or television.
6 12 U.S.C. § 1829(g)(2)(C).
7 As discussed in Littler’s Insight dated February 6, 2023, it remains unclear what the phrase “…before the date on which an individual files an application” in the FHBA means, if anything. Are all misdemeanor crimes automatically exempt from Section 19’s prohibitions after one year has passed since the criminal offense was committed, excluding any period of incarceration? Or does the phrase “the date on which an individual files an application” indicate that an individual must file an application for a waiver with the FDIC or NCUA in order for all misdemeanor crimes committed by the individual more than one year before the date of the application (excluding any period of incarceration) to automatically be considered de minimis and not covered by Section 19 and Section 205(d)? From the FDIC’s proposed revisions, it appears that the latter broad interpretation will control.
8 12 U.S.C. § 1829.