junio 29 2023

The Senate Banking Committee Passes RECOUP Act, but Next Steps Remain Uncertain

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On June 21, 2023, the US Senate Committee on Banking, Housing and Urban Affairs (SBC) reported out S.2190, the Recovering Executive Compensation from Unaccountable Practices Act (RECOUP) Act of 2023, by a vote of 21-2. The centerpiece of the RECOUP Act is new authority for banking regulators to clawback compensation from senior executives of failed banks with assets of $10 billion or more. For the vast majority of banks, however, the most important provision of the bill is likely to be its expansion of banking regulators’ removal and prohibition authority with respect to senior executives of all banks—regardless of asset size. The bill also requires banks with assets of $10 billion or more to adopt new governance and accountability standards. Congress has been discussing the potential need to reform how federal deposit insurance is provided by the Federal Deposit Insurance Corporation (FDIC), but the SBC ultimately opted not to include in the RECOUP Act any provisions related to deposit insurance.

Although the RECOUP Act had strong bipartisan support in the SBC, the legislation’s future remains uncertain. The US House Financial Services Committee (HFSC) has yet to signal whether it intends to consider the bill or similar legislation. Even if the House of Representatives does take up the bill, past congressional practices indicate that the legislation is likely to be amended and/or combined with other legislative priorities of the HFSC. Accordingly, we will continue to closely follow the bill as it moves through Congress and provide additional updates.

The specific provisions of the RECOUP Act are as follows:

1. Compensation Clawback. The bill would grant the FDIC the authority to recover compensation from a senior executive if the FDIC is appointed receiver or conservator of an insured depository institution (IDI) with assets of $10 billion or more, and the senior executive was responsible for the failure of the IDI or its holding company. The types of compensation the FDIC can recover are any of the following:

Incentive-based compensation
Equity-based compensation
Severance pay
Golden parachute benefits
Compensation that is granted or vested based wholly or in part upon the attainment of any financial reporting measure or other performance metric
Profits realized from the purchase or sale of securities of the IDI or its holding company during the 24-month period preceding the failure of the IDI

The term “senior executive” is defined for purposes of the entire bill to include “the president, the chief executive officer, the chief operating officer, the chief financial officer, the chief risk officer, the chief legal officer, the chairman of the board, an inside director of the board of directors, and an individual who occupies an equivalent position,” as well as any “individual who has oversight authority for managing the overall governance, operations, risk, or finances of a depository institution or depository institution holding company.”

2. Removal and Prohibition. The bill would significantly expand banking regulators’ existing removal and prohibition authority (12 U.S.C. § 1818(e)). Unlike the clawback provision or the governance and accountability standards (discussed below) which apply only to banks with $10 billion or more in assets, the new removal and prohibition authority would cover senior executives at any IDI.

The bill would authorize banking regulators to remove from office, or prohibit from participating in the affairs of any IDI, any senior executive who fails to carry out his or her responsibilities for “governance, operations, or risk or financial management,” where the senior executive’s failure demonstrates “gross negligence” in the performance of his or her duties. In such cases, the senior executive’s failure must also result in one of the harms listed in 12 U.S.C. § 1818(e)(1)(B), such as likely causing the IDI to suffer a financial loss, prejudicing the interests of depositors, or yielding a financial gain for the senior executive.

The bill also would add the following actions by a senior executive to the list of specific violations under 1818(e)(2)(A) that grant the federal banking regulators authority to remove an individual from office:

Breach of a fiduciary duty (such as state corporate law duties of care and loyalty) that involves “grossly negligent, reckless, or willful conduct”
Failure to “appropriately implement financial, risk, or supervisory reporting or information system or controls”
Failure to oversee such a system or controls once they are implemented

It is important to note that this expanded removal and prohibition authority would allow banking regulators greater authority to take action against senior executives regardless of whether or not their actions result in the failure of an IDI.

3. Governance and Accountability Standards. The bill would require each depository institution and its holding company with assets of $10 billion or more to adopt bylaws that “promote safety and soundness, responsiveness to supervisory matters, and responsible management.” The bill specifies that these standards would have to include:

Policies for senior executives and members of the board of directors “relating to appropriate risk management and responsiveness to supervisory matters.”
“[A]ccountability and corporate governance mechanisms and controls,” which could include directing (i) senior officers to implement and oversee reporting and information systems, (ii) management not to deviate from “sound governance, internal control, or risk management,” and (iii) that “long-term risk management be tailored to long-term economic conditions.”
Clawback authority for (i) the FDIC to recover compensation from a senior executive responsible for the failure of a depository institution or its holding company in the event the FDIC is appointed conservator or receiver of the depository institution, and (ii) the board of directors to recover compensation from such a senior executive in cases where the FDIC is not appointed receiver or conservator of the depository institution. The types of compensation covered by this provision are slightly different than the compensation covered by the bill’s FDIC clawback provision. For this provision, compensation is defined to be “any bonus, other incentive-based or equity-based compensation, severance pay, or gold parachute benefits received by that senior executive” and any profits realized from “the sale of securities of the entity” during the 24 months prior to the failure of the depository institution or its holding company. This clawback provision also does not apply to a senior executive who has not been with the depository institution or its holding company for less than 18 months before its failure, and whose conduct did not contribute to its failure.

4. Civil Money Penalties. The bill would expand the coverage of third tier violations to include any senior executive that “recklessly” (rather than only “knowingly”) violates any law or regulation, engages in any unsafe and sound practices, or breaches a fiduciary duty and, in doing so, causes a substantial loss to the depository institution or produces substantial benefit to the senior executive. Further, the bill increases the maximum civil penalty for a third tier violation by a person (not an IDI) to $3,000,000 from $1,000,000.

5. Deposit Cap Banks. The bill would limit the ability of IDIs subject to the 10 percent deposit cap (12 U.S.C. § 1828(c)(13)(A)) to acquire failed institutions. Under existing law, the prohibition on IDIs subject to the 10 percent deposit cap from acquiring IDIs does not apply to acquisitions of failed IDIs or where the FDIC provides emergency assistance. The bill would permit such acquisitions only if (1) the IDI subject to the 10 percent deposit cap has the only application to acquire a failed institution that satisfies all applicable requirements, (2) the FDIC would provide emergency assistance for the transaction, and (3) the FDIC determines that the acquisition would comply with the least-cost resolution requirement (12 U.S.C. § 1823(c)(4)), or avoid the invocation of the systemic risk exception to the least-cost resolution requirement (12 U.S.C. § 1823(c)(4)(G). A similar provision also would apply to the exception to the 10 percent deposit cap for bank holding companies (12 U.S.C. § 1842(d)(5)).

6. Transparency Provisions. The RECOUP Act would require several reports to be produced related to banking supervision. The bill would require the appropriate federal banking regulator to conduct a review of the “management, supervision, and regulation” of any failed IDI with assets of $10 billion or more. The Federal Reserve Board of Governors also would be required to produce a public report on its regulatory and supervisory practices, policies, and actions. In addition, in the event the FDIC is appointed receiver or conservator of an IDI with assets of $10 billion or more, the inspector general of the IDI’s primary federal banking regulator would be required to produce a report evaluating the regulator’s supervision of the failed IDI. The report would have to identify any acts or omissions on the part of the primary federal regulator that “contributed to the failure” of the IDI or its holding company, as well as any actions the regulator could have taken to prevent the failure of the IDI or its holding company.

7. Sense of Congress. The bill includes a “Sense of Congress” that specifies that the bill and its amendments “should not be used to penalize senior executives of healthy financial institutions that are appropriately managed.” This language implicitly seeks to deter banking regulators from using the bill’s new removal and prohibition authority in an expansive manner. The inclusion of this Sense of Congress also suggests that members of the SBC may be open to amendments to the removal and prohibition authority provisions in the event the bill is conferenced with the House.

Summer Associate Taylor Theodossiou contributed to this article.