Publication
Keeping your dawn raid guidance current
Unannounced inspections or ‘dawn raids’ are used by antitrust authorities to obtain evidence when there are suspicions that individuals or businesses have infringed the antitrust rules.
Authors:
Global | Publication | March 2023
On March 17, 2023, in the wake of the failures of Silicon Valley Bank (SVB) and Signature Bank and the bank-led rescue of First Republic Bank, the administration of US President Joseph Biden issued a statement urging Congress to pass legislation providing financial regulators with broader powers to punish bank executives deemed responsible for the collapse of financial institutions.1 In his March 17 statement, President Biden observed that the law as it stands "limits the administration's authority to hold executives responsible" and specifically asked Congress to increase the authority of the Federal Deposit Insurance Corporation (FDIC) to impose tougher penalties on executives of failed banks though a series of proposed reforms.
First, the Biden Administration seeks to broaden the FDIC's ability to claw back compensation, including gains from stock sales, from executives whose mismanagement or excessive risk-taking contributed to the failure of a financial institution. This proposal was made in direct response to reports in the wake of SVB's failure that its former chief executive officer, Greg Becker, sold more than US$3m worth of SVB shares shortly before the bank entered FDIC receivership. Under current law, the FDIC may only claw back executive compensation when the largest banks fail under the Dodd-Frank Act's special resolution authority. President Biden's proposal would expand this claw back authority to include a broader set of financial institutions, including banks the size of SVB and Signature Bank.
Second, the Biden Administration wants to expand the FDIC's authority to impose monetary penalties on executives responsible for the failure of their institutions above and beyond the compensation claw backs. Under current law, the FDIC can fine executives who "recklessly" engage in a pattern of "unsafe or unsound" practices, regardless of whether that bank enters into a receivership. The Biden Administration, however, seeks to lower this legal bar and allow the FDIC to impose fines against executives of failed banks whose negligent actions contributed to the failure of their firms.
Third, President Biden asked Congress to expand the FDIC's ability to ban executives responsible for bank failures from working elsewhere in the financial industry. The FDIC currently can only ban executives from working at other financial institutions where the executives engaged in "willful or continuing disregard for the safety and soundness" of their bank. For example, the FDIC, applying this standard, prohibited a bank director from future participation in the affairs of any insured depository institution where the director, a majority shareholder, engaged in both willful disregard and continuing disregard for the safety and soundness of a bank by taking several extensions of credit from the bank for his personal or business use which exceeded the bank's lending limits under federal banking laws despite repeated admonishments to correct the violations.2 President Biden seeks to lower this legal threshold for imposing this prohibition once a bank is put into FDIC receivership, reasoning that "if you're responsible for the failure of one bank, you shouldn't be able to just turn around and lead another."
President Biden's message aligns with US regulators' increased focus on holding individual executives accountable for corporate wrongdoing. Earlier this month, for instance, the US Department of Justice (DOJ) published its Compensation Incentives and Clawbacks Pilot Program (the Pilot Program), which we have previously analyzed. The Pilot Program requires that companies subject to criminal corporate resolutions develop compliance-promoting criteria within their employee compensation and bonus system and provides that companies which seek to claw back compensation from culpable employees may receive fine reductions. The Pilot Program reinforces Deputy Attorney General Lisa Monaco's remarks during a September 2022 speech that "going after individuals who commit and profit from corporate crime" is DOJ's "top priority for corporate criminal enforcement" and the revisions to DOJ's Corporate Criminal Enforcement Policies to that effect. Relatedly, the US Securities and Exchange Commission (SEC) issued a new regulation (Rule 10D-1) in October 2022 requiring publicly traded companies to establish policies to claw back executive compensation almost any time a company restates its financials, regardless of whether the restatement was caused by fraud, mistake or other error.
Accordingly, while the fate of President Biden's proposed reforms in Congress remains to be seen, his statements suggest that the Administration will use the currently available regulatory tools to identify and penalize executives involved in corporate misconduct in the banking sector and elsewhere.
Publication
Unannounced inspections or ‘dawn raids’ are used by antitrust authorities to obtain evidence when there are suspicions that individuals or businesses have infringed the antitrust rules.
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