United States


Do senior bank staff

On an ongoing basis, senior bank staff and directors generally do not have to be registered or approved by the bank’s Federal banking regulator, which could be the Board of Governors of the Federal Reserve System (the “FRB”), the Federal Deposit Insurance Corporation (the “FDIC”) the Office of the Comptroller of the Currency (the “OCC”) (collectively, the “Federal banking regulators”), and/or a state banking regulator. The names of new directors are sent to the regulator, accompanied by, if necessary, an executed oath of office. Information on its directors and senior executive officers routinely are provided by a bank to its regulators.

However, there are three situations in which executive staff and directors do need to be approved (and regulators may impose such a condition on a case-by-case basis such as in an enforcement order or for any other supervisory reason):

  • At the time a bank is being formed and for at least two years thereafter (the specific regulator will determine the time period and could extend it) (See for example, 12 CFR § 5.20(g)(2)),
  • When there is a change of control or a merger involving the bank and for a time period thereafter (See for example, 12 U.S.C. § 1817(j)(12)), or
  • When the bank is not in compliance with minimum capital standards and considered to be in a “troubled condition,” which is defined as having a composite CAMELS safety and soundness examination rating in its most recent report of examination of 4 or 5; is subject to a cease-and-desist order or formal written agreement that requires action to improve the bank’s financial condition (unless otherwise informed in writing by the regulator); or is otherwise informed in writing by the regulator that it is in troubled condition based on either the bank’s most recent report of condition or report of examination, or other information available to the regulator (12 U.S.C. § 1831i).

These requirements generally are applicable to all directors (not just non-executive directors) as well as the bank’s president, chief executive officer, chief operating officer, chief financial officer, chief lending officer, chief investment officer, or any other person identified by the regulator with significant influence over, or who participates in, major policymaking decisions of the bank. In addition, with a new bank, a regulator also may want to approve the appointment of other officers (such as a chief compliance officer or chief auditor).

In addition, changes in the senior management of the U.S. branches and agencies of non-U.S. banks should be reported to the appropriate Federal banking regulator.

State law also may provide for approval of directors and senior executive officers. For example, in New York State, a non-U.S. bank will need to obtain the approval of the New York State Department of Financial Services for a new manager or deputy manager at a New York State-licensed branch, agency or representative office of a non-U.S. bank.

If your national regulatory authority requires registration of senior bank staff what are the requirements?

When required as described in the answer to Question #1, the relevant persons will file a notice and a biographical and financial statement for review by the relevant Federal banking regulator. Such regulator will advise on which people are to provide the information and how much information must be provided (sometimes the financial statement is not required). These forms can be accessed here and here.

State law also may impose additional filing requirements with respect to new directors and senior executive officers.

Is there legislation specific to the banking sector that provides for penalties to be levied against senior staff for mis-managing a bank?

Removal/prohibition authority (12 U.S.C. § 1818(b)(3)-(5),(e), (f), (g), (h), (j)). Federal law allows the appropriate Federal banking regulator to act to suspend or remove an “Institution-Affiliated Person” (“IAP” - which include directors, officers, and employees) of, among other businesses, a banking organization, bank holding company or U.S. branches or agencies of non-U.S. banks (collectively, “banking institutions”), from his or her position at the banking institution and/or further participation in the affairs of that or any other banking institution, upon the occurrence of certain events (e.g., a determination by the Federal banking regulator that an IAP has violated any law, regulation, administrative enforcement order or condition imposed in writing that caused loss or other damage, and has demonstrated a wilful disregard for the banking institution).

Action to remove the IAP is required if the Federal banking regulator determines that the IAP has violated certain laws, such as Federal anti-money laundering laws.

During the pendency of a removal/prohibition proceeding, the appropriate Federal banking regulator may suspend the IAP from his or her position if it determines that such action was necessary for the protection of the banking institution.

A removal/prohibition order can be lifted by written consent of the Federal banking regulator. A removal/prohibition order can be challenged administratively. If the IAP receives an adverse decision, or is issued a suspension order, then the IAP can seek judicial review. Removal and prohibition orders also may be issued with the consent of the IAP.

If an IAP is the subject of a criminal indictment for certain actions, such as money laundering, the appropriate Federal banking regulator may suspend the IAP from his or her position if it determines that such action was necessary for the protection of the banking institution. If the IAP is convicted, then the Federal banking regulator may (or must, under certain circumstances) act to remove the IAP from his or her position at the banking institution and prohibit the person’s further participation in the affairs of any other banking institution. The Federal banking regulator’s order can be challenged administratively. If the IAP receives an adverse decision, then the IAP can seek judicial review.

If an IAP subject to a removal or prohibition order is convicted of knowingly participating in the affairs of a banking institution, he or she can be fined not more than $1,000,000 or imprisoned for not more than five years or both.

Finally, state banking laws, such as New York, also may have provide for removal and prohibition authority with respect to persons associated with state-chartered or state-licensed banking institutions.

What is the maximum amount the regulator can fine an individual?

There are three tiers of civil fines (12 U.S.C. § 1818(i)) that the appropriate Federal banking regulators of the banking institutions mentioned above may take action to impose:

Tier 1: $5,000 for each day during which such violation continues if the appropriate Federal banking regulator determines that the IAP has violated any law or regulation, any final or temporary administrative enforcement order, or any condition imposed in writing by a Federal banking agency.

Tier 2: $25,000 for each day during which such activity continues if the appropriate Federal banking regulator determines that the IAP (i) engaged in any activity described in Tier 1, recklessly engaged in an unsafe or unsound practice in conducting the affairs of the institution or breached any fiduciary duty; (ii) which violation, practice, or breach is part of a pattern of misconduct or caused or is likely to cause more than a minimal loss to such institution, or resulted in pecuniary gain or other benefit to the IAP.

Tier 3: Up to $1,000,000 for each day during which such activity continues if the appropriate Federal banking regulator determines that the IAP knowingly engaged in any activity described in Tier 1, engaged in any unsafe or unsound practice in conducting the affairs of the IAP’s institution, or breached any fiduciary duty; and knowingly or recklessly caused a substantial loss to the institution or a substantial pecuniary gain or other benefit to the IAP by reason of that activity.

Mitigating factors may be taken into account in determining the penalty such as the IAP’s good faith or history of previous violations.

The penalty may be issued upon consent of the parties, or imposed after an administrative hearing; the IAP also may challenge an adverse administrative decision in court.

If the institution is subject to state banking law, depending upon the state, there may be additional penalties that can be imposed under state law.

Is there legislation in place that requires banks to have in place remuneration policies and practices that are consistent with effective risk management?

Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") (12 U.S.C. § 5641) requires that six governmental agencies, including the three Federal banking regulators (collectively, the “Agencies”), promulgate regulations that prohibit incentive-based payment arrangements, or any feature of any such arrangement, at a “covered financial institution” with assets of $1 billion or more that the Agencies determine encourage inappropriate risks by a financial institution because the arrangements provide excessive compensation or could lead to material financial loss. The regulations also must require the covered financial institution to disclose the structure of its incentive-based compensation arrangements to its regulator so that the regulator may make a determination as to whether that structure provides “excessive compensation, fees, or benefits” or “could lead to material financial loss” to the institution. Finally section 956 requires that any standards adopted in the regulations be comparable to the compensation standards applicable to insured banks.

“Covered financial institutions” include, among other companies, banking organizations, bank holding companies, credit unions, and any other company that the regulators determine should be treated as a covered financial institution.

In addition, in 2010, the Federal banking regulators issued “Interagency Guidance on Sound Incentive Compensation Policies” (the “Interagency Guidance”). The guidance is designed to ensure that incentive compensation arrangements at banking organizations appropriately tie rewards to longer-term performance, have effective controls and risk-management, are supported by strong corporate governance, and do not undermine the safety and soundness of the firm or create undue risks to the financial system. The guidance applies to top-level managers and any other employees who have the ability to materially affect the risk profile of a banking organization, either individually or as part of a group.

Is there any legislation planned in your jurisdiction that will strengthen the accountability of senior bank staff?

In 2011, the Agencies issued an initial set of proposed regulations (the “2011 Proposal”) that would implement Section 956 of the Dodd-Frank Act. Under the 2011 Proposal, the regulations would be applicable to “covered financial institutions” with total consolidated assets of US$1 billion or more that offer incentive-based compensation arrangements to “covered persons.” “Covered financial institutions” included banking organizations, bank holding companies, U.S. branches or agencies of non-U.S. banks, and other U.S. operations of a non-U.S. that has a U.S. branch or agency office. “Covered persons” were any executive officer, employee, director or principal shareholder of a covered financial institution. “Executive officers” were persons with the title of, or function as, the covered financial institution’s president, executive chairperson, chief executive officer, chief operating officer, chief financial officer, chief lending officer, chief legal officer, chief investment officer, chief risk officer or head of a major business line.

Under the 2011 Proposal, covered financial institutions would have been prohibited from establishing or maintaining any incentive-based compensation arrangements that would encourage inappropriate risks by providing a covered person with “excessive compensation” (defined as amounts paid that are unreasonable or disproportionate to the services provided by the covered person) or that could expose the covered financial institution to inappropriate risks that could lead to material financial loss. The 2011 Proposal standards for determining whether there were inappropriate risks were intended to be consistent with the Interagency Guidance.

In addition, the 2011 Proposal included mandatory policies and procedures, annual reporting requirements for covered financial institutions with $1 billion or more in assets and a required deferral, for at least three years, of at least 50 percent of the incentive compensation of certain officers at larger covered financial institutions, generally those with $50 billion or more in. Any amounts ultimately paid must reflect losses or other aspects of performance over time. In addition, compensation of covered persons who are determined by the covered financial institution to individually have the ability to expose the covered financial institution to possible losses that are substantial in relation to the institution’s size, capital or overall risk tolerance, must be approved by the board of directors after taking into account several factors, including balancing the full range of risks presented by that covered person’s activities.

After review of the public comments submitted in response to the 2011 Proposal, in June 2016 the Agencies issued revised proposed regulations (the “2016 Proposal”). The 2016 Proposal defines “covered institutions” in substantially the same manner as in the 2011 Proposal but divides them into three levels rather than the two in the 2011 Proposal:

  • A Level 1 covered institution would have average total consolidated assets greater than or equal to $250 billion
  • A Level 2 covered institution would have average total consolidated assets between $50 billion up to $250 billion
  • A Level 3 covered would have average total consolidated assets greater than or equal to $1 billion up to $50 billion

The 2016 Proposal also expands and renames the covered “executive officers” as “senior executive officers” and expands the list of those officers to include not only those defined in the 2011 Proposal as executive officers, but adds in chief compliance officer, chief audit executive, chief credit officer and chief accounting officer. A definition of “significant risk-taker” has been added, generally pegged to the level of the covered person’s base salary and incentive-based compensation for Level 1 and 2 covered institutions. In addition, a covered person could be designated as a ‘‘significant risk-taker’’ by the relevant regulator because of that person’s ability to expose a covered institution to risks that could lead to material financial loss in relation to the covered institution’s size, capital, or overall risk tolerance.

While there are certain prohibitions and restrictions applicable to all 3 Levels of covered institutions, the 2016 Proposal imposes more rigorous requirements on the Level 1 and 2 covered institutions, including more extensive recordkeeping requirements (such as identifying the specific persons subject to the covered institution’s incentive-based compensation plan), but eliminates the annual reporting requirements contained in the 2011 Proposal.

The 2016 Proposal also would impose on Level 1 and 2 covered institutions obligations regarding deferral (a delay in vesting of incentive-based compensation beyond the award date), downward adjustment (a reduction in the amount of incentive-based compensation not yet awarded for any performance period that has already begun), forfeiture (reduction in the amount of deferred incentive-based compensation that has not yet vested), and “clawback” (a covered institution can recover vested incentive-based compensation) of incentive-based compensation. The deferral amounts from the April 2011 Proposal have been revised somewhat to require a 40, 50 or 60 percent deferral for at least one to four years, depending on the Level of the covered institution and the covered person’s status as a senior executive officer or a significant risk-taker, and whether the incentive-based compensation was awarded under a long-term incentive plan. The clawback is a new feature and allows the covered financial institution to recover incentive-based compensation for seven years after the compensation has vested if the senior executive officer or significant risk-taker is determined to have been engaged in misconduct that, among other things, resulted in significant or reputational harm to the covered institution.

Similar to the 2011 Proposal, the 2016 Proposal requires the covered institution’s board of directors to conduct oversight of the covered institution’s incentive-based compensation plans and approve arrangements and exceptions for senior executive officers. In addition, Level 1 and 2 covered institutions must have an independent risk management and compliance framework for their incentive-based compensation programs, and an independent compensation committee with no senior executive officer members.

The public was invited to submit comments by July 22, 2016. As of July 15, 2017, the Agencies had not issued final regulations.