An official website of the United States government
Share This Page:
A community bank appealed the violation of 12 C.F.R. § 359.2 – Golden Parachute Payments Prohibited, which the OCC cited in a recent letter to the board.
The basis of the bank’s appeal stemmed from the decision by the Supervisory Office to cite a violation of 12 C.F.R. § 359.2. The OCC determined the bank violated the regulation when the bank made several severance payments to a former employee while the bank was in troubled condition without written approval from the OCC and FDIC.
The bank’s appeal was based on its assertion that the severance payments made to the former institution-affiliated party (IAP) fell within its nondiscriminatory severance policy available to all employees and, as such, was specifically excluded from the definition of golden parachute payment under 12 C.F.R. § 359.1(f)(2)(v). The bank also asserted that while the terminated employee rejected its initial offer, the final negotiated severance did not differ significantly from the bank’s policy and practice of granting severance pay.
The ombudsman conducted a comprehensive review of information submitted by the bank and the supervisory office. The ombudsman relied on 12 C.F.R. Part 359 – Golden Parachute and Indemnification Payments and 12 C.F.R. § 5.51 – Changes in Directors and Senior Officers in making the determination.
Under 12 C.F.R. § 359.1(f)(1), a golden parachute payment is any payment (or any agreement to make any payment) in the nature of compensation by a bank for the benefit of and payable to any institution affiliated party (IAP) (any director, officer, or employee, etc.) that is payable on or after the termination of the IAP’s primary employment with the bank and received on or after determination by the regulatory agency that the bank is in troubled condition. A golden parachute does not include a payment made pursuant to a nondiscriminatory severance pay plan or arrangement, among other exceptions. The term nondiscriminatory means the plan, contract, or arrangement applies to all bank employees who meet reasonable and customary eligibility requirements applicable to all employees, such as minimum length of service requirements. The plan may provide different benefits based only on objective criteria, which are applied on a proportionate basis.
According to 12 C.F.R. § 5.51(c)(6)(ii), the bank met the definition of a bank in troubled condition because it was subject to a Consent Order, which the board signed in 2010. In 2011, while still in troubled condition, the bank signed a severance payment agreement with the former IAP. Based on these two facts, the payment met the definition of golden parachute.
The bank’s appeal asserted that the severance payment made to the former IAP fell within the bank’s nondiscriminatory severance policy applicable to all employees and, as such, was specifically excluded from the definition of golden parachute payment under 12 C.F.R. § 359.1(f)(2)(v). A nondiscriminatory severance pay plan or arrangement, however, provides for the payment of severance benefits to all eligible employees upon involuntary termination other than for cause and shall not have been adopted during the time in which the bank was considered troubled condition. The ombudsman’s review found that the bank adopted its severance payment plan after it signed the Consent Order, and the IAP was terminated for performance reasons.
Based on his analysis of the regulatory definitions and information presented, the ombudsman concluded that the severance payment did not meet the definition of nondiscriminatory because the severance pay plan was adopted at a time when the bank was in troubled condition, the employee was terminated for cause, and the terms of the severance agreement were specifically negotiated with the IAP and not universally applied to all employees in accordance with the requirements of 12 C.F.R. § 359.1(j). Therefore, the ombudsman concluded that the supervisory office appropriately supported the violation of 12 C.F.R. § 359.2, and approval from the OCC and FDIC would be necessary to grant golden parachute payments.