4000 - Advisory Opinions
Application Pursuant to Section 19 of The FDI Act As Amended by FIRREA: Criminal Offense Involving Dishonesty or Breach of Trust
December 26, 1989
Sheldon J. Reisman, Regional Counsel
This letter will confirm your December 11, 1989 telephone conversation with Senior Regional Attorney Stephen Miller of this Office. As he indicated, an application pursuant to section 19 of the Federal Deposit Insurance Act, as amended, must be filed, and FDIC written consent granted, before a person who has been convicted of a criminal offense involving dishonesty or a breach of trust may participate, directly or indirectly, in any manner in the conduct of the affairs of an insured depository institution.
There was a significant expansion in the scope of section 19 when Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The provision was previously applicable to service as a director, officer or employee of an insured bank; that it now applies to any person who would participate, directly or indirectly, in any manner in the conduct of the affairs of any insured depository institution, requires that we evaluate the nature and scope of any proposed activity which is outside the traditional employment/directorial relationship.
You have inquired about *** , who is *** *** a financial consulting firm which would provide certain financial services upon bank premises to bank customers. *** was convicted, upon a plea of nolo contendre, of one count of willful filing of a false federal income tax return. He was sentenced to pay a fine of $5,000.00 and the tax owed plus interest and penalties, and to serve 3 years in jail. The jail sentence was reduced to 30 days and 5 years' probation, upon his meeting certain requirements, including the performance of community service.
Willful filing of a false federal income tax return is clearly a crime which involves dishonesty. Whether a section 19 application is required to be filed in this case is dependent upon whether *** would be participating, directly or indirectly (whether through his corporation or otherwise), in any manner in the conduct of the affairs of the Bank.
The bank sent a letter to its customers stating in part:
We are pleased to announce that we are offering a new service to a select number of our customers. *** in conjunction with the *** a regional financial consulting firm, is offering personal financial planning.
The letter also advised them that the bank has "decided to offer financial planning to our customers" and introduced a representative of *** who would call to arrange for an appointment. The bank has entered into a Lease Agreement with *** wherein *** leases space in the bank's facilities and *** pays the bank 20% of the gross revenue derived from its operations. Also as part of a financial plan, *** could recommend that the depositor/customer increase the dollar amount of his or her deposits at the bank or purchase a bank issued certificate of deposit. Additionally, the bank receives a monthly report of all depositor/customer's money which has left the bank and gone into other investments. All of the above indicates that *** has been held out to be and is significantly involved in the conduct of the affairs of the bank.
From the information you submitted and your conversations with *** it appears that *** *** constitute the board of directors of *** . Moreover, it appears that *** makes significant decisions of *** with respect to the financial planning it offers to the bank's customers. It also appears that the bank identifies *** with its president. Thus, it would appear that *** would be indirectly participating in the affairs of the bank through the vehicle of his firm.
Based upon the information which you submitted to this office, it is our opinion that *** participation in the conduct of the affairs of the bank would be such that your bank would be required to file a section 19 application with the FDIC and obtain its prior written consent before *** could participate in the affairs of the bank through *** ***. If this service has already begun, the bank should discontinue it immediately pending an application to the FDIC and its response thereto.
Parenthetically, this letter is not to be construed as any form of approval by the regional office of the FDIC of the bank's entering into such a relationship with any such corporation, regardless of the applicability of section 19 of the Federal Deposit Insurance Act. We do not have sufficient information for an evaluation of its propriety; in any event, that would ordinarily be done by your primary regulator.
Please feel free to contact me should you require any further information.