WASHINGTON - The government this week revived its aging plan to limit golden parachutes for bank and thrift employees at troubled institutions.
Because the industry is so healthy today, the rule will not affect many institutions. But it will provide a guidepost for writing employment contracts by clearing up questions that have been hanging since 1990.
That was the year Congress passed anti-fraud legislation designed to deny payoffs to the people who ran financial institutions into the ground.
The Federal Deposit Insurance Corp. took its first stab at implementing the law in October 1991, but the proposal was slammed in comment letters as too tough.
The agency took the criticism to heart and substantially eased its proposal. Opinions on the new version, released Tuesday, may be sent to the FDIC through late May. A final regulation could be out this summer.
The FDIC's 77-page proposal also would restrict a banking company from picking up the tab for expenses an employee incurs fighting a regulatory enforcement action. This indemnification rule - also softened from the original 1991 proposal - would apply to all institutions, not simply troubled banks and thrifts.
"There are substantial improvements over the first proposed regulations," said Ronald R. Glancz, a partner with Venable, Baetjer, Howard & Civiletti law firm here.
In its biggest concession on the golden parachute proposal, the FDIC decided bona fide deferred compensation plans do not have to be funded in order to be excluded from the regulation's constraints.
The 1990 law excluded bona fide deferred compensation plans from the definition of a golden parachute payment. However, the FDIC said in its original proposal that these compensation plans had to be funded to earn the exclusion.
"Comment letters expressed grave concerns that the FDIC's imposition of the funding requirement would upset established deferred compensation plans," the FDIC said, noting termination of these plans would have cost banks and thrifts a lot of money.
In another compromise, the agency doubled the maximum possible severance package to a year's pay. A bank could grant more than a year's pay with express permission from the FDIC.
The new proposal also lays out several exceptions to the ban on troubled institutions or holding companies offering golden parachutes.
First, in order to allow an ailing bank or thrift to attract new management talent, the FDIC will permit golden parachutes for "white knights." However, these deals must be approved by regulators first.
To collect a golden parachute payment if the institution fails, a white knight must stand in line with other creditors, the FDIC noted.
The FDIC also is offering a case-by-case exemption to any troubled institution that can convince the agency the golden parachute is needed.
In the new proposal, the FDIC rejected requests to grandfather existing golden parachute plans. Thus, troubled institutions will have to seek approval of any exit-pay package currently in place.
A bank or thrift may apply for approval of a golden parachute plan before becoming troubled, the FDIC noted, explaining that it does not want to discourage the hiring of new managers before problems become too large.
The new proposal also clarifies that retired executives may continue receiving payments even if the institution becomes troubled after they leave. The regulation also will not apply to affiliates that are not in financial services, the FDIC said.
The new indemnification rules would make it easier for an institution to pay the cost of defending an employee or a director hit with an enforcement action.
Originally the FDIC planned to limit coverage of such expenses as legal costs to cases in which an institution's board had concluded that the employee had a "substantial likelihood" of winning the case. The new proposal lowers that standard; a board would have to find only that the employee acted in good faith and in the best interests of the institution.
"That's a real loosening," Mr. Glancz said.
