The FDIC's recent proposal to tighten controls on insider transactions is a necessary response to some of the excesses that failed banks and S&Ls committed in the 1980s. Although it places still another set of administrative burdens on bank boards and managements, it is hard to say that this one isn't necessary.

The proposal can be made much better, however, by amending it in two respects to prevent the Federal Deposit Insurance Corp. from narrowly based second-guessing of board of directors' judgments, and to make an independent committee of the board, rather than the full board, responsible for compliance.

The FDIC's proposal is quite simple: A bank is prohibited from entering into any transaction (which can include even using a copier for personal purposes) with an insider (as defined) unless:

* The board of directors of the bank in a written policy has specified that the transaction is deemed an "insignificant" transaction.

* The transaction is at arm's length, "for the benefit of the bank," and -- if the transaction exceeds $500,000 or 2 1/2% of the bank's Tier 1 capital -- has been approved by a majority of the bank's board of directors.

'Insignificant' Is Key Word

It appears that the provision permitting the board to exempt transactions that are "insignificant" will solve the problem posed by the rule's otherwise overinclusive scope, although smaller institutions may have difficulty with the 2 1/2% of Tier 1 capital limitation.

(In addition, banks are prohibited from investing in equity interests in real estate in which an insider also has an interest. Justifying this outright prohibition takes up most of the release, but it should affect few institutions.)

One problem with the proposal is that a transaction is "prohibited" -- and therefore leaves the bank and its officers and directors subject to the whole panoply of enforcement powers granted by the thrift law and its progeny -- if the FDIC thinks that it was not done at arm's length" or not "for the benefit of the bank," even though the board of directors had concluded otherwise in good faith.

That is not fair. A board of director's good-faith judgments on matters that the law requires them to judge should not constitute violations of law, even if the regulatory authorities later disagree with the directors' judgment. The law should not put a director at risk for having done his or her duty.

There is a simple solution to this defect in the regulation: Make the board of director's specific finding, entered in the minutes, that the transaction is "arm's length" and "for the benefit of the bank" presumptively correct, subject to being overturned only if the board acted in bad faith, under corrupt influence, or on the basis of false information.

A second change in the proposal would reinforce the one outlined above: Establish a board committee rather than the majority of the board as the judge of the transaction. The FDIC has invited comment on the board committee idea, so it is apparently open to this suggestion.

Transactions should be passed on by a board committee composed of at least three directors who have agreed not to engage in any transactions (except "insubstantial" ones) with the bank while they sit on the committee and for a period of at least one year thereafter.

A committee of this type will be more independent than the whole board and thereby will provide better protection to the public, stockholders, and the insurance fund, while at the same time being more efficient.

Its independence should merit the type of presumption of correctness suggested above because directors who have forsworn potential benefits will take their job seriously and will be less subject to peer pressure than board members who one day may have to put their own transactions before their peers for a vote.

There is ample precedent for a committee of the type suggested. Most prominently, committees that pass on options for boards of directors under Rule 16b-3 of the Securities Exchange Act agree not to receive options themselves and thereby, in the view of the SEC, achieve the necessary independence to safeguard stockholder interests.

If you agree that the FDIC should make these amendments to its proposed rule, please clip this comment and mail it with your card to Hoyle Robinson at the FDIC before Monday. Even better, the FDIC's fax number is 202-98-3838.

Mr. Lowy, counsel to the firm of Rosenman & Colin, New York, is the author of the recently published "High Rollers: Inside the Savings & Loan Debacle."

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