The Office of the Comptroller of the Currency recently released the latest version of its policy on the assessment of civil money penalties against national banks and bank-affiliated persons.

The revised policy contains a number of significant changes in the way the agency administers such powers.

Equally important, by stating more clearly and in greater detail both the steps and the methodology that the Comptroller's office examiners should follow in considering whether to recommend a civil money penalty, the agency has removed a good deal of the mystery from the process.

It is no secret that the banking agencies have been increasingly aggressive in their use of civil money penalties as sanctions against banks and bankers. A belief seems to have grown among the regulators that such penalties are necessary to get the full attention of officers and directors.

As a result, bankers are more frequently facing proposed civil money penalties in cases that in the past may have provoked no more than a stern lecture by the examiner during an exit interview. The Comptroller's revised policy on such penalties, then, is a matter of no small interest to bank officers and directors.

Enhanced Powers

The Comptroller's office, like other bank regulatory agencies, has paid increasing attention to the formalization of the civil money penalty process following the 1989 amendments in the Financial Institutions Reform, Recovery, and Enforcement Act to section 8 of the Federal Deposit Insurance Act.

These amendments gave the agencies enhanced power to assess civil money penalties against insured institutions and institution-affiliated parties.

The statute provides for three tiers of penalties, which become increasingly severe as the seriousness of the violations increases. Indeed, the penalties may be assessed in amounts up to $1 million a day for the most egregious offenses.

Grounds for assessing civil money penalties include: violations of laws of regulations, as well as violations of final orders or written agreements with the regulator; engaging in unsafe and unsound banking practices; and breaching fiduciary duties.

Old and New

In many respects, the Comptroller's new policy simply formalizes procedures already being followed by field examiners and supervisory personnel. It does, however, establish certain processes and deadlines that had not been clearly mandated by policy statements or internal procedures.

For example, an examiner determining whether to propose the assessment of a civil money penalty continues to use the "CMP matrix" developed several years ago by the Federal Financial Institutions Examination Council and which the banking agencies have been using for some time.

The matrix contains 13 factors (for example, the number of violations involved, whether there has been a loss to the bank) against which the actions under scrutiny are measured.

However, the policy now explicitly acknowledges that, in certain cases, it may be more appropriate to issue a "reprimand" or a "supervisory letter" than to assess a money penalty.

It is significant that the policy states that these lesser sanctions are to be considered, both because it serves as a moderating influence on increasingly aggressive examiners, and because these lesser sanctions are not subject to mandatory public disclosure by the agency.

Procedures Spelled Out

The revised policy also sets out in some detail the internal referral and review process.

If the examiner (following consultation with his superiors and the legal staff) determines to recommend the assessment of a money penalty (or the issuance of a reprimand), he must provide advance notice to the bank of his recommendation either at the exit interview or in the report of examination.

Within 30 days following the close of the examination the examiner-in-charge is to submit the penalty recommendation to the appropriate supervisory office (a district office or one of the Comptroller's Washington headquarters units). The policy also sets forth the type of information that must accompany the recommendation.

The 15-Day Letter

Following review by the supervisory office and the legal staff, the director of the supervisory office issues a "15 day letter to the person or institution against whom the money penalty is to be assessed.

The policy provides that the 15-day letter should only be sent to an individual or an institution against whom the supervisory office is actively considering assessing the penalty (or issuing a reprimand) and where the office has established a basis for taking such action.

The policy also cautions that, in cases in which only a reprimand is being considered, the 15-day letter should state that fact. It further directs that a 15-day letter is not to be sent when only a supervisory letter is under consideration, nor is it to be used as a discovery device. An "investigative letter" should be used for the latter purpose.

The 15-day letter invites the person or institution addressed to demonstrate why the civil money penalty (or reprimand) should not be issued.

Review Committees

The supervisory office then considers the response together with the examiner's supporting information, including the matrix analysis, and must present its case to an internal review group, called the enforcement review committee, within 90 days after receipt of the examiner's recommendation.

There is a review panel in each of the Comptroller's district offices and one at headquarters in Washington.

If the appropriate committee decides to go forward with the money penalty, the subject institution or individual is notified of the assessment and is asked to sign a consent order.

This assessment and consent settlement may be subject to negotiation for a reasonable period, in most cases not to exceed 30 days. Matters not settled will go to an administrative hearing.

One noteworthy aspect of the revised policy deals with indemnification. As a general matter, under Comptroller's regulations a bank may not indemnify its directors and officers for payment of a civil money penalty, or the expenses associated with defending a proceeding in connection with one, if the matter results in a final order assessing a money penalty.

However, the revised policy states that, if properly provided for in its articles of association, a bank may indemnify its directors and officers for expenses associated with responding to 15-day letters.

This concession had not previously appeared in any enforcement policy statements by the Comptroller's office, and may represent a substantial change in policy for the agency. Presumably, the expenses referred to would include any legal fees incurred in preparing a response to a 15-day letter.

Meaningful Changes

The revised policy is significant for a number of reasons.

* First, the agency has made it possible for individuals and institutions involved in the process to have a clearer understanding of what is going on at any given stage and roughly how long it is likely to take.

* Second, the policy reminds an examiner who might be considering a civil money penalty recommendation that less draconian measures need to be considered.

* Third, it reinforces the importance of developing a credible and convincing response to a 15-day letter, and makes it clear that the response must be seriously considered by the enforcement decision-makers.

* Finally, it acknowledges the permissibility of providing indemnification to officers and directors for expenses incurred in responding to 15-day letters.

For any national bank officer and director, being the subject of the civil money penalty process will always be a frustrating and infuriating experience.

The Comptroller's revised policy does nothing to change that. It does, however, reveal how the process works in sufficient detail that the rules of the game are clear.

Mr. Katz, an attorney in the Washington office of the Fulbright & Jaworski law firm, was senior deputy chief counsel of the Office of Thrift Supervision and director of the litigation division of the Office of Comptroller of the Currency.

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