December 1, 2021

Volume XI, Number 335

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Post-Election Outlook for Financial Regulatory Agencies: Federal Deposit Insurance Corporation

The election of Donald J. Trump as President, along with continued Republican control of the Senate and House of Representatives, promises to bring change to the Federal Deposit Insurance Corporation (“FDIC”).  The transition at the FDIC should be gradual due to the structure of the agency’s board of directors.  The five-person board consists of three directors appointed by the President and confirmed by the Senate (the “independent directors”), and two directors who serve by virtue of their positions as heads of other agencies, the Comptroller of the Currency and the Director of the Consumer Financial Protection Bureau (“CFPB”).  One of the three independent directors is separately appointed by the President and confirmed by the Senate to serve as Chair, and another is separately appointed by the President and confirmed by the Senate to serve as Vice Chair.  In addition, one of the three independent directors must have State bank supervisory experience.  No more than three of the directors may be members of the same political party.

The Federal Deposit Insurance Act is silent as to whether, and for what reasons, the President may remove an independent director from the board before his or her term has expired, and no court has addressed these questions with respect to the FDIC.  However, courts have referred to other statutes that similarly provide a fixed term for a senior agency official but are silent on the President’s removal powers.  These courts have sometimes indicated that, based on the structure and mission of the organization as an agency that is meant to be “independent,” the President may only remove such an official for “good cause.”  See, e.g., SEC v. Blinder, Robinson & Co, 855 F. 2d 677 (10th Cir. 1988).

Once the new Administration takes office, the President’s ability to appoint new members to the FDIC, and the timing for those appointments, will be different for each board seat:

  • Chair.  Each independent director has a six-year term, while the term as Chair lasts only five years.  As a result, Martin J. Gruenberg’s current term as a director appears to expire in December 2018, while his term as Chair appears to expire in November 2017.  Chair Gruenberg stated after the election that he intends to serve his entire term as Chair, but has not indicated whether he plans to remain a board member past that point.  The Chair may continue to serve as Acting Chair after the expiration of his or her term as Chair until a successor has been appointed.

  • Vice Chair. Vice Chair Thomas M. Hoenig’s term as a director appears to expire in March 2018, but the Federal Deposit Insurance Act does not specify a fixed length of service for the Vice Chair position.  In the event of a vacancy in the position of Chair, the Vice Chair acts as Chair.  As a result, if Chair Gruenberg were to serve his full term as Chairman until November 2017, and then step down without a Senate-confirmed replacement, Vice Chair Hoenig would serve as Acting Chair until his term as a board member expires in 2018 (or until a permanent successor is appointed and confirmed).

  • Third Independent Director. The seat of the third independent director is currently vacant, providing the incoming President with the ability to nominate a new member to the board immediately following his inauguration.

  • CFPB Director. The Director of the CFPB has a term of five years.  Director Richard Cordray’s term appears to expire in July 2018.  While the Dodd-Frank Act specifies that the President can only remove the Director for inefficiency, neglect of duty, or malfeasance in office, the United States Court of Appeals for the District of Columbia Circuit held in PHH Corporation v. Consumer Financial Protection Bureau in October 2016 that this removal provision is unconstitutional and that the President can remove the Director at will.  We discussed the implications of the PHH case for the CFPB’s future under the incoming Administration in a previous post.  If Congress changed the structure of the CFPB to a multi-member board or commission, rather than a single agency head, it is not clear whether the CFPB would retain a seat on the FDIC board.

  • Comptroller of the Currency. The Comptroller of the Currency has a term of five years.  Current Comptroller Thomas J. Curry’s term expires on April 1, 2017.  By statute, the President can remove the Comptroller before the end of his term for reasons “communicated by [the President] to the Senate.”  In a footnote to the PHH case, the D.C. Circuit interpreted this provision to mean that the President can remove the Comptroller at will, e., for any reason communicated to the Senate.

As the new President makes each of these appointments, he will need to be mindful of the limitation on having no more than three directors from the same party.  In particular, assuming that the new Comptroller of the Currency and the new Director of the CFPB are Republicans, then only one of the three independent directors could also be a Republican – and that seat would presumably be reserved for the Chair position.

Over time, as the new President re-shapes the makeup of the FDIC’s board, the members he appoints will be influence the direction of the agency’s policies with respect to regulation, compliance, enforcement, and transactions.

One important area where there could be a change in policy concerns the formation of new (or “de novo”) banks, where the FDIC plays a key role.  Banks are chartered by states or by the Office of the Comptroller of the Currency, but charter applicants generally must also apply for deposit insurance from the FDIC.  Since 2009, the FDIC has granted deposit insurance to just three de novo applicants.  While the FDIC has taken some steps to encourage the formation of de novo banks, including reducing the period of enhanced supervision (in April 2016) for new banks from seven to three years, these steps have not led to an increase in the formation of such banks, and the agency’s standards for granting deposit insurance are still perceived to be more rigorous than before the financial crisis.  President-elect Trump has not publicly taken a position on this issue.

Another key policy area that may be affected is resolution planning.  The FDIC and the Federal Reserve jointly review resolution plans (also known as “living wills”) submitted by large financial institutions to determine whether the plans are credible or would facilitate an orderly resolution of such institutions under the Bankruptcy Code.  Where these standards are not met, the agencies may jointly decide to impose significant restrictions on an institution, which ultimately could include required divestitures of assets and/or lines of business.  The new leadership at the FDIC – especially the new Chair – will play a critical role in such determinations going forward.

© 2021 Covington & Burling LLPNational Law Review, Volume VI, Number 336
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About this Author

Jean Veta, Covington Burling, litigation attorney
Partner

Jean Veta is described by Chambers USA as “one of the premier banking and financial regulatory enforcement litigators in the country.” She defends financial institutions and their officers and directors in civil and regulatory enforcement matters, government investigations, internal corporate investigations, and congressional investigations. One client said, “[s]he brought a discipline and toughness that was necessary in dealing with private litigants and was very experienced at dealing with government litigants.” Ms. Veta was named by The American Lawyer ...

202-662-5294
Randy Benjenk, Covington Burling, Regulatory attorney
Associate

Randy Benjenk helps clients navigate the bank regulatory landscape. He represents domestic and foreign financial institutions and trade associations on a variety of bank regulatory issues, including compliance, government affairs, and transactional matters.

Mr. Benjenk regularly advises clients on compliance with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bank Holding Company Act, the Change in Bank Control Act and U.S. and international capital and liquidity regulations.

Mr. Benjenk represents financial institutions...

202-662-5041
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