On May 30, 2012, Representative Barney Frank introduced a bill entitled the “Executive Compensation Clawback Full Enforcement Act” (here) that by its own terms is designed to “prohibit individuals from insurance against possible losses from having to repay illegally-received compensation or from having to repay civil penalties.” The proposed Act’s appears primarily addressed to the compensation clawback sections in the FDIC’s “orderly liquidation authority” in the Dodd-Frank Act. However, the proposed Act’s separate prohibition of insurance for “civil money penalties” appears to address the long-standing question of insurance for civil money penalties imposed on bank officials by the FDIC.
Title II of The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for “orderly liquidation authority” for the FDIC to act as a receiver of failed “systemically important” financial institutions. Section 210(s) of the Act permits the FDIC to recover compensation from any senior executive or officer deemed to be “substantially responsible” for the failure of the financial institution. The FDIC may clawback all compensation the executive or director received during the tw0-year period preceding the FDIC’s appointment as receiver.
In response to these provisions, at least one industry participant introduced a new insurance product designed to provide protection against these new compensation clawback measures. The new insurance product was not only intended to provide protection for the costs of defending against a clawback action, but also “indemnification for damages sought by the FDIC “for “ earned salaries, wages, commissions, benefits, or other compensation obligations repudiated and recouped by the FDIC.
In public statements about this new product, a spokesman for the company that introduced it conceded that product could “possibly” provide indemnification for these clawbacks “if they’re insurable under the law," adding that "the basic premise, of course, (is that) you’re not going to be able to insure something that the law says is not insurable,"
As least as interpreted in news coverage of Rep. Frank’s introduction of the bill, the proposed Act appears to be expressly addressed to this compensation clawback insurance product. Frank himself is quoted as saying “"the creation of insurance policies to insulate financial executives from claw-backs is one more effort by some in the industry to perpetuate a lack of accountability.”
However, the proposed Act’s provisions reach more broadly than just the Dodd-Frank orderly liquidation authority clawback provisions. The proposed Act’s provisions also seem expressly designed to address the question of insurance for the FDIC’s imposition of “civil money penalties” against senior officials at depositary institutions.
The proposed Act provides in Section 2 that an officer, director, employee or “institution-affiliated party” of “a depository institution, depository holding company or nonbank financial company” who is required by law “to repay previously earned compensation or pay a civil money penalty” shall be “personally liable for the amounts so owed” and “may not , directly or indirectly insure or hedge against, or otherwise transfer the risks associated with, personal liability for the amounts so owed.”
The proposed Act provide further that the Section 2 is not intended to preclude a person from “being provided funds necessary to defend against a previously earned compensation recovery,” either from the company itself or “under an insurance policy.” The proposed Act also specifies that the Act is not intended to preclude a person from obtaining insurance against being held personally liable for “penalties, judgments or other amounts assessed against a depositary institution, depositary institution holding company, or nonbank financial company.” The Act is also not intended to prohibit insurance for personal liability against “unintentional outcomes associated with the ordinary exercise of trade or business judgment”
The question of insurability of civil money penalties is a long-standing one. As discussed in a prior guest post on this site, the FDIC has taken the position on an individual institution level basis that insurance protecting individual bank directors and officer from civil money penalties was prohibited. But while there was some discussion of and concern about these issues, the question of insurability of civil money penalties remained an uncertain issue (at least for the banks themselves, if not for the FDIC). However, if Rep. Frank’s bill becomes law, or at least of its provisions prohibiting insurance of civil money penalties becomes law, the question would obviously be resolved.
With respect to the Act’s provisions relating to compensation clawbacks, it is worth noting that the provisions prohibit insurance only with respect to the returned compensation. The proposed Act expressly allows insurance for defense costs. The insurance industry’s working presumptions about the FDIC’s clawback authority generally has been that the company’s traditional D&O insurance would, all else equal, provide defense cost protection, but that the traditional policy would not cover the returned compensation amounts. In other words, Rep. Frank’s proposed bill would not appear to change the insurance coverage arrangements that would likely apply in most situations. The bill seems only to change things with respect to the recently introduced new insurance products that promised provide insurance protection for the returned compensation.
Finally, it is probably worth noting that the proposed Act by its own terms applies only to corporate officials as depositary institutions, depositary institution holding companies and nonbank financial companies. Accordingly, the proposed bill would not seem to have any impact on the vast run of companies, one way or the other.