On June 21, 2023, the Recovering Executive Compensation Obtained from Unaccountable Practices (RECOUP) Act passed 21-2 out of the Senate Banking Committee. Spearheaded by Sens. Sherrod Brown (D-OH) and Tim Scott (R-S.C.), the legislation seeks to “strengthen[] certain existing authorities” to address concerns regarding executives’ accountability in the wake of the recent bank failures.[1]
The legislation is particularly noteworthy because it goes beyond addressing recourse to the leadership at failed banks and would expand the authority of federal banking agencies to remove senior executives of live depository institutions and their holding companies and prohibit those executives from working further in the banking industry. The RECOUP Act also would impose corporate governance and accountability standards to “promote responsible management” and allow for clawbacks of executive compensation in certain circumstances.
The bipartisan support the bill enjoyed in the Senate Banking Committee is notable, but no analog legislation has advanced in the House, and it is unclear what the future prospects are for the legislation. Below we summarize the principal provisions of the legislation and discuss their potential implications.
- Removal and Prohibition Authority Broadened
Section 2 of the RECOUP Act would grant federal banking agencies four new grounds to remove senior executives of insured depository institutions (“IDIs”) and depository institution holding companies (i.e., not just those executives of failed institutions) and prohibit such senior executives from further participation, in any manner, in the affairs of any IDI or its holding company.
The four new grounds for removal and prohibition are as follows:
(i) failure to carry out governance, operations, risk or financial management responsibilities, where such a failure would constitute “gross negligence,”
(ii) breach of any fiduciary duty to the IDI, where such a breach would result from the executive’s grossly negligent, reckless or willful conduct,
(iii) failure to implement appropriate systems or controls or oversee operations at an institution, and
(iv) failure to oversee the financial, risk or supervisory reporting or information systems or controls of an institution.[2]
Notably, the last two grounds are not limited by a gross negligence or similar standard of conduct and, thus, afford the agencies broad discretionary authority to remove and bar individuals. Therefore, the RECOUP Act would substantially broaden the federal banking agencies’ authority and discretion to exercise their removal and prohibition powers over any individuals considered senior executives. The legislation thus may make it more difficult for IDIs and their holding companies to compete for high-quality talent relative to the nonbank financial sector. (That said, the bill seemingly seeks to limit potential improper application of the agencies’ authorities, by noting in Section 10 that the purpose of the Act is not to “penalize senior executives of healthy financial institutions that are appropriately managed,” although it is unclear how this would be effectuated in practice.)
The individuals who may be subject to the federal banking agencies’ removal and prohibition powers are “senior executives,” which includes those who have “oversight authority for managing the over all governance, operations, risk, or finances of a depository institution or depository institution holding company.” Senior executives include a depository institution or depository institution holding company’s president, chief executive officer, chief operating officer, chief financial officer, chief risk officer, chief legal officer, chairman of the board and an inside director of the board, as well as any individual who occupies an equivalent position, as determined by the depository institution or depository institution holding company, as applicable.
- Governance and Accountability Standards in Bylaws
Section 3 of the RECOUP Act would introduce a federal mandate that IDIs and their holding companies with more than $10 billion in assets adopt certain governance and accountability standards in their bylaws. The required content of such standards include:
- Policies for senior executives and board members of depository institutions or depository institution holding companies related to appropriate risk management and responsiveness to supervisory matters;
- Accountability and corporate governance mechanisms and controls, such as directing (a) management not to “deviate from sound governance, internal control, or risk management;” (b) management not to deviate from “sound governance, internal control, or risk management;” and (c) that appropriate long-term risk management is tailored to long-term economic conditions; and
- Clawback mechanisms that would allow either the board (of a failed depository institution or failed depository institution holding company) or the FDIC (as appointed receiver or conservator) to clawback senior executive compensation received in the 24 months prior to the organization’s failure. These clawbacks may include senior executives’ incentive- based and equity-based compensation, as well as profits realized from selling stock of the failed organization. There are certain exceptions to this clawback standard; for example, senior executives employed by a failed IDI or holding company would not be subject to the clawback standards if the executives had only been employed by the institution or holding company for 18 or fewer months prior to failure and whose conduct did not contribute to the failure.
- Financial Impact for Senior Executives of Failed Institutions
Building on the requisite standards related to clawbacks described above, Section 4 of the RECOUP Act would allow the FDIC, if appointed receiver or conservator of an IDI with over $10 billion in total consolidated assets, to claw back senior executives’ compensation and any profits from the purchase or sale of the institution’s and/or its holding company’s stock in the 24 months prior to an institution’s failure.
Additionally, the ability and discretion of the federal banking agencies to impose civil money penalties on senior executives would be expanded. Specifically, the federal banking agencies would be permitted to impose civil money penalties on executives not only for knowingly committing certain violations, as is the case under the 12 U.S.C. § 1818(i)(2)(C)(i), but also for recklessly committing certain violations. Additionally, the legislation would triple the maximum penalty (from $1 million per day to $3 million per day) that may be imposed on senior executives for egregious violations. The lowered conduct standard for the application of civil money penalties against senior executives, when coupled with maximum penalties being tripled, could together result in a much more substantial monetary penalties imposed overall by the agencies.
- Additional Restrictions to Enforce the Nationwide Deposit Cap
Section 6 of the RECOUP Act revises the circumstances whereby a failed bank or its holding company may be sold to another depository institution. Today, under 12 U.S.C. § 1828(c)(13)(B), an IDI or its holding company may acquire failed banks or banks to which the FDIC provides emergency assistance even if the resulting organization would hold 10% or more of total nationwide deposits. In contrast, under Section 6 of the RECOUP Act, IDIs would only be able to complete such transactions where the resulting institution would exceed the 10% total nationwide deposit cap if: (i) the acquiring IDI is the only institution applying to acquire the failed (or in danger of failing) institution that meets applicable requirements; (ii) the FDIC would provide emergency assistance under section 13 of the Federal Deposit Insurance Act (FDI Act) for the transaction; and (iii) the FDIC determines that the acquisition would either (a) comply with the least-cost resolution requirements of section 13(4) of the FDI Act or (b) avoid serious adverse effects on economic conditions or financial stability that would otherwise occur (absent a systemic risk determination) pursuant to section 13(c)(4)(G) of the FDI Act. Section 6 also provides amendments to existing law related to exceptions to the 10% deposit cap with respect to holding companies.
- Transparency and Public Reporting
Finally, the RECOUP Act imposes new reporting requirements in the event of failures of IDIs with over $10 billion in total consolidated assets as well as with respect to ongoing health of the broader financial system. Section 7 would require each applicable agency to publish a report of its findings as to the management, supervision and regulation of a failed depository institution within 180 days of such institution’s failure. Section 8 would require the Federal Reserve Board to make publicly available at least semi-annually a report on its supervisory and regulatory policies and action (and any internal changes being made to operations and culture with respect to its supervisory and regulatory policies and actions and related budget, staffing and third-party usage), the current banking conditions and progress made with respect to metrics related to internal supervisory and regulatory changes being made at the Board. Finally, Section 9 sets forth requirements that the primary federal regulator of a failed IDI with over $10 billion in total consolidated assets would submit a report to the Senate Banking Committee and the House Committee on Financial Services; under the Act, such a report would include an evaluation of the primary regulator’s effectiveness in carrying out its supervisory responsibilities, identify any acts or omissions by the primary regulator’s officials that contributed to the bank or holding company failure as well as any actions that could have prevented the failure and identification of the failure’s cause(s). Section 9 also requires that the inspector general of the primary regulator testify to both the Senate and House committees within 30 days of filing its report.
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We will continue to track developments related to this bill.
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[1] United States Senate Committee on Banking, Housing, & Urban Affairs, Recovering Executive Compensation From Unaccountable Practices (RECOUP) Act One-Pager, https://www.banking.senate.gov/imo/media/doc/recoup_act_one-pager.pdf.
[2] RECOUP Act, S. 2910, 118th Cong. (2023), https://www.congress.gov/118/bills/s2190/BILLS-118s2190rs.pdf.
