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  4. Background and Summary of the Board’s Rules of Practice for Hearings

Background and Summary of the Board’s Rules of Practice for Hearings

8-099
The Board of Governors’ Rules of Practice for Hearings establish the rules of practice and procedure governing formal enforcement actions that are required by law to be determined on the record. The rules do not cover rulemaking procedures.
The rules are organized into eight subparts:
  • Subpart A sets forth uniform rules of practice and procedure governing formal administrative actions common to the five federal financial-institution supervisory agencies, including rules for initiating enforcement proceedings, filing and service of papers, motions, discovery, prehearing conferences, public hearings, hearing subpoenas, conflicts of interest, ex parte communications, rules of evidence, and posthearing procedures.
  • Subpart B addresses subjects that are not addressed in the uniform rules, such as terms specific to the Board, the Board’s procedures for discovery depositions, and provisions for certain proceedings that are the result of a Board order that a formal hearing be held.
  • Subpart C contains Board rules for the assessment and payment of civil money penalties.
  • Subpart D applies to informal hearings afforded anyone affiliated with an insured depository institution (“an institution-affiliated party”) who has been suspended or removed from office or prohibited from further participation in an institution’s affairs.
  • Subpart E addresses procedures under which the Board may take action to require a bank or bank holding company to achieve and maintain adequate capital.
  • Subpart F contains provisions for the discipline of practitioners before the Board through sanctions that extend beyond a specific proceeding. This subpart therefore supplements the sanctions contained in the uniform rules that relate only to the proceeding at hand.
  • Subpart G implements the Equal Access to Justice Act, which allows certain private parties that prevail against an agency in an adversary adjudication to recover their costs and attorneys’ fees if the agency was not substantially justified in its position.
  • Subpart H sets out the procedures for issuing prompt-corrective-action directives under section 38 of the Federal Deposit Insurance Act and procedures for reviewing those directives.
  • Subpart I establishes procedures for issuing an enforceable order requiring a submission of a compliance plan by a state member bank that is not in compliance with a safety-and-soundness standard established by guideline under section 39(a) or (b) of the Federal Deposit Insurance Act.
  • Subpart J sets out rules and procedures for the removal, suspension, or debarment of independent public accountants and their accounting firms from performing independent audit and attestation services for insured state member banks and for bank holding companies required by section 36 of the Federal Deposit Insurance Act.
8-099.1

FORMAL HEARINGS

The Board’s Rules of Practice for Hearings apply to the following enforcement actions:
  • suspension of a member bank from the use of Federal Reserve System credit facilities
  • termination of a bank’s membership in the Federal Reserve System
  • issuance of a cease-and-desist order, or a removal or suspension order, under section 11 of the Clayton Act or section 8 of the Federal Deposit Insurance Act
  • adjudications under sections 2, 3, or 4 of the Bank Holding Company Act
  • issuance of a divestiture order against a bank holding company
  • approval or disapproval of a proposed acquisition of control of a state member bank or a bank holding company
  • imposition of sanctions upon any government or municipal securities broker or dealer regulated by the Board, or any person associated with such a broker or dealer
  • formal adjudications on bank merger applications
  • assessment of a civil money penalty for a violation of the statutes and regulations enumerated in section 263.1(e) of the rules
Whenever a proceeding is ordered, the Board must send the respondent a notice that includes the time, place, and nature of the proceeding; the facts of law constituting the grounds for the proceeding and the time within which to request a hearing. The respondent then has 20 days to file an answer. (§  263.18)
The presiding officer has complete charge of the hearing. This individual may be a Board member, an administrative law judge of the Office of Financial Institution Adjudication, or any other hearing officer appointed by the Board. (§ 263.55)
A prehearing conference may be ordered by the administrative law judge or may be requested by the Board or any of the parties. The purpose of the conference is to ensure an orderly disposition of the hearing. (§  263.31(b))
Sections 263.26, 263.34, 263.27, and 263.23 prescribe the rules for subpenas, depositions, and motions, respectively. Section 263.37 outlines the procedure that Board counsel or any party should follow when filing briefs of proposed findings and conclusions of law with the presiding officer. Section 263.10 details the specifications to which filed papers must conform.
8-100

CIVIL PENALTIES

Subpart C of the rules specifies that the rules and procedures set out in subpart A are applicable to proceedings in which the Board seeks to assess and collect civil money penalties for violations of specified sections of the Federal Deposit Insurance Act, Federal Reserve Act, Bank Holding Company Act and Change in Bank Control Act. At the sole discretion of the Board’s general counsel, an opportunity for an informal proceeding may be offered to the affected party. (§ 263.61)
In determining the amount of the penalty, the Board takes into account the following:
  • financial resources and good faith of the person charged
  • gravity of the violation
  • history of previous violations
  • economic benefit derived from the violation
  • such other matters as justice may require (§ 263.62)
Within 20 days after the notice of assessment is issued, the affected person may request a formal hearing (§ 263.19(a)). After such a request is received, and within 30 days of service of the notice, the administrative law judge will order a scheduling conference. If the respondent fails to request a hearing within 20 days, the notice constitutes a final and unappealable assessment order.
If the Board finds grounds for assessment of the penalty, an assessment order is issued. Normally, the civil penalty must be paid within 60 days after the notice of assessment is issued. The Board may, however, shorten or lengthen this period if the purposes of the authorizing statute would be better served. (§ 263.64)
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SUSPENSION OR REMOVAL OF AN INSTITUTION-AFFILIATED PARTY

The rules and procedures in subpart D apply to hearings that are afforded to anyone affiliated with an insured depository institution who has been suspended or removed from office upon grounds set forth in section 8(g) of the Federal Deposit Insurance Act. A person may be suspended from office or prohibited from any further participation in the conduct of an institution’s affairs when formally charged with the commission of, or participation in, a crime involving dishonesty or breach of trust punishable by imprisonment for a term exceeding one year. If the Board finds that continued service to the institution or participation in its affairs may pose a threat to the interests of the institution’s depositors or may threaten to impair public confidence in the institution, the Board may suspend, remove, or prohibit such a person from participation in the institution’s affairs. The person may be removed from office or prohibited from participation upon a conviction that is not subject to appellate review. (§ 263.71(a))
The suspension or removal action is begun by a Board notice or order indicating the basis for the action, which is served on the institution concerned. The institution-affiliated party must immediately cease all participation in the conduct of the affairs of the institution and may submit a written request for an informal hearing within 30 days of service of the removal or suspension order. The informal hearing shall take place within 30 days after receipt of the request for such hearing. The bank official may appear personally at the hearing, with counsel or alone, or may be represented by counsel without appearing personally. The record of the hearing is normally kept open for five business days after the hearing. A recommendation will then be made by the presiding officer to the Board within 20 calendar days of the close of the record. (§ 263.73)
Within 60 days of the closing of the record, the Board will notify the institution-affiliated party whether the notice of suspension or prohibition will be continued, terminated, or modified. In making its decision, the Board will not rule on whether or not the individual is guilty of the charged crime. (§ 263.74)
8-101.1

DIRECTIVES TO MAINTAIN ADEQUATE CAPITAL

Subpart E establishes the procedures under which the Board may take action to require state member banks and bank holding companies (banking organizations) to achieve and maintain adequate capital. Banking organizations are required to establish minimum capital levels as outlined in the Board’s capital adequacy guidelines. If the Board considers it necessary, it may set higher capital levels for a particular organization.
The Board is authorized to issue a directive to a banking organization that fails to meet the minimum capital requirement. A directive may require a plan for achieving the requirement. The issuance of a directive is discretionary, and a directive may be issued in lieu of, in conjunction with, or in addition to other enforcement tools. The notice and comment procedures for issuance of a directive are outlined in section 263.83 of the regulation.
If a banking organization fails to follow a Board directive, the Board may seek enforcement through the appropriate U.S. district court, as if the directive were a final cease-and-desist order. The Board may also assess civil money penalties for violation of a directive. The Board may consider failure to meet the minimum capital requirement or a higher capital requirement set by the Board as bearing adversely upon applications or notices that a bank or bank holding company may file. (§ 263.84)
8-101.2

PRACTICE BEFORE THE BOARD

Subpart F contains provisions for the discipline of practitioners before the Board and supplements the proceeding-specific sanctions contained in subpart A. “Practice” is broadly defined to include the representation of parties not only in administrative enforcement proceedings, but also in the Board’s application and licensing process.
The Board is authorized to censure, suspend, or debar an individual from practice before the Board under specified circumstances. For example, the Board could take disciplinary actions against a practitioner who refused to comply with the procedures set forth in the Rules of Practice for Hearings, willfully or knowingly deceived or misled any client, or engaged in conduct set forth in section 263.94 (willful violations of federal banking laws, knowingly giving false or misleading information to the Board or any member of the Board’s staff, disbarment or suspension from practice as an attorney or accountant by the appropriate authority as a result of a criminal conviction, or suspension or debarment of practice before the other agencies, or the Securities and Exchange Commission).
The Board may, without any further proceeding, censure the individual involved in the misconduct. After giving the individual notice and an opportunity to respond, the Board may initiate a formal proceeding, which, in most cases, will be private. An individual charged with misconduct may choose to forgo his or her right to a hearing and voluntarily agree to a suspension or debarment.
Section 263.98 sets forth the effect of the various types of disciplinary orders that the Board may issue. A person who has been debarred cannot practice before the Board unless otherwise permitted by the Board. Suspension orders are effective for a defined term, during which the suspended person cannot practice before the Board. A censure order will not bar an individual from practice before the Board, although such practice must conform to any conditions imposed by the Board. The Board will grant a petition for reinstatement from any debarred person only when it finds that the petitioner will act in accordance with the appropriate standards of conduct and that reinstatement is not contrary to the public interest. A request for reinstatement will be limited to written submissions unless the Board orders an informal hearing (§ 263.99). The Board will apply these disciplinary sanctions only in egregious cases of misconduct in practice before the Board, and after the practitioner has had an opportunity for a formal hearing.
8-101.3

CLAIMS UNDER THE EQUAL ACCESS TO JUSTICE ACT

Subpart G implements the provisions of the Equal Access to Justice Act (5 USC 504), which allows certain private parties that prevail against an agency in an adversary adjudication to recover their costs and attorneys’ fees if the agency was not substantially justified in its position. The subpart establishes eligibility standards for an award, the required contents of an application for an award, including the required statement of net worth, standards for the reasonableness of claimed fees, and procedures for adjudicating an application for an award.
8-101.4

PROMPT-CORRECTIVE-ACTION DIRECTIVES

Subpart H sets out procedures for the issuance of directives under section 38 of the Federal Deposit Insurance Act, which mandates a uniform system of supervisory action indexed to the capital level of each insured depository institution. An institution will generally be given advance notice of corrective actions. The procedures allow an opportunity for the institution to respond to a proposed action or, when immediate action is warranted, an opportunity for administrative review of the action. When stringent action is taken based on supervisory factors other than capital, the institution may request an informal hearing. Officers and directors dismissed under section 38 may request a review of the dismissal, including an informal hearing.
If a bank is not in compliance with a safety-and-soundness standard established by guideline under section 39(a) or (b), the Board may request that it submit a compliance plan. If the bank is notified that it is in violation of a safety-and-soundness standard and fails to submit an acceptable compliance plan or fails in any material way to implement an accepted plan, the Board may issue an enforceable order. Subpart I establishes procedures for requiring submission of a compliance plan and issuing an enforcement order under section 39.
8-101.5

REMOVAL, SUSPENSION, AND DEBARMENT OF ACCOUNTANTS FROM PERFORMING AUDIT SERVICES

Section 36 of the Federal Deposit Insurance Act requires each insured depository institution with total assets of $500 million or more to obtain an audit of its financial statements and an attestation on management’s assertions about internal controls over financial reporting by an independent public accountant. The institution must include the accountant’s audit and attestation reports in its annual report. Subpart J addresses misconduct by accountants, setting out the rules and procedures for the removal, suspension, or debarment of independent public accountants and their accounting firms from performing independent audit and attestation services for insured state member banks and bank holding companies.
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