BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 91-13 (FIS)
June 3, 1991
TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
SUBJECT: Civil Money Penalties and the Use of the Civil Money Penalty Assessment Matrix
The Board has historically reserved the use of its authority to assess civil money penalties for egregious or repetitive violations of law and for instances where other informal and formal enforcement tools, such as memoranda of understanding, written agreements, and cease and desist orders, failed to yield correction due to the purposeful actions of individuals or financial institutions. However, the changing climate of bank supervision and regulation that has resulted from the lessons learned from the savings and loan crisis has placed a new emphasis on examining the activities of individuals who manage and direct the affairs of financial institutions. There now appears to be a clear consensus among regulators that if civil money penalties are assessed against individuals associated with insider abuse or the repetitive lack of compliance with banking laws, they will have a deterrent effect and, thus, keep small problems from becoming larger ones.
With the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Congress endorsed the aforementioned view and greatly expanded the Board's authority to assess civil money penalties to include assessment for the violation of: (1) any law, rule or regulation; (2) a final or temporary order, including a cease and desist, suspension, removal, or prohibition order; (3) a condition imposed in writing in connection with the granting of approval of any application or other request; and (4) a written agreement. Civil money penalties may also now be assessed, under FIRREA, for recklessly engaging in an unsafe or unsound practice or a breach of fiduciary duty that results in loss to the institution or gain to the individual. In addition, FIRREA expanded the Board's authority to assess penalties against any "institution-affiliated party," including any officer, director, employee, controlling stockholder, agent, and any shareholder who participates in the conduct of the affairs of the institution, as well as any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in a law or regulation violation or unsafe or unsound practice that causes more than a minimal financial loss to the institution.
FIRREA not only significantly expanded the Board's authority to assess penalties, it also increased the dollar amount of penalties. The standard $1,000 per day penalty was replaced by a new three-tiered framework. A first-tier penalty of up to $5,000 per day may be assessed for any violation of law, rule or regulation, final order, condition imposed in writing or written agreement. A second-tier fine of up to $25,000 per day may be assessed for any violation of law or regulation or for any reckless unsafe or unsound practice or for a breach of fiduciary duty that has caused loss to the institution or gain to the individual. A third-tier fine of up to $1,000,000 per day may be assessed for any knowing or reckless violation of law or regulation, participation in an unsafe or unsound practice or breach of fiduciary that causes substantial loss to the institution or gain to the individual.
In addition, the Board may assess fines of up to $25,000 per day for any violation of the Bank Holding Company Act of 1956, as amended, and may assess fines ranging from $2,000 per day to $1,000,000 per day for failure to make, submit or publish required regulatory reports or for the filing of false or misleading reports (e.g., Call Reports and FR Forms Y-6 and Y-9).
Last year, an interagency civil money penalty working group (the "CMP Working Group"), comprised of enforcement staff attorneys from the OCC, FDIC, OTS, Farm Credit Administration and Board, was formed to develop uniform and consistent policies for the assessment of civil money penalties. Noting the increased use of civil money penalties by the banking agencies and anticipating a further increase, the CMP Working Group sought a means to ensure that in assessing penalties, the five statutory factors1 and the 13 Federal Financial Examination Council factors (the "FFIEC Factors")2 would be consistently applied not only among the agencies but, also, within each agency. As a result, the CMP Working Group developed a model civil money penalty matrix to provide for consistency. This matrix was based largely on the one in use by the OCC since 1988. Each agency then modified the model matrix for the particular and unique types of actions for which it had authority to assess a civil money penalty.3 The Federal Reserve matrix, which is described below, very closely follows the interagency model.
The Civil Money Penalty Assessment Matrix
The attached Civil Money Penalty Assessment Matrix (the "CMP Matrix") condenses the five statutory factors and the 13 FFIEC Factors into 11 factors, each with an assigned weight.4 Mitigating factors are also separately incorporated and assigned weights. Certain factors, such as loss and concealment, carry higher weights. The CMP Matrix also takes into account the seriousness or frequency of each violation or unsafe or unsound practice by providing a multiplier for each factor, ranging from 0 to 5, based on severity. On the CMP Matrix, each factor is listed in the left column, its weight factor is listed in the right column, and the multiplier is listed across the top. For example, to find the total point value for concealment in a particular case, locate the "concealment" factor, note that it carries a weight of 5, and multiply it by a number from 0 to 5 depending on the level of concealment. The total point value for concealment would range from 0 for no concealment to 20 for active concealment.
In analyzing an activity that could give rise to a civil money penalty assessment, after each of the factors has been assigned its point value, the points are totaled for a preliminary figure. Mitigating factors, such as restitution, good faith, and full cooperation, are then considered on a weighted basis and the mitigating factors point total is subtracted from the preliminary figure. This final figure is then measured against the attached "Suggested Scale of Civil Money Penalty Amounts" to serve as a guide in determining the amount of the penalty.
We note that the CMP Working Group also considered adding other factors to its proposed matrix. These included: the financial resources of the individual or institution, the dollar amount of personal gain received by the individual as a result of a violation and whether a violation reaches the level of tier-two (up to $25,000 per day) or tier-three (up to $1,000,000 per day). After considerable work and discussion, it was decided that these could not be reduced to the same type of forumla as the other factors. Therefore, these factors must be considered separately before setting the final penalty amount.
Board procedures require that before the setting of any final penalty amount, the parties to be assessed be offered the opportunity to provide Board staff with any evidence, including financial factors, that would either weigh against assessment or mitigate the amount of the proposed penalty. The Board's General Counsel sends the parties letters advising them of Board staff's intent to recommend a penalty and inviting them to offer any mitigating evidence. The responses to these letters are evaluated and considered, along with the final figure from the CMP Matrix, by Federal Reserve Bank and Board staffs in determining the final penalty amount that will be presented for negotiations with the parties and their counsels.
Starting immediately, the staffs of the Federal Reserve Banks and the Board should begin using the CMP Matrix in connection with their evaluation of each proposed civil money penalty assessment action. It is most important to note, however, that because the facts and circumstances of each penalty case are different, the assessment of a civil money fine cannot be completely reduced to the mechanical application of a formula or purely numerical index. The exercise of judgment based on expertise and experience is important and necessary.
In the event that you have any questions concerning any of the matters described herein, please contact me at 202-452-2620.
Herbert A. Biern
ATTACHMENTS TRANSMITTED ELECTRONICALLY BELOW
Note: Boxes on the Matrix (including the empty boxes) should be used to reflect progressive levels of severity.
0 1 2 3 4 Weight
Intent No Should Have Known Clear Intent 5 Pecuniary gain or other benefit to IAP or Related Interest No Indirect Benfit to IAP or Related Interest Direct Benefit to IAP or Related Interest 4 Prev. Admin. Action or Criticism None Prev. Criticism for Similar Violation Violation or Criticism on Point Cited in Report Prior Letter or MOU on Point C&D, Agreement, or Condition in Writing on Point 3 History None Unrelated Prior Violations At Least One Similar Violation Several Similar Violations Frequent Similar Violations 2 Loss or Risk of Loss No Loss and No Risk of Loss No Loss or Minimal Risk Minimal Loss or Moderate Risk Substantial Actual or Potential Loss 6 Number of Violations at Issue Numerous Violations 2 Duration of Violation Prior to Notification Violation Outstanding for Long Period 2 Continuation after Notification Violation Ceased Prior to Notification Violation Ceased Immed. Upon Notification Violation Continued for Period of Time After Notification Violation still Continuing 3 Concealment None Purposely Complicated Transaction to Make It Difficult to Uncover Active Concealment 5 Impact No Impact on Institution or Banking Industry Substantial Impact on Institution; No Impact on Banking Industry Moderate Impact on Banking Industry or on Public Perception of Banking Industry Substantial Impact on Banking Industry or on Public Perception of Banking Industry 6 Loss or Harm to Consumers (where applicable) No Loss and No Harm No Loss or Minimal Harm Minimal Loss or Moderate Harm Substantial Loss or Harm 5 Subtotal 1 Restitution No Restitution Complete Restitution Under Compulsion (e.g. Threat of Losing Job) Partial Restitution Complete Restitute Immed. After Loss or Violation Brought to Attention Complete Restitution Volutarily. Before Institution or Examiner Uncovered Loss 2 Good Faith None Unintentional Violation 3 Full Cooperation None Forthcoming in Interviews 2 Subtotal 2 Total (Subtract 2 From 1)
SUGGESTED CIVIL MONEY PENALTY ASSESSMENTS
Points Amount of Penalty 10 - 39 $1,000 to $5,000 40 - 59 $5,000 to $10,000 60 - 79 $10,000 to $25,000 80 - 99 $25,000 to $75,000 100 - 119 $75,000 to $125,000 120 + greater than $125,000
- These suggested amounts are for tier 1 penalties. Facts and circumstances, as well as pertinent legal considerations, may warrant the use of tier 2 or tier 3 penalties.
- The amount of pecuniary gain that the party received as a result of the violation may increase the amount of the penalty assessed beyond the range set forth herein as long as the total penalty remains within the maximum statutory amount.
- The amount of the penalty may be mitigated by the financial resources of the party assessed.
1. The five statutory factors that the Board must consider in determining the amount of a civil money penalty assessment are: the financial resources of the party, the good faith of the party, the gravity of the violation, the history of previous violations, and other factors as justice may require. (See, generally, 12 U.S.C. 1818(i)(2)(G)). Return to text
2. In 1980, the Board and the other financial regulatory agencies adopted an Interagency Policy Regarding the Assessment of Civil Money Penalties. This policy set out 13 regulatory factors that should be considered in determining if a civil money penalty is warranted. Many of the factors paralleled the five statutory factors. Other FFIEC Factors included: evidence of concealment, actual loss to the institution or gain to the party committing the violation, and evidence of restitution.
We note that the members of the FFIEC are revising the 1980 policy to conform to FIRREA. The proposed revisions are minor and have been considered in connection with this action. Return to text
4. We note that the CMP Matrix does not eliminate the need for the Board to follow the statutory factors, which are mandated by law, and the FFIEC Factors. The CMP Matrix merely facilitates compliance with the statutory and FFIEC Factors. Return to text
SR letters | 1991