Risk Management Manual of Examination Policies - FDIC

REPORT OF INVESTIGATION INSTRUCTIONS Section 18.1
any debt. The forms should also include information on contingent liabilities, civil litigation, prior criminal
convictions, administrative proceedings, and other matters involving a breach of trust.
A section 19 application will be necessary if an employee, officer, director, controlling shareholder or Institution
Affiliated Party has been convicted of a criminal offense involving dishonesty or breach of trust, money laundering
or has entered into a pretrial diversion in connection with a prosecution of such an offense. The Applicant must
obtain the FDIC’s written consent under section 19 of the FDI Act before any such person may serve in one or more
of those capacities.
Significant assets in the form of closely held corporations, partnerships, or sole proprietorships should be supported
by detailed financial statements on these entities. Net equity positions should be reviewed to determine the
reasonableness of the carrying value and the potential impact of related debt. In addition, if an individual's financial
standing is largely dependent upon appreciated value of real estate or closely held companies, the basis for valuation
of the assets should be sought.
For state nonmember charters, background checks are normally requested by the Regional Office and if necessary
and available, forwarded to field personnel for review during preparation of the investigation report. Such
information provides an independent, third party check that can be used to verify the applicant's stated financial
position, credit history, and confirm the absence of public filings and judgements. Liens, lawsuits, wage
assignments, defaults, and public filings such as bankruptcies and judgements will be shown. The major credit
reporting agencies also provide an additional service that automatically alerts the requester to possible false social
security numbers and high risk addresses such as post office boxes, and multiple business addresses.
If necessary, additional information can be requested through the Regional Office, including Nexis/Lexis. These
systems feature searches that can be conducted by key words or names. Nexis provides access to numerous news
service publications and Lexis allows for a search of legal databases containing final case law from Federal and
State courts. Finalized civil and criminal proceedings as well as bankruptcy cases are listed. Also, a background
check can include a search of State Corporation Commission records, Dun & Bradstreet, and county and other State
records. The Federal Reserve also maintains information on international and foreign companies.
Be cautious of bank ownership that is restricted to a single individual or entity, or a small group of individuals who
lack broad-based financial strength. Also identify any proposed directors that have little or no prior financial
institution experience, minimal financial interest in the proposal, or are poorly equipped to contribute to policy
formation or adequate supervision. Determine whether senior officers lack necessary experience, or have not served
in senior management positions, which provide adequate insight into proposed roles. The SOP requires at least a
five-member board of directors. At a minimum, an even mix of directors with and without banking experience is
preferred. The proposed board should provide for officer/director continuing education, and a management
succession plan.
The SOP requires that the proposed full-time chief executive officer be made known to the FDIC. If the proposed
CEO has not served in a similar capacity, it is important to determine whether the individual has the technical
competence to fulfill the responsibilities of the position. Further, the proposed CEO’s expertise and experience
should correlate with the proposed business plan. Knowledge of such areas as lending and investments, interest rate
risk management, internal controls, and bank regulations should be considered.
The proposed operating policies and strategic plan should be reviewed in assessing management. Inadequate
policies may be an indication of a weak management team. Written investment, loan, funds management, and
liquidity policies should be reviewed and comments should be made regarding their soundness and acceptability.
The CEO is also expected to be a qualified and experienced lending officer. If not, an explanation should be
provided and the name of the proposed chief lending officer should be furnished.
While conditional approval can be granted prior to the selection of a chief executive officer or primary lender, this is
allowable in only very limited circumstances. An example is where the new bank will be owned by an “eligible
holding company” as defined in section 303.22 of the FDIC’s regulations. Ultimately, prior to opening, these
individuals should be identified and their abilities assessed. Any changes in the directorate, active management, or
10% shareholders prior to the bank's opening must also be disclosed to the FDIC in writing.
Report of Investigation Instructions (12-04) 18.1-10 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation