Know the risks - Zurich

Insurance Corporation (FDIC) in two respects: (1) the FDIC was given broad authorityover federally insured banks and savings associations; and (2) the FDIC was givenpower to bring enforcement actions against any “institution-affiliated party,” which isdefined to include, among other things, any director, officer, employee or controllingstockholder (other than a holding company) of an insured depository institution.In addition to administrative remedies such as issuing cease and desist orders,suspension or removal from office, and prohibition orders, FIRREA empowers theFDIC to impose civil money penalties against institution-affiliated parties, includingindividuals who have left the institution, or individuals associated with institutionsthat are now closed. FIRREA sets forth three levels of civil money penalties that maybe imposed against an institution-affiliated party, ranging from less than $5,000to $1 million per day for continuing violations. Criminal penalties may range from$100,000 per day and one year’s imprisonment to $1 million per day and 20 years’imprisonment. These penalties also apply to violations of anti-tying provisions of theBank Holding Company Act, the Change in Bank Control Act, affiliate transactionrestrictions, and the National Bank Act.Statutory and common laws governing the responsibilities of directors of financialinstitutions vary from state to state. Historically, a director’s acts or omissions weretested against an ordinary prudent person standard. However, at least 43 states haveenacted statutes permitting corporations to adopt charter provisions that limit oreliminate the liability of directors (and, in some states, officers) for breach of the dutyof care. FIRREA, however, limits the ability of depository institutions to eliminate adirector’s liability for gross negligence.“Functional regulation”The Gramm-Leach-Bliley Act of 1999 changed how depository institutions and theirholding companies and affiliates are regulated. The Gramm-Leach-Bliley Act promotes“functional regulation,” meaning that traditional depository institution activitiesare regulated by depository institution regulatory agencies, securities activities areregulated by the Securities and Exchange Commission (SEC), insurance activities areregulated by the states, and so on.Many depository institutions offer securities, mutual funds and other types ofinvestments to customers as alternatives to traditional deposit instruments. Customersmay misunderstand the nature of non-deposit products because the products are oftensold within the institution’s premises by the institution’s employees. In many instances,personnel are required to register as brokers (or dealers) with the SEC and NationalAssociation of Securities Dealers. Moreover, the products offered may be “securities”under federal or state securities laws which must be registered with the SEC and/orstate agencies. And, under the Gramm-Leach-Bliley Act, depository institutions that actas advisers to mutual funds must register with the SEC as “investment advisers” underthe Investment Advisers Act of 1940. The Gramm-Leach-Bliley Act also contemplatesthe offering by depository institutions of “hybrid” products – products other thanequity swaps or a limited number of other products not previously regulated by theSEC as a security – and these may be regulated either by the SEC or by the FederalReserve Board, depending on the product in question.11Financial institutions guide