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Dr. DONALD D. HESTER,

FEDERAL DEPOSIT INSURANCE CORPORATION,

OFFICE OF THE CONTROLLER, Washington, D.C., January 19, 1971.

Professor Economics, Department of Economics, University of Wisconsin, Madison, Wis.

Dear DR. HESTER: I am enclosing the Corporation's check for $148.90 in connection with the expenses you incurred in the course of the December 1970 meeting called by the staff of the Presidential Commission. Mr. Scruggs, a member of the Commission staff, received your voucher and passed it along to us after auditing it in the context of the Commission conference and our letter-contract with you. I believe the amount is substantially what you claimed.

Sincerely,

EDWARD F. PHELPS, Jr., Controller.

COMMISSION ON FINANCIAL STRUCTURE AND REGULATION,
Washington, D.C., February 22, 1971.

Mr. RAYMOND E. HENGREN,

Senior Advisor to Board of Directors, Federal Deposit Insurance Corporation, Washington, D.C.

DEAR MR. HENGREN: In accordance with the letter from Mr. Donald P. Jacobs, (enclosure 1), Co-Director of Research for The Commission on Financial Structure and Regulation, the paper submitted by Donald Hester is approved for payment.

For your information, the subject paper is titled, "Savings Banks in an Evolving Financial Structure: Problems and Potential Contributions", by Donald D. Hester.

Sincerely,

Mr. CLARENCE H. SCRUGGS,

C. H. SCRUGGS, Administrative Officer.

NORTHWESTERN UNIVERSITY, GRADUATE SCHOOL OF MANAGEMENT, Evanston, Ill., February 16, 1971.

Administrative Officer, Commission on Financial Structure and Regulation, Washington, D.C.

DEAR CLARENCE: I have received a paper submitted by Donald D. Hester. The paper meets our need and fulfills our requirement. This is stated in our letter to Hester.

Would you therefore take the step necessary to get Hester paid.
Sincerely,

DONALD P. JACOBS,

Morrison Professor of Finance,
Chairman, Finance Department.

FEDERAL DEPOSIT INSURANCE CORPORATION.

OFFICE MEMORANDUM

To: Dr. Benston

From: EFP

This is a duplicate, with slight modification of the original letter-contractwhich appears to have been misplaced.

Dr. GEORGE J. BENSTON,

FEDERAL DEPOSIT INSURANCE CORPORATION,
OFFICE OF THE CONTROLLER,
Washington, D.C., February 25, 1971.

Professor of Business Administration, College of Business Administration, The University of Rochester, Rochester, N.Y.

DEAR DR. BENSTON: This will confirm your recent conversations with Mr. Raymond E. Hengren, Senior Advisor to the Board of Directors of the Federal Deposit Insurance Corporation.

As you know, the Corporation desires to enter into an arrangement with you for the development of a paper on examination policies. The subject of the paper will be of interest both to the Corporation and to the Presidential Commission on Financial Structure and Regulation.

This paper will analyze examination policies, and the extent to which examination policies might affect or change the regulations which the Commission might propose. The scope of the study will include the examination activities of both Federal and State authorities. It will cover the examination of commercial banks. In surveying the subject matter, the objective will be to identify the areas wherein the state of knowledge is so well developed that additional research is not likely to be very productive, and to designate areas that appear to need further research effort.

It is our understanding that you are prepared to develop such a paper as soon as possible, but in any event by April 1, 1971. The Corporation agrees to pay you $1,750 upon receipt of your paper. You will assume all expenses incidental to the preparation of the paper but, if it should be necessary to incur travel expenses beyond the incidental category, the Corporation, upon prior approval of the travel in question, will be willing to pay for air travel tourist accommodations and your actual expenses for subsistence and lodging up to $40 per day. When your paper is completed, the original and two copies should be sent to Mr. Hengren here at the Corporation. We shall then see that the Presidential Commission receives its copies.

If this agreement meets with your approval, please sign the attached copy in the space noted below and return it to me, retaining the original for your files. If you have any questions or problems, or desire the Corporation's prior approval for necessary travel beyond the incidental category, please communicate with Mr. Hengren here at the Corporation's Washington office (A/C 202 389-4471).

Sincerely,

Accepted:

EDWARD F. PHELPS, Jr., Controller.

DR. GEORGE J. BENSTON.

COMMISSION ON FINANCIAL STRUCTURE AND REGULATION,
Washington, D.C., February 27, 1971.

Mr. RAYMOND E. HENGREN,
Senior Advisor to Board of Directors, Federal Deposit Insurance Corporation,
Washington, D.C.

DEAR MR. HENGREN: In accordance with the letter from Mr. Almarin Phillips (Enclosure 1), Director of Research for the Commission on Financial Structure and Regulation, dated 12 February 1971, the papers submitted by Mr. Thomas Mayer, Mr. Kenneth Scott and Mr. James Van Horne are approved for payment. For your information, the subject papers are titled: "Federal Deposit Insurance, Insurance Fund and Risk: Too Much or Too Little?" by Thomas Mayer and Kenneth Scott; and, "The Liability Structure of Deposit Institutions" by James Van Horne.

Sincerely,

C. H. SCRUGGS, Administrative Officer.

COMMISSION ON FINANCIAL STRUCTURE AND REGULATION,
Washington, D.C., February 12, 1971.

Mr. CLARENCE H. SCRUGGS,

Administrative Officer, Financial Structure and Regulation,
Washington, D.C.

DEAR MR. SCRUGGS: I have received the papers from Mr. Thomas Mayer, Mr. Kenneth Scott and Mr. James Van Horne, and the papers meet our needs and fulfill our requirements.

Therefore, would you please take the necessary steps to have the papers processed for payment.

Sincerely yours,

ALMARIN PHILLIPS, Director of Financial Studies.

(The following letter with attachments was received from Mr. Wille for inclusion in the record:)

FEDERAL DEPOSIT INSURANCE CORPORATION,

Washington, D.C., June 8, 1971.

Hon. WRIGHT PATMAN

Chairman, Committee on Banking and Currency,
House of Representatives,

Washington, D.C.

DEAR MR. CHAIRMAN: During my testimony before your Committee on April 20, 1971, with respect to the proposed "Banking Reform Act of 1971," I stated that the Corporation was considering proposing an amendment to section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818), which would make more effective the cease-and-desist power presently vested in the Federal bank regulatory agencies by authorizing an administrative proceeding for the prompt removal or finding of any director or officer who violated a cease-anddesist order which had become final or which was the subject of a written agreement between an agency and a bank.

As you know, section 8(b) of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818 (b)), authorized the appropriate Federal bank regulatory agency-i.e., the Corporation, the Board of Governors of the Federal Reserve System, or the Comptroller of the Currency-to issue a cease-and-desist order, after notice and hearing, against any insured bank which it finds (1) is engaging or has engaged or is about to engage in an unsafe or unsound practice in conducting the business of the bank or (2) is violating or has violated or is about to violate a law, rule, or regulation, or any condition imposed in writing by the agency in connection with the granting of any application or other request by the bank, or any written agreement entered into with the agency. Unless the bank upon which a notice of charges is served appears at the hearing through a duly authorized representative, it is deemed to have consented to the issuance of the cease-and-desist order.

In the case of violation or threatened violation of an outstanding and effective cease-and-desist order, the appropriate agency may in its discretion, pursuant to section 8(i) of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818(i)), apply to the United States district court within the jurisdiction of which the main office of the bank is located for the enforcement of any such order. However, since the publicity possibly attendant upon any such court proceeding could adversely affect a bank already in serious financial difficulty, causing a runoff of deposits and possible closing of the bank involved in the proceeding, an application to a court for the enforcement of a cease-and-desist order has the potential for being self-defeating. In particular cases, some lesser enforcement tool appears to be both necessary and desirable for more effective correction of unsafe, unsound, or illegal practices. The Corporation believes such a tool could be provided through amendments to the present provisions authorizing the removal of officers and directors and through enactment of provisions for administrative fines or forfeitures.

Although section 8(e) of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818 (e)), authorizes the appropriate Federal bank regulatory agency to initiate a proceeding for the removal or suspension of any director or officer who has violated a cease-and-desist order which has become final, its ability to proceed is conditioned upon a requirement that it find (1) that the bank against which the cease-and-desist order is outstanding has suffered or will probably suffer substantial financial loss or other damage or that the interests of its depositors could be seriously prejudiced by reason of violation of the cease-and-desist order, and (2) that the violation is one involving personal dishonesty on the part of the director or officer. Particularly with respect to the latter of these required findings, the agency's burden of proof is difficult to sustain. Violations may be willful or negligent, but they usually do not involve "personal dishonesty." Where personal dishonesty is involved, complex efforts at concealment can be anticipated and time may not be available to the agency to complete, within the statutory period, the thorough type of investigation necessary to uncover evidence that will sustain the burden of proof. For all practical purposes, a director or officer who violates a cease-and-desist order which has become final cannot now be suspended or removed from office.

The Corporation believes that the cease-and-desist power presently vested in the Federal bank regulatory agencies would be a more useful tool in compelling compliance with a corrective program suggested by an agency if directors or officers who violated a cease-and-desist order which had become final or which was the subject of a written agreement between an agency and a bank could be administratively fined or if they could be removed or suspended from office even without the two findings now required by law.

Accordingly, a draft of legislation "To amend section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818), to eliminate the need for a finding of personal dishonesty as a basis for initiating proceedings for the suspension or removal of directors or officers, to authorize the imposition of fines for the violation of cease-and-desist orders which have become final, and for other purposes" is enclosed for your Committee's consideration. A comparative print, which shows changes that the draft of legislation, if enacted, would make in existing law, is also enclosed. In view of the Corporation's belief that the amendments proposed by the draft of legislation would assist the Federal bank regulatory agencies in correcting some of the problems with which the proposed "Banking Reform Act of 1971" is concerned, the Committee may wish to consider incorporating one or more of these proposed amendments in any revised version of H.R. 5700 that may be reported out of Committee.

If the Committee considers the Corporation's recommendation to be meritorious, it may wish to amend section 5(d) of the Home Owners' Loan Act of 1933, as amended (12 U.S.C. 1464 (d)), and section 407 of the National Housing Act, as amended (12 U.S.C. 1730), in a manner comparable to that proposed by the enclosed draft of legislation. Those statutes vest the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation with cease-anddesist power with respect to insured institutions identical to that vested in the three Federal bank regulatory agencies.

Sincerely,

FRANK WILLE,
Chairman.

A BILL TO amend section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818), to eliminate the need for a finding of personal dishonesty as a basis for initiating proceedings for the suspension or removal of directors or officers, to authorize the imposition of fines for the violation of cease-and-desist orders which have become final, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That subsection (e) of section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818(e)), is amended as follows:

(1) Paragraph (1) is amended to read as follows:

"(e) (1) Whenever, in the opinion of the appropriate Federal banking agency, any director or officer of an insured State bank (other than a District bank)— "(A) has committed any violation of a cease-and-desist order which has become final, or

"(B) has committed any violation of law, rule, or regulation, or has engaged or participated in any unsafe or unsound practice in connection with the bank, or has committed or engaged in any act, omission, or practice which constitutes a breach of his fiduciary duty as such director or officer, and the agency determines that the bank has suffered or will probably suffer substantial financial loss or other damage or that the interests of its depositors could be seriously prejudiced by reason of such violation or practice or breach of fiduciary duty, and that such violation or practice or breach of fiduciary duty is one involving personal dishonesty on the part of such director or officer,

the agency may serve upon such director or officer a written notice of its intention to remove him from office."

(2) Paragraph (2) is amended to read as follows:

"(2) Whenever, in the opinion of the Comptroller of the Currency, any director or officer of a national banking association or a District bank

"(A) has committed any violation of a cease-and-desist order which has become final, or

"(B) has committed any violation of law, rule, or regulation, or has engaged or participated in any unsafe or unsound practice in connection with the bank, or has committed or engaged in any act, omission, or practice which constitutes a breach of his fiduciary duty as such director or officer, and the Comptroller determines that the bank has suffered or will probably suffer substantial financial loss or other damage or that the interests of its depositors could be seriously prejudiced by reason of such violation or practice or breach of fiduciary duty, and that such violation or practice or breach of fiduciary duty is one involving personal dishonesty on the part of such director or officer,

the Comptroller of the Currency may certify the facts to the Board of Governors of the Federal Reserve System."

SEC. 2. Subsections (k)-(q) of section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818(k)–(q)), are redesignated as subsections (1)–(r), respectively, and the following new subsection is inserted immediately after subsection (j):

"(k) Any director or officer of an insured bank who knowingly violates a cease-and-desist order (which is an order which has become final) issued under this section shall be subject to a civil penalty of not to exceed $1,000 for each such violation, which the appropriate Federal banking agency may recover for its use. If such violation is a continuing one, each day on which such violation continues shall constitute a separate violation."

CHANGES IN TEXT OF EXISTING STATUTES

In compliance with clause 3 of rule XIII of the Rules of the House of Representatives, the text of existing Federal statutes or parts thereof which the draft of legislation would amend or repeal is printed below, with the proposed changes shown (a) by enclosing in brackets material to be omitted, (b) by underscoring the new matter, and (c) by printing in regular type those provisions in which no change is to be made.

Paragraphs (1) and (2) of subsection (e) and subsection (k) of section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818(e)(1) and (2) and 1818 (k))

(e) (1) Whenever, in the opinion of the appropriate Federal banking agency, any director or officer of an insured State bank (other than a District bank) — (A) has committed any violation of a cease-and-desist order which has become final, or

(B) has committed any violation of law, rule, or regulation, [or of a cease-and-desist order which has become final,] or has engaged or participated in any unsafe or unsound practice in connection with the bank, or has committed or engaged in any act, omission, or practice which constitutes a breech of his fiduciary duty as such director or officer, and the agency determines that the bank has suffered or will probably suffer substantial financial loss or other damage or that the interests of its depositors could be seriously prejudiced by reason of such violation or practice or breach

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