Enforcement Standards for Independent Contractors

Issue

Treatment of a bank's independent contractors as an institution-affiliated party for enforcement purposes.

Position Statement

ABA supports retaining the standard that a bank's independent contractor must be found to have acted "knowingly or recklessly" before being prosecuted as an institution-related party.

Explanation

The law gives the federal banking agencies the power to assess civil money penalties of up to $1 million per day against institution-affiliated parties, e.g., a director, officer, employee, or controlling stockholder. The current standard enacted in FIRREA requires "knowing or reckless" conduct on the part of outside attorneys and other independent contractors before these penalties apply to them. The banking agencies have proposed legislation that would hold outside attorneys and other independent contractors liable in administrative actions to the same standard as bank insiders.

Congress expressly decided to treat independent contractors differently than others associated with financial institutions, for a variety of important public policy reasons. First, they do not have the same relationship to the insured institution as other insiders; they are not part of the management of the institution, nor do they benefit from the institution's access to federally insured funds (which are guaranteed by the full faith and credit of the United States) to run their businesses. Second, Congress recognized that many independent contractors (such as attorneys) were already accountable to the institution under applicable professional standards. Finally, there were concerns expressed that the lack of any meaningful threshold for legal liability would subject an independent contractor's good faith advice to administrative enforcement actions unilaterally initiated by the federal banking agencies, thereby causing the most highly trained and capable professionals to decline to become associated with troubled institutions. These institutions typically are those with the greatest need for sound and frank professional advice of the highest quality.

The current standard does not undermine in any way the ability of the agencies to pursue monetary damages against independent contractors whose misconduct contributes to the failure of an insured institution. The record is clear that the civil judicial system has provided a meaningful forum for the agencies to pursue aggressively remedies against independent contractors whose conduct is alleged to have harmed failed financial institutions. Moreover, the agencies have not been reluctant to use their administrative enforcement authority to pursue claims as is currently provided for under existing law.

Contact for further information: Cecelia Calaby (202) 663-5325.