Since last year, the FDIC has begun citing banks in exams for maintaining D&O policy endorsements that indemnify directors for CMPs, even when the directors pay for this coverage. The American Association of Bank Directors (AABD) wrote to the FDIC earlier this year questioning these citations and the FDIC’s interpretation of the law on which it was relying for the citations (Section 359.3 of the Federal Deposit Insurance Act). The FDIC responded in a letter vigorously disagreeing and indicating that it would continue applying its harsh interpretation of Section 359.3 going forward.

In a recent American Banker article, which reports on the issue and describes these two letters, the quotes from the FDIC general counsel suggest that the FDIC might even disapprove of directors purchasing their own CMP indemnification directly for themselves, apart from the bank’s D&O policy and with no involvement by the bank (although he did state that the FDIC would need to study that question).

All things considered, it seems clear to us that, in the absence of legislation or a court stepping in and overturning the FDIC’s position, the prospects are dim for the FDIC changing course on this issue.