While it may take years before the full ramifications of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to become evident, one thing is clear: The Federal Deposit Insurance Corporation's (FDIC) authority over financial institutions, including hedge funds, alternative investment funds, private equity funds and venture capital funds, has been dramatically expanded.

The personal risk to executives, directors, and general partners at these institutions is significant.

FDIC Receivership Risks Created by the Dodd-Frank Act

Under Title II of the Dodd–Frank, the Federal Deposit Insurance Corporation (FDIC) may be appointed the receiver of a financial institution with or without the acquiescence of the financial institution’s board of directors. Once appointed, the FDIC may:

• issue subpoenas requiring individual executives to produce documents and information that the FDIC deems necessary to the orderly liquidation of the financial institution;
• repudiate any contracts entered into before the FDIC became receiver that it determines to be “burdensome,” including compensation agreements;
• recoup any compensation received during the previous two year period by any current or former senior executive or director that the FDIC deems “substantially responsible for the failed condition” of the financial institution; and

• directly and personally sue directors and officers for monetary damages for gross negligence and disregard of duty of care.

To be clear, even compensation received by a senior executive up to two years prior—likely already spent or reinvested—can still be recovered by the FDIC, even if the executive or director engaged in no fraud or criminal behavior.

Marsh’s First-Of-Its-Kind FDIC Receivership Protects Personal Assets

Executives and directors of financial institutions can protect their personal assets even in the face of this broad authority. Marsh has collaborated with two of the world’s most respected insurers to create first-of its kind insurance coverage that funds the defense of and damages for such actions by the FDIC.

Specifically, the coverage will pay up to the policy’s limit of liability for the following:

• costs and attorneys fees incurred by an executive or director in evaluating, responding to, and defending against any subpoena, written request or notice, written demand, complaint, or similar documents received from the FDIC;
• earned salaries, wages, commissions, benefits, and any other compensation either repudiated or “clawed” back by the FDIC from an executive or director; and

• damages established by the FDIC due to nonintentional wrongful acts or omissions by the executive or director.

Marsh FINPRO’s Financial Institutions and Alternative Investment Practices

Marsh is a leading risk management advisor and thought leader in the financial institutions and alternative investment space. From arranging quality director and officer and general partner liability insurance to designing innovative coverage for specific and evolving risks, Marsh continues to move and shape the insurance market on behalf of our clients.

As part of our service offerings, Marsh is able to assist our financial institution, hedge fund, alternative investment fund, and private equity and venture capital firm clients evaluate and address their potential institutional and personal risks.