Vol 9 (2012) - Issue 3

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The Lost Justice: Regulatory Recoupment of Executives’ Compensation by the FDIC

'The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny.'
James Madison

Introduction
In the era of Dodd-Frank, it is not a getaway for a bank’s executives when the bank fails and is taken over by the Federal Deposit Insurance Corporation ('FDIC'). Rather, it may result in severe consequences for those executives who are responsible for the bank’s failure, including losing their jobs and the imposition of financial penalties by the Dodd-Frank Act. Dodd-Frank Act § 210 (s) permits ‘the FDIC to recover from any current or former senior executive or director who is 'substantially responsible' for the 'failed condition' of a covered financial company any 'compensation' received by such person during the two year period preceding the date on which the FDIC was appointed as the receiver (or for an unlimited period in the case of fraud). In its statutory language, § 210 (s) is not clear about the standard for assessing whether or not an executive is 'substantially responsible'. § 210 (s) delegates the FDIC to promulgate regulations to implement § 210 (s) in order to increase the transparency of the process. The delegation places the FDIC in a sensitive position: on one hand, it is the legislator who making the regulations; on the other hand, it is executor of its own regulation and has an essential interest in the result of executing the regulation. As an administrative agency assuming multiple roles, especially when it has a stake in the result of its legislative or administrative actions, it would be very difficult for the agency to ensure justice is achieved when carrying out its duties. Although difficult, it is important that an administrative agency should ensure justice in the execution of its duties; as Professor Johnson argued, the administrative agency should weigh questions of justice and fairness as they carry out these duties while they have more and more power.6 The guarantee for the justice and fairness of governmental actions is the U.S. Constitution (the 'Constitution'), especially the due process and the takings clause. As the Supreme Court stated '[T]he touchstone of due process is protection of the individual against arbitrary action of government'. The takings clause also prevents the governmental taking of private property without just compensation. The subject of the FDIC’s clawback regulations is senior executives and directors’ compensation, which is private property, protected by the Constitution and cannot be taken without just compensation.