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4000 - Advisory Opinions
Part 362: Whether a State Insured Bank May Make an Equity
Investment as a Member/Owner in a Limited Liability Company
FDIC--94--50
October 12, 1994
Sandra Comenetz, Counsel
This responds to your June 16 and June 22, 1994 letters to Pamela
LeCren in which you inquire whether a State insured state bank may make
an equity investment as a member/owner in a limited liability company
("LLC"), instead of as a limited partner in a limited
partnership, where the sole purpose of the LLC is to invest in the
acquisition, rehabilitation, or new construction of a qualified housing
project. If the answer to the foregoing is "yes", you also
inquire whether 12 CFR § 24.4(a)(4),
12 U.S.C. § 1831a(c)(1),
and 12 CFR § 362.3(a)
limit an insured state bank's use of profits, dividends, tax credits,
and any other distributions received from the qualified housing
project.
Essentially, you assert that LLCs are sufficiently similar to
limited partnerships, that, like insured state banks that are limited
partners in limited partnerships, insured state banks that are members
of LLCs should be allowed to make equity investments in qualified
housing projects. In support of your position you state that (1) LLCs
may be taxed for federal income tax purposes like partnerships; (2)
LLCs are "formed and governed in much the same way as limited
partnerships"; (3) the State law pertaining to LLCs, limited
partnerships, and general partnerships are all found in the same title
of the State Code, but the law pertaining to corporations is found in a
different title; and, (4) members of LLCs have greater protection from
personal liability than limited partners in a limited partnership
because they are sheltered from liability even if they participate in
the management of the LLC.
The starting point for determining whether an equity investment is
permissible for an insured bank is section 24 of the Federal Deposit
Insurance Act ("FDI Act"), 12 U.S.C. § 1831a, which provides
that an insured state bank may not, directly or indirectly, acquire or
retain an equity investment of a type, or in an amount, not permissible
for a national bank. 12 U.S.C.
§ 1831a(c)(1) and (f)(1)M. 1
{{2-28-95 p.4904}}
There is an exemption, however, for equity investments in qualified
housing projects ("QHPs").
Notwithstanding any other provision of this subsection, an
insured State bank may invest as a limited partner in a
partnership, the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation, or new construction of a
qualified housing project.
12 U.S.C. § 1831a(c)(3)(A) (emphasis
added). 2
While it appears that members of LLCs have greater protection from
personal liability than limited partners in a limited partnership, the
exemption in Section 24 applies solely to limited partnership
interests. The legislative history to 12 U.S.C. § 1831a sheds no
light on Congress's reasons for requiring that an insured state bank
invest in QHPs as a limited partner in order to qualify for the
exemption. Nor have we found any indication in the legislative history
that the section should be read broadly. In addition, to the best of
our knowledge, equity investments by national banks in LLCs are not
among the investments that the OCC has approved across the board
for national banks. In keeping with the basic tenet of statutory
construction that exceptions are to be narrowly construed, we are
reluctant to read the QHP exception broadly, and conclude that an
insured state bank may not rely on the exception in 12 U.S.C.
§ 1831a(c)(3)(A) and make equity investments as a member/owner in an
LLC, instead of as a limited partner.
On the other hand, there may be other ways to approach the issue.
The March 4, 1993 redacted OCC letter opinion that you sent to the FDIC
indicates that at least one equity investment in a State LLC met the
OCC's requirements for a community development investment under 12
U.S.C. § 24 (Eighth) and (Eleventh) and Interpretive Ruling 7.7480
(replaced by 12 CFR Part 24). Thus, if the OCC found that the bank's
proposed investment, were it made by a national bank, qualified under
12 U.S.C. § 24 (Eleventh) and 12 CFR Part 24 as a community
development investment, the investment would fall outside the scope of
Section 24 and Part 362.
For your information, we have enclosed a copy of an FDIC advisory
memorandum that, among other things, sets forth the circumstances under
which an investment made for public welfare purposes could be
permissible for a state bank. If the investment is on the list of
previously approved investments maintained by the OCC, or if the state
bank (assuming it were a national bank) could take advantage of the
OCC's self-certification mechanism, and, in both cases, certain other
criteria are met, the investment would be permissible. If the foregoing
are inapplicable, the state bank could request the FDIC's consent to
hold the investment indirectly through a majority owned subsidiary
provided that the bank meets its minimum capital requirements. If none
of the foregoing are applicable, and because the FDIC defers to the
OCC's determinations in such matters, the state bank could request that
the FDIC seek the OCC's opinion whether the activity is permissible for
a national bank. If the OCC were to determine that the investment meets
its criteria for a national bank, the FDIC would accept that
determination.
Thank you for writing to the FDIC.
{{2-28-95 p.4905}}
1"Equity investment" means, inter alia,
any partnership interest; any equity interest in real
estate as defined in
§ 362.2(e); and any
transaction which in substance [meets § 363.2(f) criteria] even
though it may be structured as some other form of business transaction.
12 CFR § 362.2(f). With certain exceptions not
relevant here, "equity interest in real estate'' means
any form of direct or indirect ownership of any interest
in real property, whether in the form of an equity interest,
partnership, joint venture or other form, which is accounted for as an
investment in real estate or real estate joint venture under generally
accepted accounting principles. . . .
12 CFR § 362.2(e). Go Back to Text
2A QHP is
residential real estate intended to primarily benefit
lower income persons throughout the period of the bank's investment
including but not necessarily limited to any project eligible for the
low income housing tax credit under section 42 of the Internal Revenue
Code (26 U.S.C. 42).
12 U.S.C. § 1831a(c)(3)(C)(i), 12 CFR
§ 362.3(b)(2)(i). Go Back to Text
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