|
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
4000 - Advisory Opinions
Request for Extension of Time to Terminate
Management Official Interlock
FDIC-84-2
January 23, 1984
Pamela E. F. LeCren, Senior Attorney
The following is in response to your request for the Legal
Division's comments and opinion regarding the above captioned request
for an extension of time in which to terminate a prohibited management
official interlock. The application presents two issues: (1) whether or
not * * * (* * *, a Nebraska industrial loan and investment
company licensed under the Nebraska Industrial Loan and Investment
Companies Act), is a depository institution for the purposes of Part
348 of FDIC's regulations and the Depository Institution Management
Interlocks Act ("Interlocks Act", 12 U.S.C. 3201
et
{{4-28-89 p.4144}}seq.); and (2) assuming * * * is
a depository institution and further assuming that the interlocks
presently enjoyed with * * * are prohibited under Part 348, is the
requested extension of time in which to terminate the prohibited
interlocks under section 348.4(b)(5) available.
1. Applicability of the Interlocks Act to Nebraska Industrial
Loan and Investment Companies
The Interlocks Act prohibits management official interlocks between
unaffiliated depository institutions depending upon the size and
location of the institutions in question. The term "depository
institution" is defined by the statute to mean "a commercial
bank, a savings bank, a trust company, a savings and loan association,
a building and loan association, a homestead association, a cooperative
bank, an industrial bank [emphasis added], or a credit
union." (12 U.S.C. 3201(1)). To the extent relevant here, the
definition of depository institution contained in Part 348 essentially
tracks that found in the statute.
It has been the opinion of the FDIC's Legal Division, and one
concurred in by legal staff of the OCC, that the Interlocks Act's
definition of depository institution is enumerative rather than
illustrative, that is, a financial institution is only subject to the
prohibitions of the Interlocks Act if it falls into one of the
enumerated categories of depository institutions. Heretofore we have
not taken, nor advocated taking, the approach that any institution
which is functionally similar to an industrial bank should
be considered subject to the Interlocks Act. Rather than undertake a
functional analysis, we simply have deferred to state law. If under
state law an organization is an industrial bank, the organization is
within the scope of the Interlocks Act. Conversely, if state law does
not view the organization as an industrial bank (such as is the case
with California thrift and loan associations which are prohibited from
receiving deposits, issuing certificates of deposit, or using the title
bank) the organization is not within the scope of the Interlocks Act.
The only written opinion issued by the Legal Division dealing with
this subject matter is a November 7, 1979 letter (copy attached)
concerning California thrift and loan associations. In addition to
deferring to the state's classification of the organization, the letter
goes on to say "furthermore, since California prohibits the thrift
and loan associations from accepting deposits (the common denominator
among those organizations listed as depository institutions) we find
there to be no reason to say that the California thrift and loans are
the functional equivalent of industrial banks."
Although we still feel that the statutory definition of the term
depository institution should be strictly construed, an amendment to
the Federal Deposit Insurance Act enacted by the Garn-St Germain
Depository Institutions Act necessitates review of our earlier
position. The amendment redefined the term "state nonmember bank"
under section 3(a) of the Federal Deposit Insurance Act to include
financial institutions operating substantially in the same manner as
industrial banks and redefined the term "deposit" in section 3
(1)(1) to include the unpaid balance of money or its
equivalent received or held by a bank which is evidenced by a thrift
certificate, investment certificate, certificates of indebtedness, or
certificates of similar names. Thus, for deposit insurance purposes,
certificates typically issued by industrial banks and other
organizations which are similar in nature, albeit not classified as
industrial banks by state law, are deposits. This is the case even
where state law prohibits the receipt by the organization of
"deposits" as is the case in both California and Nebraska.
Despite the fact that the Garn-St German Act did not in turn amend
the Interlocks Act, in our opinion, it would be an anomaly for an
organization that accepts "deposits" as defined by the Federal
Deposit Insurance Act, which has been found by the Board of Directors
to be the functional equivalent of an industrial bank, and which is
insured by the FDIC, to not fall within the scope of the Interlocks
Act. Furthermore, once the Board of Directors has made the
determination that * * *, a Nebraska industrial loan and investment
company, is a "similar organization" to an industrial bank and is
thus eligible for a deposit insurance, to not bring all Nebraska
industrial loan and investment companies within the scope of Part
348, regardless of whether or not the particular industrial loan
company in question has applied for or been granted Federal Deposit
Insurance, would undermine the purpose of the Interlocks Act. We
therefore conclude that, should the Board
{{4-28-89 p.4145}}of Directors make the requisite
determinations with regard to * * *, it, as well as other Nebraska
industrial loan and investment companies, shall be considered subject
to the restrictions of Part 348 and the Interlocks
Act. 1
2. Request for Extension of Time in which to Terminate
Interlock
Based on the information contained in Regional Director Konjevich's
December 6, 1983 memorandum, and in view of our above determination, we
conclude that the interlocks between * * * and * * * are prohibited
under section 348.3 of FDIC's
regulations. 2
* * * is seeking an extension of time in which to terminate the
interlocks as provided by section 348.4(b)(5), "Loss of Management
Officials Due to a Change in Circumstances". That provision,
recently amended effective November 30, 1983, provides that if a
depository organization is likely to lose 30% or more of its directors
or of its total management due to a change in circumstances described
in section 348.6, the affected institution may terminate the interlocks
over a period of 30 months rather than the 15 months that would
normally be available. The additional time period is designed to avoid
the disruption that would arise from the loss of a large portion of the
institution's management.
Several issues must be resolved favorably in order for the Legal
Division to find that the above extension is available: (1) does the
potential loss of management meet the minimum requisite percentage, (2)
will the loss be disruptive to the internal management of * * *, (3)
has * * * demonstrated that absent relief it is likely to incur the
management loss i.e. will the affected management officials
opt to relinquish their positions at * * * rather than * * * or
* * * 3
and (4) has * * * developed an orderly plan for the phase out of the
affected management? In addition to these four items which must be
favorably resolved under the language of section 348.4(b)(5), we also
need to determine that there has been a change in circumstances as
described in section 348.6. Section 348.6 indicates that where a
management official's service is not grandfathered under section
348.5 4
, the person's service must be terminated if a change in circumstances
causes such services to become prohibited. Section 348.6 provides that
such a change may include, but is not limited to, an increase in the
asset size of an organization due to natural growth, a change in SMSA
or community boundaries or designation of a new SMSA, an acquisition,
merger, or consolidation, the establishment of an office, or a
disaffiliation.
Should the Board of Directors grant * * * deposit insurance, the
finding that * * * is a similar institution to an industrial bank
will, as indicated above, trigger the application of the Interlocks
Act. That action on the part of the Board of Directors can
legitimately, in our opinion, be viewed as a change in circumstances
under section 348.6. As to meeting the other requirements of section
348.4(b)(5), we note from the application that three directors out of a
total of four directors are involved in the interlocks. Thus, the
minimum requisite percentage management official loss is met.
Furthermore, the loss of that many directors would appear on its face
to be disruptive. The applicant has submitted an orderly plan for the
termination of the interlocks, 5
however, the application does not expressly address the
{{4-28-89 p.4146}}likelihood of the management officials
resigning their positions at * * *. We suggest contacting the
applicant for supplementary information addressing this deficiency. As
the relevant provision was recently amended, and in fact was not
effective until the day after the application was received in the
regional office, the applicant may not have been aware of the necessity
to address this question and may wish to submit supplementary
information.
In conclusion the Legal Division feels that the subject interlocks
are in fact prohibited under Part 348 and the Interlocks Act.
Furthermore, should the applicant submit satisfactory information
addressing the issue of whether or not it is likely that the management
officials in question will resign their positions at * * *, the
exemption contained in section 348.4(b)(5) is
available. 6
1 The Legal Division recommends that a bank letter be
formulated which can be sent out to all insured nonmember banks, the
Banking Commissioner, and the appropriate state official responsible
for supervision of the "similar" institutions where that official
is not the Banking Commissioner in those states for which the Board has
made the determination that the "similar institutions are eligible
for deposit insurance. The bank letter would serve to apprise insured
nonmember banks and "similar" institutions located in that state
that the Interlocks Act is applicable. The date of the Board's action
in granting the first deposit insurance application from that state
from a "similar" institution is the date from which the fifteen
month grace period under section 348.6(b) will run. Go Back to Text
2 The interlocks in question are prohibited under section
348.3(a)(1) as the institutions are located in the same city. Go Back to Text
3 The regulation contains a rebuttable presumption that a
director who is a paid, full-time employee of the affected depository
organization will not resign his/her position absent unusual
circumstances. Go Back to Text
4 In order for a management official's dual service to be
grandfathered, he/she must have been serving two depository
institutions as of November 10, 1978. The interlocking service with
* * * is not eligible for grandfathering under section 348.5 as the
three individuals in question did not begin to serve * * * until
1979. Go Back to Text
5 * * * has submitted the following phase out plan: (1) a
fifth director will be added to the Board of Directors by March 1,
1984; (2) by December 31, 1984 one of the interlocking directors will
be replaced; (3) by December 31, 1985 a second interlocking director
will be replaced; and (4) by June 30, 1986 the third and final
interlocking director will be replaced. This schedule should satisfy
section 348.4(b)(5) which directs that the depository organization has
a thirty month period in which to terminate the interlocks, said time
to run from the date of the change in circumstances. As indicated
above, the time period is to be measured from the date of the Board's
action. Go Back to Text
6 We note that Regional Director Konjevich's December 6, 1983
memorandum recommends that section 348.5 be amended to allow
grandfathering of interlocks involving institutions "similar" to
industrial banks. Such an amendment could be proposed for comment,
however, any change would require interagency co-ordination (the FDIC,
FRB, OCC, FHLBB, and NCUA have identical regulations.) Additionally,
the authority under the statute for enlarging the class of
grandfathered institutions is uncertain. * * *. Go Back to Text
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
|
