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4000 - Advisory Opinions
Effect of Section 24 of the FDI Act on State-Chartered BIF Member
Insured Savings Bank's Investment in Limited Partnership Organized to
Make Portfolio Investments in Equity of Various Enterprises
FDIC-92-28
May 11, 1992
Pamela E.F. LeCren, Counsel
The following is in response to your March 31, 1992 letter to me
seeking confirmation of your understanding, based upon our recent
telephone conversation, of the effect of section 24 of the Federal
Deposit Insurance Act ("FDI Act", 12 U.S.C. 1831(a)) on [savings
bank] investment as a limited partner in a limited partnership
organized for the purposes of making portfolio investments in the
equity of various enterprises. You also asked for guidance on the
divestiture requirement imposed by section 24.
According to your letter, [savings bank], a state chartered BIF
member insured bank, entered into an agreement of limited partnership
in 1989. The general partner is an affiliate of a major investment
banking firm. Pursuant to the agreement the bank committed to invest a
maximum of $10,000,000 in the form of capital contributions to the
partnership. To date the bank has invested approximately one half of
that amount. The portfolio investments of the partnership presently
consist of equity investments in, among other things, companies
involved in the aerospace, broadcasting and automobile industries. When
the general partner determines in its sole discretion that it is
appropriate for the partnership to make a portfolio investment, the
general partner can call for an additional capital contribution the
proceeds of which are used to fund new investments by the partnership.
The agreement provides that a limited partner may be excused from its
obligation to make a capital contribution with respect to a portfolio
investment if the limited partner delivers a legal opinion to the
effect that the payment of the capital contribution, or any specified
portion thereof, to acquire the proposed portfolio investment is
prohibited by any statute, regulation, law, judicial or administrative
order or decree.
Section 24(c), which was added to the FDI Act effective December 19,
1991, provides that an insured state bank may not directly or
indirectly acquire or retain any equity investment of a type that is
not permissible for a national bank. There are a number of exceptions
to the general prohibition 1
none of which are applicable here. Therefore, the issue presented by
the facts of your letter is whether section 24(c) prohibits [savings
bank] from making any additional capital contributions to the
partnership.
It is our opinion that any additional capital contribution by the
bank pursuant to a capital call by the general partner would be an
"acquisition" of an equity investment for purposes of section
24(c). As we know of no statute or regulation that would authorize a
national bank to make a similar investment, no further capital
investments are permissible. Additionally, the bank's current
investment must be divested.
You will note that section 24(c)(4) provides that an insured state
bank must divest any equity investment as quickly as prudently possible
(but in no event later than December 19, 1996) if the equity investment
is not a permissible equity investment for a national
bank.
{{8-17-92 p.4633}}The FDIC is the arbiter as to the
timing and conditions under which a prohibited equity investment may be
retained during the divestiture period. Insured state banks are
expected to use their best efforts to divest prohibited equity
investments. A bank will not be held to be in violation of the
prohibition on the retention of a prohibited equity investment so long
as the bank complies with any conditions or restrictions that the FDIC
places on the retention of the equity investment during the divestiture
period.
Until such time as the FDIC imposes any conditions or restrictions
(either by order or regulation) on [savings bank] retaining its
limited partnership interest, the bank is not under any obligation to
take action with respect to that investment other than to use its best
efforts to divest its interest as quickly as possible. A bank is
expected to immediately evaluate and plan for divestiture. It will not
be considered acceptable for a bank to continue to merely hold a
prohibited equity investment until the outside divestiture date.
Additionally, the FDIC expects any action that the bank may take with
respect to its interest in the limited partnership to be consistent
with its obligation to divest that interest as quickly as possible. If
the bank is determined by the FDIC to have failed to divest as soon as
it could have prudently divested, the FDIC can order the bank to do so
and if the bank fails to comply with any conditions or restrictions
that are placed on retention of the limited partnership interest during
the divestiture period, the bank will be cited for a violation of
section 24(c).
I hope that this letter has been responsive to your request. Should
you have any further questions, or need for clarification, please do
not hesitate to contact me at (202) 898-3730.
1Paragraph (2) creates an exception for majority owned
subsidiaries and paragraph (3) allows insured state banks to 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 qualified housing projects. Section 24(e) excepts
investments in the stock of a savings bank life insurance company by
banks in Massachusetts, New York, and Connecticut. Section 24(f)(2)
allows, subject to certain restraints, insured state banks located in
certain states to acquire and retain common or preferred stock listed
on a national securities exchange and/or shares of investment companies
registered under the Investment Company Act of 1940. Finally, section
24(f)(3) allows insured state banks to acquire not more than 10 percent
of a directors and officers insurer and to acquire or retain shares of
certain depository institutions. Go Back to Text
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