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4000 - Advisory Opinions
Would Section 24 of the FDI Act Prevent a State Chartered Bank
From Acquiring and Operating a Wholly-Owned Subsidiary Engaged in the
Business of General Insurance Brokerage
FDIC--97--12
October 20, 1997
Jamey Basham, Counsel, Regulation and Legislation
This letter is to confirm in writing our telephone conversation of
July 18, 1997. Please accept my apologies for my delay.
You asked whether section
24 of the Federal Deposit Insurance Act and the FDIC's
regulations thereunder at 12 C.F.R.
Part 362 would prevent a state chartered bank from acquiring
and operating a wholly-owned subsidiary engaged in the business of
general insurance brokerage. In your follow-up correspondence of July
24, 1997, you also inquired about the same issue with regard to related
risk management functions.
Section 24 only applies to state bank activities conducted either
directly or through a subsidiary "as principal."
Section 362.4(a) of the
FDIC's regulations specifically articulates this restriction.
Section 362.2(c) states
that "[a]n activity is considered to be conducted as
principal if it is conducted other than as agent for a
customer, is conducted other than in a brokerage, custodial, advisory
or administrative capacity, or is conducted other than as trustee."
In the preamble accompanying the rule, the FDIC described the
definition as not covering, for example, acting as agent for the sale
of insurance, acting as agent for the sale
{{2-29-00 p.4984.28-A}}of securities, acting as agent for the
sale of real estate, or acting as agent in arranging for travel
services. Likewise, providing safekeeping services, providing personal
financial planning services, and acting as trustee were described as
not being "as principal" activities. 58 Fed. Reg.
64,462, 64,468 (Dec. 8, 1993). The FDIC's pending notice of proposed
rulemaking to revise part 362 would continue this approach, albeit
under a different structure. 62 Fed. Reg. 47969, 47972
(Sept. 12, 1997).
Also, as a general matter, analysis of this issue does not end with
a determination that a state bank is acquiring an operation generally
referred to as an "agency," such as a travel agency, insurance
agency, or real estate agency. The various activities of the agency
must be examined on an unbundled basis.
The selling of insurance as an agent in connection with a general
insurance brokerage would not be an "as principal" activity
subject to section 24 or part 362. As for what you describe as related
risk management functions, I am not certain exactly what group of
activities this would encompass.
As for holding the general insurance brokerage as a subsidiary, this
is permitted, because section 24 and
section 363.3 of the
FDIC's regulation expressly permit state banks to make an equity
investment in a majority owned subsidiary.
Your letter also asks whether the first-tier insurance brokerage
subsidiary could in turn own other second-tier subsidiaries or
interests in companies engaged in similar non-principal activities.
This is actually two separate questions.
If the first-tier insurance brokerage subsidiary held a majority of
the stock of one or more second-tier subsidiaries, the second-tier
subsidiaries would themselves be majority owned subsidiaries for
purposes of part 362, and the above analysis authorizing the bank's
equity investment in a majority-owned subsidiary and indirect conduct
of activities not as principal would apply to the second-tier
subsidiaries themselves. In other words, no further 362 analysis would
be required as long as there was majority ownership and the second-tier
subsidiary did not engage in any activity as principal.
As for your question about holding "interests" in similar
companies, this could be authorized by section 362.4(c)(3)(iii)(D). In
section 362.4(c)(3), the FDIC lists certain activities and investments
which the FDIC has determined do not pose a significant risk of loss to
the deposit insurance fund, and in which an insured state bank may
engage with obtaining the FDIC's prior consent, provided that the bank
meets and continues to meet the applicable minimum capital standards as
prescribed by the appropriate Federal banking agency, and provided that
the activity or investment in question is authorized by state law, and
is otherwise permitted under federal law and regulations. Section
362.4(c)(3)(iii)(D) permits a majority-owned subsidiary of a state bank
to invest in fifty percent or less of the stock of a corporation which
engages solely in activities which are not considered to be as
principal. You should be aware, however, that the FDIC has proposed to
add a requirement to this authorization. Under the FDIC's proposed
revision of part 362, the state bank would also be required to control
the corporation in which its majority-owned subsidiary invests. I
invite you to consult 62 Fed. Reg. 47,983 (Sept. 12, 1997)
for the FDIC's discussion of its thinking and our request for comment
on this point.
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