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4000 - Advisory Opinions
Whether sale of an insurance subsidiary of a state chartered bank
to another state chartered bank within the same holding company system
would affect the insurance subsidiary's grandfather powers under
§ 24(d)(2)(B) of the FDI Act
FDIC--96--3
January 30, 1996
Patrick J. McCarty, Counsel
This is in response to your December 8, 1995 letter to Pamela
LeCren, Esq., Senior Counsel, FDIC, requesting confirmation that the
transfer/sale of an insurance subsidiary of a state chartered bank to
another state chartered bank in the same bank holding company system
would not affect the insurance subsidiary's grandfathered powers under
Section
{{10-31-96 p.4971}}24(d)(2)(B) of the Federal Deposit
Insurance Act ("FDI Act") 12
U.S.C. § 1831a(d)(2)(B). As discussed below, the FDIC hereby
confirms your conclusion.
Your December 8, 1995 letter presents the following facts. Bank
Holding Company A owns all of the shares of a well-capitalized insured,
state nonmember bank ("Bank A"). Bank A is the sole owner of an
insurance company ("Subsidiary"), which engages, as principal, in
certain insurance underwriting activities that are grandfathered under
Section 24(d)(2)(B) of the FDI Act. Bank Holding Company B owns all of
the voting shares of an intermediate holding company, which, in turn,
owns all of the voting shares of a well-capitalized insured, state
nonmember bank located in the same state as Bank A ("Bank B").
Bank Holding Company A and Bank Holding Company B have entered into a
merger agreement, with Bank Holding Company B being the survivor. Bank
Holding Company A and B propose to transfer ownership of Subsidiary
from Bank A to Bank B after the merger of the two bank holding
companies as part of a larger corporate restructuring.
With certain exceptions, Section 24 of the FDI Act generally
prohibits insurance underwriting by state chartered banks and their
subsidiaries, except to the extent such activities are permissible for
a national bank. 12 U.S.C.
§§ 1831a(b)(1) and (d)(2). One of the major exceptions to
the general prohibition is a "grandfathering" of insurance
underwriting activities conducted through subsidiaries of
well-capitalized insured state banks. 12 U.S.C. § 1831a(d)(2)(B). To
be eligible for grandfathering status, the bank subsidiary must have
been lawfully underwriting insurance as principal as of November 21,
1991. Id. Section 24 provides for the loss of an insurance subsidiary's
grandfathered status in the event of a change in control of the parent
bank in the case of a title insurance subsidiary. 12 U.S.C.
§ 1831a(d)(2)(C).
You have asked whether the grandfathered status of the Subsidiary
will be affected by the proposed sale/transfer from Bank A to Bank B.
You have represented that once the merger of bank holding companies A
and B is consummated--after which both Bank A and Bank B will be part
of the same bank holding company system--that the Subsidiary will be
transferred/sold to Bank B. Both Bank A and B are chartered by, and
located in, the same state.
The FDIC legal staff has opined in the past that the grandfather
status of an insurance subsidiary under Section 24(d) is not lost in
connection with a one bank holding company reorganization where no
actual change in control occurs. See
FDIC Advisory Opinion 94--36
(July 13, 1994). Your specific situation asks this to be extended to
the merger of bank holding companies and where there is an actual
change in control of the bank owning the grandfathered subsidiary. For
many of the same reasons articulated in FDIC Advisory Opinion 94--36,
the FDIC legal staff takes the position that a merger of bank holding
companies which results in a change in control of the bank owning the
grandfathered subsidiary, in and of itself, will not result in the loss
of a subsidiary's grandfather status under Section 24(d)(2)(B).
The larger issue which you have raised is whether the sale/transfer
of a grandfathered insurance subsidiary should nullify the statutory
grandfathering. The facts in this situation are extremely important.
The fact that the Subsidiary will remain within the same bank holding
company system, will remain a subsidiary of a bank chartered and
located in the same state, albeit a different bank, and the
sale/transfer of the Subsidiary is part of a larger corporate
restructuring leads us to conclude that the sale/transfer does not
result in a material change in the subsidiary's position. For these
reasons, the FDIC legal staff takes the position that the proposed
sale/transfer of the Subsidiary from Bank A to Bank B, after
consummation of the proposed merger of the two bank holding companies,
would not result in the loss of its statutory grandfather under Section
24(d)(2)(B).
This conclusion is limited strictly to the facts and circumstances
discussed above and may change if those facts or circumstances change
in a material way. This opinion should not be interpreted as an
indication of the FDIC legal staff's views on other issues, including,
but not limited to, the effect on the grandfather status under Section
24 arising from the sale/transfer of a grandfathered subsidiary out of
a bank holding company system.
{{10-31-96 p.4972}}We note that the Subsidiary remains, of
course, subject to the product line, customer and geographic
limitations found in Section 24(d)(2)(B).
I hope this letter responds fully to your questions. Please feel
free to contact me at (202) 898--8708 with any other questions or
comments you may have.
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