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4000 - Advisory Opinions
Whether Incorporation of a Minimally Capitalized Shell Subsidiary
Constitutes Establishment of a Subsidiary for Purposes of 12 C.F.R.
§ 303.13(f)
FDIC 91-44 May 15, 1991 Pamela E. F. LeCren, Counsel
The following is in response to your request for an opinion on
whether, in the circumstances outlined below, your client, ***
("[Savings Bank]") must provide the FDIC with thirty days prior
notice before incorporating a service corporation subsidiary.
According to your letter, [Savings Bank] proposes to enter into an
arrangement with ***, a registered broker-dealer, and ***, a legal
reserve life insurance company (collectively hereinafter referred to as
"[X]") pursuant to which [X] will offer tax-deferred
annuities, mutual funds, and other insurance and securities products to
[Savings Bank]'s customers at various [Savings Bank] branches. As
regulations adopted by the Office of Thrift Supervision ("OTS")
prohibit federal savings associations from entering directly into any
third-party contract with a broker-dealer, [Savings Bank]
contemplates establishing a service corporation that would enter into
the necessary agreements with [X]. This type of activity qualifies as
a preapproved activity for a federal savings association service
corporation. 1
[X] has indicated that it will not proceed to recruit, hire,
train, obtain licenses for, or employ the necessary personnel, for
the described venture unless and until the service corporation is
formed and it enters into a written agreement with [X] evidencing the
service corporation's intent to proceed with the program. The
recruitment process is expected to take up to 90 days or longer. In
order to avoid delays in implementing the program, [Savings Bank]
proposes to incorporate a minimally capitalized shell service
corporation for the purpose of the shell corporation entering into
the requisite agreements. The agreements would recite that no
activities or services could be conducted either by
[X]
{{6-28-91 p.4554}}or the service corporation unless and
until all necessary regulatory approvals have been obtained and all
required notification periods have expired. The service corporation
would not acquire any assets or conduct any business whatsoever until
all necessary approvals are received and/or all necessary notice
periods have expired. [X] is prepared to incur the risk that
[Savings Bank] does not receive approval. If approval is not
forthcoming, [Savings Bank] will not incur any appreciable financial
loss.
As you are aware, section 303.13(f) of the FDIC's regulations (12
C.F.R. § 303.13(f)) provides that no insured savings association may
"establish'' a subsidiary without providing the regional director
for the Division of Supervision for the region in which the savings
association's principal office is located thirty days prior notice of
its intent to do so. The contemplated service corporation is a
subsidiary within the meaning of the regulation. In essence your letter
invites us to conclude that the incorporation of a minimally
capitalized shell subsidiary does not constitute the establishment of a
subsidiary for the purposes of section 303.13(f), i.e.,
thirty days prior notice need not be given to the FDIC before the
shell company is formed and enters into one or more contingent
contracts. Subject to the following caveats, we concur.
The purpose of section 303.13(f), which implements section 18(m) of
the FDI Act as added thereto by FIRREA, is to provide the FDIC with an
opportunity to evaluate the potential impact on an insured savings
association of its proposed establishment of a subsidiary and to
evaluate the potential impact of that action on the insurance fund. If
the provision is to achieve its purpose, it is critical that that
opportunity occur before the savings association incurs expenses in
connection with the formation of the subsidiary and before the
subsidiary enters into binding agreements obligating it for some future
performance. Although the incorporation of a subsidiary does entail
some expense, the incorporation of a shell company without giving the
FDIC thirty days prior notice should not undermine the purpose of
section 303.13(f) of the FDIC's regulations and section 18(m) of the
FDI Act provided that: (1) the subsidiary is capitalized at only the
most minimal of levels; (2) the subsidiary does not conduct any
business or incur any expenses and neither purchases nor commits itself
to purchase any assets until after the FDIC is given notice and the
thirty-day notice period expires (or the savings association is
informed prior to the expiration of the thirty days that the FDIC has
no objection); (3) any and all agreements the shell corporation enters
into during the notice period regarding its future conduct of business
specifically provide that the agreements are not binding unless and
until all necessary regulatory approvals are received and/or all
necessary notification periods have expired; and (4) the savings
association files with the FDIC the notice required pursuant to section
303.13(f) promptly upon the formation of the shell company.
If the above conditions are met, the FDIC will not consider the
formation of a service corporation by [Savings Bank] and the
execution of one or more agreements by the service corporation to
necessitate thirty days prior notice to the FDIC under section
303.13(f).
1See 12 C.F.R. § 545.74(c)(4). Go Back to Text
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