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FDIC Federal Register Citations

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October 18, 2002

Mr. Robert E. Feldman
Executive Secretary
Attention: Comments/OES
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC    20429

RE: Insurance of State Banks Chartered as Limited Liability Companies (12 CFR Part 303)

Dear Mr. Feldman:

Thank you for the opportunity to comment on the Federal Deposit Insurance Corporation’s (FDIC’s) proposed rulemaking to clarify that a bank chartered as a limited liability company (LLC) under state law would be considered “incorporated” under state law if it meets certain criteria. This determination would satisfy a critical requirement that LLC banks must meet in order to be considered eligible for federal deposit insurance. The Conference of State Bank Supervisors (CSBS) supports the proposal. 1

Background

In the notice of proposed rulemaking issued on July 23, 2002, the FDIC indicated that one of the statutory requirements that a state chartered bank must meet in order to be eligible for federal deposit insurance was that it be “incorporated under the laws of any state.” The proposal further indicated that the FDIC had received inquiries regarding whether a state bank chartered as a LLC could be considered to be “incorporated” for purposes of satisfying this requirement.

In response, through the proposed rulemaking, the FDIC has suggested that if a state chartered bank organized as a LLC exhibits four attributes generally associated with corporations, the FDIC will consider the LLC to be “incorporated,” thereby clearing a critical hurdle for federal deposit insurance eligibility. The four attributes are: (i) perpetual succession; (ii) limited liability; (iii) centralized management; and (iv) free transferability of ownership interests.

The proposed rulemaking also includes a series of definitions to align terms that apply to LLC banks with those used for other insured banks. Specifically, the proposed rulemaking indicates that an owner of an interest in a LLC is a “shareholder,” a manager of a LLC is a “director,” an officer of a LLC is an “officer” (for purposes of the Federal Deposit Insurance Act and FDIC regulations) and a certificate or other evidence of an ownership interest in a LLC is both “voting stock” and a “voting security.”

Analysis

CSBS believes that the proposal further expands the ability for state chartered banks to be innovative regarding permissible structures. As the professional association of regulators that charter and supervise two thirds of the nation’s commercial banks, we are committed to approaches that maintain and facilitate the existing authority that state legislatures and regulators have to grant and interpret powers and activities for state chartered banks. States have long served as laboratories for innovation, originating a broad range of activities – from checking accounts to real estate brokerage powers. CSBS applauds the FDIC’s interest in maintaining flexibility and options.

CSBS also supports the FDIC’s effort to ensure that state banks organized as LLCs meet appropriate safety and soundness standards. In that regard, the proposal seeks comment on whether the four characteristics associated with corporations are appropriate as a standard to determine whether state banks organized as LLCs should be eligible for federal deposit insurance. CSBS believes that the four attributes are appropriate but offers two specific comments.

Firstly, we strongly believe that the full range of safety and soundness and enforcement mechanisms that apply to existing state chartered banks (e.g., state banks organized as corporations) should apply to banks organized as LLCs. In the proposal the FDIC aligns key definitions in the Federal Deposit Insurance Act that currently apply to federally insured banks with terms that would apply to banks organized as LLCs. This is a sound approach which facilitates safety and soundness. In that regard, CSBS also expects state banking agencies to either fully apply existing safety and soundness requirements or to supplement existing safety and soundness guidelines for banks that are authorized to organize as LLCs.

Secondly, while CSBS generally supports utilization of the four corporate attributes that the FDIC has identified, and we recognize that the FDIC has identified the four attributes for purposes of determining suitable standards that a bank must meet in order to qualify for federal deposit insurance, CSBS believes that states remain the appropriate authorities for determining what standards are suitable for corporations in their states. The FDIC’s interpretation and action in this area should be limited to this context.

Finally, CSBS is aware that only a small number of states currently allow state chartered banks to organize as LLCs.2 Some states will be required to amend certain statutes in order to authorize banks to operate as LLC’s; those changes may not be made immediately. However, our dialogue with state banking agencies indicates that several states may consider accommodating this option in the future. In this regard, we support the FDIC’s proposal to expand options available to state chartered banks.

Thank you again for this opportunity to comment. Please feel free to call on us if we can provide further assistance.

Best personal regards,

Neil A. Milner, CAE
President and CEO

[1] CSBS is the professional organization that represents the regulators of the nation’s 6,500 state chartered banks and works to advance the state banking system.

[2] Among the states that allow this option are Maine, Nevada, Texas and Vermont.

Last Updated 10/21/2002 regs@fdic.gov

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