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4000 - Advisory Opinions


Exception from the Interlocks Act Pursuant to Section 348.4(b)(3) of FDIC's Regulations

FDIC-83-7

June 22, 1983

Pamela E. F. LeCren, Senior Attorney

The following is in response to your request for comments concerning the subject application. The application requests that * * * and * * * be permitted to serve as directors of * * * while continuing to serve as directors of * * *. According to Regional Director Waldrop's memorandum, * * * and * * * are located in the same community (as that term is defined in Part 348 of FDIC's regulations) and the two institutions are not affiliated for the purposes of the Interlocks Act. Absent approval of the exception request, the interlocks would be prohibited under section 348.3(a) of FDIC's regulations implementing the Depository Institutions Management Interlocks Act ("Interlocks Act", 12 U.S.C. § 3201 et seq).1

The exception request is being made pursuant to section 348.4(b)(3). Section 348.4(b)(3) provides that, despite the prohibitions of the Interlocks Act, a person may serve at the same time as a management official of two depository institutions if: (1) the primary federal supervisory agency of one of the institutions (or its state supervisory agency if it has no federal supervisory agency) believes that the depository institution faces conditions endangering its safety or soundness, and (2) the appropriate federal supervisory agency or agencies determine the relationship to be necessary to provide management or operating expertise to the institution facing conditions endangering its safety or soundness. Other conditions in addition to or in lieu of the foregoing may be imposed by the appropriate federal agency in a specific case. The section does not provide any time limit on the length of service that may be permitted. There is an implied condition, however, that the excepted service will terminate when the institution no longer faces conditions that endanger its safety or soundness.

The Director of the Division of Bank Supervision has the delegated authority to approve but not deny the subject application. (See section 303.11(a) (14).) In order to approve the application, two things must be favorably resolved. The Division of Bank Supervision must determine that * * * faces conditions that endanger its safety or soundness and that the presence of * * * are necessary to provide management or operating expertise to * * *. According to Regional Director Waldrop's memorandum, the condition of * * * has deteriorated significantly in the past year and it is evident that the bank is in need of stronger management in order that its present problems might be satisfactorily resolved. In its comments on the recent change in bank control involving * * * which was the subject of a FDIC letter of intent not to disapprove dated May 20, 1983, the Department of Banking and Securities for the State of * * * indicated that the equity capital of * * * is greatly diminished and that failure is possible unless corrected.2

We would presume, based upon Regional Director Waldrop's comments and the letter from the * * * Department of Banking and Securities, that the subject institution does in fact face conditions that endanger its safety and soundness. As to the necessity of the interlocks in order to provide management or operating expertise to * * *, the Legal Division has had occasion, in at least one other interlock arising from a change in bank control application,3 to indicate that the interlock was "necessary" as the purchase was dependent upon the purchasers receiving approval to serve as management, i.e., the transaction (including the formation of the interlock) was necessary to provide management or operating expertise without which the institution would fail.

We do not know whether or not such a "package arrangement" was involved with this change in bank control. It is conceivable that the change in bank control could have proceeded and the necessary management have been obtained through individuals other than * * *. We note that * * *, Review Examiner, in a May 20, 1983 memorandum to the files regarding the notice of change in bank control, indicated that "it is evident there is some direct competition between * * * and * * * which would be significantly diminished through the proposed acquisition of control." Although the review examiner resolves the question favorably stating that the situation is not sufficiently severe to warrant denial on the basis of competitive factors, the review examiner's statement raises two questions: (1) whether the anti-competitive effects of the proposed interlocks are outweighed by the management and operating expertise that would be made available to * * * and (2) whether the bank's situation is such that it could invest the time to locate additional management that would not present an interlocks problem.

Despite our above comments, we recognize that the standard of necessity in the case of an institution that faces conditions which endanger its safety and soundness is inherently flexible. If the Division of Bank Supervision can satisfactorily resolve in its own mind that the instant interlocks are necessary in the same context as in the case of * * * (see footnote 3) or that the instant interlocks are necessary in that the condition of the bank does not allow the investment of time to locate additional management, then the Legal Division would not have any objection to Regional Director Waldrop's recommendation for approval.

1 Section 348.3(a) of FDIC's regulations provides that two unaffiliated depository institutions with offices located in the same community may not share the same management. "Community" is defined to mean the same city, town, or village, and contiguous or adjacent cities, towns, or villages. * * * are, in addition to serving * * * serving as directors at the * * *. We presume, based upon the information presented to the Legal Division, that the interlocks between * * * and * * * do not present any problem under the Interlocks Act. Go back to Text

2 The change in bank control application involved * * * who acquired 80% of the stock of * * * from * * *. The letter of intent not to disapprove indicated that the acquiring individuals could not legally serve as directors of * * * unless an affiliation with * * * was established or a request for an exception from the prohibitions of the Interlocks Act is approved by the FDIC. An amendment to the subject Change in Bank Control Notice indicates that it is the intent of the parties to transfer shares in * * * to certain other individuals whereupon * * * will become affiliated with * * *. As we have no details regarding the intended transfer, we cannot comment upon whether or not the two institutions would be affiliated subsequent to that transfer. Go back to Text

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