4000 - Advisory Opinions
Request for Extension of Time to Terminate Management Official Interlock
January 23, 1984
Pamela E. F. LeCren, Senior Attorney
The following is in response to your request for the Legal Division's comments and opinion regarding the above captioned request for an extension of time in which to terminate a prohibited management official interlock. The application presents two issues: (1) whether or not * * * (* * *, a Nebraska industrial loan and investment company licensed under the Nebraska Industrial Loan and Investment Companies Act), is a depository institution for the purposes of Part 348 of FDIC's regulations and the Depository Institution Management Interlocks Act ("Interlocks Act", 12 U.S.C. 3201 et seq.); and (2) assuming * * * is a depository institution and further assuming that the interlocks presently enjoyed with * * * are prohibited under Part 348, is the requested extension of time in which to terminate the prohibited interlocks under section 348.4(b)(5) available.
1. Applicability of the Interlocks Act to Nebraska Industrial Loan and Investment Companies
The Interlocks Act prohibits management official interlocks between unaffiliated depository institutions depending upon the size and location of the institutions in question. The term "depository institution" is defined by the statute to mean "a commercial bank, a savings bank, a trust company, a savings and loan association, a building and loan association, a homestead association, a cooperative bank, an industrial bank [emphasis added], or a credit union." (12 U.S.C. 3201(1)). To the extent relevant here, the definition of depository institution contained in Part 348 essentially tracks that found in the statute.
It has been the opinion of the FDIC's Legal Division, and one concurred in by legal staff of the OCC, that the Interlocks Act's definition of depository institution is enumerative rather than illustrative, that is, a financial institution is only subject to the prohibitions of the Interlocks Act if it falls into one of the enumerated categories of depository institutions. Heretofore we have not taken, nor advocated taking, the approach that any institution which is functionally similar to an industrial bank should be considered subject to the Interlocks Act. Rather than undertake a functional analysis, we simply have deferred to state law. If under state law an organization is an industrial bank, the organization is within the scope of the Interlocks Act. Conversely, if state law does not view the organization as an industrial bank (such as is the case with California thrift and loan associations which are prohibited from receiving deposits, issuing certificates of deposit, or using the title bank) the organization is not within the scope of the Interlocks Act.
The only written opinion issued by the Legal Division dealing with this subject matter is a November 7, 1979 letter (copy attached) concerning California thrift and loan associations. In addition to deferring to the state's classification of the organization, the letter goes on to say "furthermore, since California prohibits the thrift and loan associations from accepting deposits (the common denominator among those organizations listed as depository institutions) we find there to be no reason to say that the California thrift and loans are the functional equivalent of industrial banks."
Although we still feel that the statutory definition of the term depository institution should be strictly construed, an amendment to the Federal Deposit Insurance Act enacted by the Garn-St Germain Depository Institutions Act necessitates review of our earlier position. The amendment redefined the term "state nonmember bank" under section 3(a) of the Federal Deposit Insurance Act to include financial institutions operating substantially in the same manner as industrial banks and redefined the term "deposit" in section 3 (1)(1) to include the unpaid balance of money or its equivalent received or held by a bank which is evidenced by a thrift certificate, investment certificate, certificates of indebtedness, or certificates of similar names. Thus, for deposit insurance purposes, certificates typically issued by industrial banks and other organizations which are similar in nature, albeit not classified as industrial banks by state law, are deposits. This is the case even where state law prohibits the receipt by the organization of "deposits" as is the case in both California and Nebraska.
Despite the fact that the Garn-St German Act did not in turn amend the Interlocks Act, in our opinion, it would be an anomaly for an organization that accepts "deposits" as defined by the Federal Deposit Insurance Act, which has been found by the Board of Directors to be the functional equivalent of an industrial bank, and which is insured by the FDIC, to not fall within the scope of the Interlocks Act. Furthermore, once the Board of Directors has made the determination that * * *, a Nebraska industrial loan and investment company, is a "similar organization" to an industrial bank and is thus eligible for a deposit insurance, to not bring all Nebraska industrial loan and investment companies within the scope of Part 348, regardless of whether or not the particular industrial loan company in question has applied for or been granted Federal Deposit Insurance, would undermine the purpose of the Interlocks Act. We therefore conclude that, should the Board of Directors make the requisite determinations with regard to * * *, it, as well as other Nebraska industrial loan and investment companies, shall be considered subject to the restrictions of Part 348 and the Interlocks Act.1
2. Request for Extension of Time in which to Terminate Interlock
Based on the information contained in Regional Director Konjevich's December 6, 1983 memorandum, and in view of our above determination, we conclude that the interlocks between * * * and * * * are prohibited under section 348.3 of FDIC's regulations.2 * * * is seeking an extension of time in which to terminate the interlocks as provided by section 348.4(b)(5), "Loss of Management Officials Due to a Change in Circumstances". That provision, recently amended effective November 30, 1983, provides that if a depository organization is likely to lose 30% or more of its directors or of its total management due to a change in circumstances described in section 348.6, the affected institution may terminate the interlocks over a period of 30 months rather than the 15 months that would normally be available. The additional time period is designed to avoid the disruption that would arise from the loss of a large portion of the institution's management.
Several issues must be resolved favorably in order for the Legal Division to find that the above extension is available: (1) does the potential loss of management meet the minimum requisite percentage, (2) will the loss be disruptive to the internal management of * * *, (3) has * * * demonstrated that absent relief it is likely to incur the management loss i.e. will the affected management officials opt to relinquish their positions at * * * rather than * * * or * * * 3 and (4) has * * * developed an orderly plan for the phase out of the affected management? In addition to these four items which must be favorably resolved under the language of section 348.4(b)(5), we also need to determine that there has been a change in circumstances as described in section 348.6. Section 348.6 indicates that where a management official's service is not grandfathered under section 348.54 , the person's service must be terminated if a change in circumstances causes such services to become prohibited. Section 348.6 provides that such a change may include, but is not limited to, an increase in the asset size of an organization due to natural growth, a change in SMSA or community boundaries or designation of a new SMSA, an acquisition, merger, or consolidation, the establishment of an office, or a disaffiliation.
Should the Board of Directors grant * * * deposit insurance, the finding that * * * is a similar institution to an industrial bank will, as indicated above, trigger the application of the Interlocks Act. That action on the part of the Board of Directors can legitimately, in our opinion, be viewed as a change in circumstances under section 348.6. As to meeting the other requirements of section 348.4(b)(5), we note from the application that three directors out of a total of four directors are involved in the interlocks. Thus, the minimum requisite percentage management official loss is met. Furthermore, the loss of that many directors would appear on its face to be disruptive. The applicant has submitted an orderly plan for the termination of the interlocks,5 however, the application does not expressly address the likelihood of the management officials resigning their positions at * * *. We suggest contacting the applicant for supplementary information addressing this deficiency. As the relevant provision was recently amended, and in fact was not effective until the day after the application was received in the regional office, the applicant may not have been aware of the necessity to address this question and may wish to submit supplementary information.
In conclusion the Legal Division feels that the subject interlocks are in fact prohibited under Part 348 and the Interlocks Act. Furthermore, should the applicant submit satisfactory information addressing the issue of whether or not it is likely that the management officials in question will resign their positions at * * *, the exemption contained in section 348.4(b)(5) is available.6
1 The Legal Division recommends that a bank letter be formulated which can be sent out to all insured nonmember banks, the Banking Commissioner, and the appropriate state official responsible for supervision of the "similar" institutions where that official is not the Banking Commissioner in those states for which the Board has made the determination that the "similar institutions are eligible for deposit insurance. The bank letter would serve to apprise insured nonmember banks and "similar" institutions located in that state that the Interlocks Act is applicable. The date of the Board's action in granting the first deposit insurance application from that state from a "similar" institution is the date from which the fifteen month grace period under section 348.6(b) will run. Go back to Text
2 The interlocks in question are prohibited under section 348.3(a)(1) as the institutions are located in the same city. Go back to Text
3 The regulation contains a rebuttable presumption that a director who is a paid, full-time employee of the affected depository organization will not resign his/her position absent unusual circumstances. Go back to Text
4 In order for a management official's dual service to be grandfathered, he/she must have been serving two depository institutions as of November 10, 1978. The interlocking service with * * * is not eligible for grandfathering under section 348.5 as the three individuals in question did not begin to serve * * * until 1979. Go back to Text
5 * * * has submitted the following phase out plan: (1) a fifth director will be added to the Board of Directors by March 1, 1984; (2) by December 31, 1984 one of the interlocking directors will be replaced; (3) by December 31, 1985 a second interlocking director will be replaced; and (4) by June 30, 1986 the third and final interlocking director will be replaced. This schedule should satisfy section 348.4(b)(5) which directs that the depository organization has a thirty month period in which to terminate the interlocks, said time to run from the date of the change in circumstances. As indicated above, the time period is to be measured from the date of the Board's action. Go back to Text
6 We note that Regional Director Konjevich's December 6, 1983 memorandum recommends that section 348.5 be amended to allow grandfathering of interlocks involving institutions "similar" to industrial banks. Such an amendment could be proposed for comment, however, any change would require interagency co-ordination (the FDIC, FRB, OCC, FHLBB, and NCUA have identical regulations.) Additionally, the authority under the statute for enlarging the class of grandfathered institutions is uncertain. * * *. Go back to Text