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4000 - Advisory Opinions


Bank Compliance with Regulations on Collecting and Reporting Information on Principal Shareholders

FDIC-84-7

February 27, 1984

Pamela E. F. LeCren, Senior Attorney

The following is in response to your December 30, 1983 letter to Roger A. Hood, Assistant General Counsel, requesting an opinion from the FDIC concerning compliance by your client bank with certain FDIC regulations which require insured nonmember banks to, among other things, collect and report information with respect to their "principal shareholders." Your letter specifically references Parts 337 and 349 of FDIC's regulations.

Insured nonmember banks have certain reporting obligations under Part 349 of FDIC's regulations, are subject to certain insider lending restrictions and recordkeeping obligations under § 337.3 of FDIC's regulations, and must report certain insider transactions on their quarterly call report, all of which involve the identification of the bank's "principal shareholders" as defined therein, i.e., any person that owns or controls more than 10% of any class of the bank's voting securities. According to your letter, your client bank has two classes of voting stock: common and preferred, the latter of which is convertible. Over time the market value of the common stock has increased and the bank has accordingly experienced a "rush-to-convert" on the part of its preferred shareholders. The class of preferred stock has shrunk from 303,493 shares outstanding as of March 4, 1983 to 153,854 shares outstanding as of December 23, 1983. The bank can legally force the conversion of the remaining shares after June 30, 1984 and, according to your letter, it intends to do so. Because of the volatile situation concerning your client's class of preferred shareholders, your client is faced with an "onerous" burden if it hopes to comply with FDIC's reporting and other regulations that involve the identification of holders of more than 10% of any class of the bank's voting securities.

The bank proposes the following in an attempt to cope with the rapidly changing situation with respect to its preferred class of shareholders: (1) to tabulate its 10% preferred shareholders as of December 31, 1983, (2) to use the December 31, 1983 tabulation "during the following months for purposes of complying with the regulations", and (3) to "recalculate holdings of persons suspected of being principal shareholders' following any purchase or sale (other than by conversion) of preferred stock by them in the secondary market." Your letter invites the FDIC to approve the above "plan". It also urges the FDIC to "reconsider the status of preferred stock" under FDIC's regulations which use the above referenced definition of "principal shareholder."

As to the latter request, we can only say that the definition as used in the relevant regulations is set by statute in clear, unambiguous language. We do not feel that we can take any other course than that of applying the statute as written. Insofar as the use of Form FFIEC 004, "Report on Indebtedness of Executive Officers and Principal Shareholders and their Related Interests to Correspondent Banks", is concerned, the form is only required to be sent to persons having principal shareholder status as of December 31 of the reporting year. To this extent your client's "plan" is consistent with existing requirements. In order to comply with the substantive provisions of § 337.3 concerning loans to principal shareholders, any insured nonmember bank must use its best efforts to be continually aware of the identity of its principal shareholders. That this task may be particularly difficult for your client bank does not remove its obligation to comply with the law and to use its best efforts in doing so. Therefore, despite the fact that we are not unsympathetic to your client's somewhat unusual circumstances, we cannot say that the FDIC will not cite as a violation of relevant regulation any nonconforming loan extended by your client bank to individuals determined by FDIC to be principal shareholders.


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