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4000 - Advisory Opinions

Affiliation under the Depository Institution Management Interlocks Act


January 23, 1980

Pamela E. F. LeCren, Attorney

The following is in response to your November 9, 1979 letter requesting a ruling by the FDIC as to whether or not *** is affiliated with *** under the Depository Institution Management Interlocks Act (12 U.S.C. § 3201 et seq.) and FDIC's regulations (12 C.F.R. Part 348) implementing the Act. If the two institutions are affiliated, they may share common management officials without violating the Act or the regulations. You have presented facts which you feel demonstrate that *** and *** are affiliated by virtue of common ownership. Based on the following, we are of the opinion that *** and *** are affiliated.

Section 202(3)(B) of the Act provides that two institutions are considered to be affiliated if "more than 50 per centum of the voting stock of one corporation is beneficially owned in the aggregate by one or more persons who also beneficially own in the aggregate more than 50 per centum of the voting stock of the other corporation." According to the stockholder list contained in your letter, twenty-two persons own 55.6% of the stock of *** while at the same time owning 57.8% of the stock of ***.1 Although the requisite stock ownership under section 202(3)(B) of the Act seems to be present, it is necessary to read section 202(3)(B) with section 348.2(b) of FDIC's regulations. Section 348.2(b) qualifies section 202(3)(B) of the Act by stating that an affiliation based on common ownership will not be considered to exist where (1) the asserted affiliation appears to have been established in order to avoid the prohibitions contained in the Act on interlocking management and (2) where the asserted affiliation does not represent a true commonality of interest between the two depository organizations. In determining whether or not an asserted affiliation by common ownership is disqualified under section 348.2(b), we first examine the circumstances behind the creation of the pattern of stock ownership said to demonstrate common ownership. If the circumstances are such as to give rise to the appearance of avoiding the prohibitions of the Act, we next examine the pattern of ownership to determine whether or not a true commonality of interest exists between the persons in the ownership group as to both institutions. In general, if a person holds a minimal number of shares in one organization while holding shares in the other in an amount wholly disproportionate to his/her holdings in the first organization, his/her share will not be counted in determining whether the group owns more than 50% of the stock of both organizations.

In the instant case, the stock ownership pattern of *** and *** has not changed since 1976. It therefore could not have been established in order to avoid the prohibitions of an Act not made law until 1978. As the first of the two elements contained in section 348.2(b) has not been met, we need not reach the second test.2 As the stock ownership of *** and *** meets the requirements for affiliation under section 202(3)(B) of the Act and is not disqualified by the operation of section 348.2(b) of FDIC's regulations, it is our opinion that *** and *** are affiliated for the purposes of the Depository Institution Management Interlocks Act.

Should you have any questions regarding the substance of this opinion, the Act, or FDIC's regulations, please contact me.

1 *** is wholly owned by ***, (a one bank holding company) with the exception of directors qualifying shares in the amount of 1,000 out of 190,000 shares outstanding. The twenty-two persons named in the list are in actuality shareholders of ***, i.e., they as a group own approximately 57% of the stock of ***. Because *** owns over 99% of the shares of ***, the FDIC will consider each *** stockholder to beneficially own a pro rata amount of shares in ***. Go back to Text

2 Seven stockholders named on the list would be subject to disqualification if we were to reach the nominal and disproportionate test. These persons each own substantial amounts of stock in one organization while owning only one share in the other. Of the seven, four (***) could be treated as one person as each is an "immediate family" member, as that term is defined in section 348.2(b), of the other. If these four persons were treated as one stockholder, only the remaining three persons would be disqualified from the common ownership group. Go back to Text

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