4000 - Advisory Opinions
Applicability of Part 348 to Hypothetical Interlocking Management Situations
August 12, 1980
Pamela E. F. LeCren, Attorney
The following is in response to your July 11, 1980 letter presenting several hypothetical situations along with your opinion as to the application of Part 348 of FDIC's regulations (12 C.F.R. 348) to the facts.1 You have requested that the FDIC concur in your opinion. The hypotheticals, which deal with the definition of the term "management official"; representative or nominee status; the definition of "person"; and changes in circumstances as those terms are used in the Depository Institution Management Interlocks Act are discussed separately below:
Hypothetical No. 1:
Your first fact situation posits whether or not an individual who has the title of "director emeritus", who attends board of directors' meetings, who does not vote at the board meetings but does speak to the matters of business before the board of directors, and who receives the same director's fee as the voting members of the board is a management official as that term is defined by section 348.2(h).
In pertinent part, section 348.2(h) defines "management official" to include advisory and honorary directors. We have no doubt that an individual such as described above falls into the category of a management official, i.e., is an advisory director or an honorary director. You further posit; however, that instead of attending meetings and addressing topics before the board for consideration, this individual merely receives a director's fee. In fact, you go so far as to indicate that the bank's policy is to prohibit this individual's attendance at board meetings and to further prohibit contact with any voting director about bank policy etc. You describe the "director's fee" as being in the way of a retirement benefit.
It is the opinion of the FDIC that a person such as described above is neither an advisory nor an honorary director for the purposes of the Interlocks Act. Although the FDIC has not officially adopted a definition of the terms "honorary" and "advisory" director, we have concluded that we will not consider anyone to be either if he or she neither attends nor is authorized to attend board of directors' meetings, does not advise voting members of the board, nor has access to information presented to the board. It is further our intention to initially presume all persons with the appropriate titles to in fact be honorary directors or advisory directors within the meaning of the Interlocks Act. We will; however, invite such persons to rebut the presumption.
Hypothetical No. 2:
The second set of facts establishes a situation where a member (A) of a law firm resigns from one of two management official positions and another member (B) of the same firm is elected to the position vacated by A. A and B do not, according to your facts, have any agreement, express or implied, to act for, or on behalf of, each other or the law firm.
In essence your fact situation poses the question of whether or not A or B is the representative or nominee of the other thus causing a management official interlock. Section 348.2(k) defines representative or nominee as follows:
(k) "Representative or nominee" means a person who serves as a management official and has an express or implied obligation to act on behalf of another person with respect to management responsibilities. Whether a person is a "representative or nominee" depends upon the facts in individual cases. The appropriate Federal supervisory agency or agencies will determine, after giving the affected persons the opportunity to respond whether a person is a "representative or nominee". Certain relationships (including family, employment, and agency relationships), or the ability and exercise of ability by a shareholder of a depository organization to elect a director, may be evidence of such an express or implied obligation. For the purposes of this subsection, person shall include only natural persons.
The law firm will not be considered a management official of both institutions inasmuch as only natural persons may have representatives or nominees. A and B could, however, be the representative or nominee of the other. In determining if a management official interlock existed, we would have to carefully examine the circumstances under which B was elected to A's vacated position and any relationship between the law firm and the two institutions.2 Whether or not a representative or nominee relationship exists is a factual determination, one which we cannot make based on the hypothetical as presented. We will say that the facts as presented would warrant close review.
In an opinion dated June 26, 1979 we had occasion to review a situation in which two individuals associated as counsel with the same law firm were each management officials of two different institutions. One of the two institutions was a client of the law firm. Although we did not need to reach the question to answer the request for an opinion, we did indicate that the two individuals would not represent each other because: (1) the two did not share in the profits of the law firm, (2) neither participated in the legal services rendered to the bank, and (3) we were assured that they would not communicate with each other regarding the affairs of either bank. Although the opinion was an early one (i.e., predated the final adoption of the definition in section 348.2(k)) it does provide some guidance as to the type of factors we will continue to examine in making a determination on the issue.
Hypothetical No. 3:
The third hypothetical concerns an individual who is serving two institutions (a bank and a mutual savings and loan association) as a director and who has served in those positions since prior to November 10, 1978. The bank and savings and loan each have offices located in the same city.
We agree that the regulation (specifically section 348.5) provides that the above individual is grandfathered in his or her positions as director of both institutions. This assumes of course that the interlocking relationship did not immediately prior to November 10, 1978 violate section 8 of the Clayton Act (15 U.S.C. 19). We also agree, as you further posit, that should the savings and loan association convert to stock form there will have been no "change in circumstances" resulting in early termination of the grandfathered interlock. Section 348.6(a) sets out the changes in circumstances that can force early termination of a grandfathered interlock. Those and only those events listed in that subparagraph will do so. Conversion from mutual to stock form by an institution is not a listed "change in circumstances."
Should you have any questions regarding the substance of this opinion, the Interlocks Act, or Part 348 of FDIC's regulations, please contact me.
1 Part 348 implements the Depository Institution Management Interlocks Act (12 U.S.C. 3201 et seq., "Interlocks Act"). In general, the Interlocks Act prohibits two nonaffiliated depository institutions from sharing a common management official depending upon the size and location of the institutions. The Interlocks Act grandfathers certain interlocking relationships which existed prior to the enactment of the statute (November 10, 1978) and provides for the orderly termination of interlocks that undergo a "change in circumstances." Go back to Text
2 Relatively few cases have dealt with the question of representative or nominee status in the context of an interlock (banking or otherwise). See Lehman v. Civil Aeronautics Board, 209 F.2d 289 (D.C. Cir., 1953) for one case in which the court found two partners to be representatives of each other thus creating an interlock even though they acted individually and neither exerted control over the other. Go back to Text