4000 - Advisory Opinions
Whether Bank Subsidiary May Hold Common Stock Listed on National Securities Exchange
January 14, 1994
Pamela E.F. LeCren, Senior Counsel
The following is in response to your letter to Mr. Alan Kaplan, Assistant General Counsel, Federal Deposit Insurance Corporation, asking for an opinion on whether [SUBSIDIARY] of [BANK] ("Bank") may under section 24 of the Federal Deposit Insurance Act (12 U.S.C. 1831a, "FDI Act") continue to hold its investment portfolio consisting of common stock listed on a national securities exchange or, if divestiture of those shares is required, whether the Bank may "divest" of those shares by charging off the book value of the shares.
As you are aware, section 24 of the FDI Act prohibits insured state chartered banks from acquiring or retaining any equity investment that is not permissible for a national bank. The statute does provide for a number of exceptions to the general prohibition, however, one of which "grandfathers" investments in common or preferred stock listed on a national securities exchange. In order for that exception to be available, the bank must be located in a state that permitted such investments as of September 30, 1991 and the bank must have made or maintained an investment in such securities during the period beginning on September 30, 1990 and ending on November 26, 1991. (Section 24(f)(2) of the FDI Act, 12 U.S.C. 1831a(f)(2)).
According to your letter, the Bank currently holds a securities portfolio which is comprised of, with the exception of one issue, common stock listed on a national securities exchange (book value $142,112.09, market value $1,522,263.88, yearly dividend in excess of $30,000). All of the stock was purchased prior to 1969 under the authority of state law which at the time authorized state banks to make such investments. In 1969 the state law was changed making such investments unlawful. Your letter further indicates that from 1969 to the present the bank has had numerous state and FDIC examinations and that "it appears both state and federal regulators were under the impression that the ownership of the stock portfolio had been "grandfathered" because no serious criticism of the portfolio is noted in examination reports."
In our opinion, the exception found in section 24(f)(2) of the FDI Act only permits banks located in a state which would have allowed any bank located in that state to make an investment in listed common or preferred stock on September 30, 1991 to retain existing qualifying investments in stocks (as well as to make additional qualifying investments) provided that the other conditions of grandfathering are met. The requirements of the exception have not been met in this instance. As the securities are neither permissible equity investments for a national bank nor are otherwise excepted by statute or regulation from the prohibition of section 24, the Bank must divest the securities as quickly as prudently possible but in no event later than December 19, 1996.
This office has previously determined that writing an asset down to zero does not constitute sufficient divestiture under the law. Therefore, we cannot accept charging the securities off the Bank's books as compliance with section 24. The Bank may, however, request the FDIC's consent to transfer the securities to a majority-owned subsidiary pursuant to section 362.4(d) of the FDIC's regulations (12 C.F.R. 362.4(d). The request cannot be approved unless the Bank meets its minimum capital requirements and the FDIC determines that holding the securities in a subsidiary does not pose a significant risk to the insurance fund. In addition, please keep in mind, of course, that the Bank must be authorized under state law to hold the securities in a subsidiary.
If you have any questions, please feel free to contact me at (202) 898-3730.