4000 - Advisory Opinions
Part 362: Whether a State Insured Bank May Make an Equity Investment as a Member/Owner in a Limited Liability Company
October 12, 1994
Sandra Comenetz, Counsel
This responds to your June 16 and June 22, 1994 letters to Pamela LeCren in which you inquire whether a State insured state bank may make an equity investment as a member/owner in a limited liability company ("LLC"), instead of as a limited partner in a limited partnership, where the sole purpose of the LLC is to invest in the acquisition, rehabilitation, or new construction of a qualified housing project. If the answer to the foregoing is "yes", you also inquire whether 12 CFR § 24.4(a)(4), 12 U.S.C. § 1831a(c)(1), and 12 CFR § 362.3(a) limit an insured state bank's use of profits, dividends, tax credits, and any other distributions received from the qualified housing project.
Essentially, you assert that LLCs are sufficiently similar to limited partnerships, that, like insured state banks that are limited partners in limited partnerships, insured state banks that are members of LLCs should be allowed to make equity investments in qualified housing projects. In support of your position you state that (1) LLCs may be taxed for federal income tax purposes like partnerships; (2) LLCs are "formed and governed in much the same way as limited partnerships"; (3) the State law pertaining to LLCs, limited partnerships, and general partnerships are all found in the same title of the State Code, but the law pertaining to corporations is found in a different title; and, (4) members of LLCs have greater protection from personal liability than limited partners in a limited partnership because they are sheltered from liability even if they participate in the management of the LLC.
The starting point for determining whether an equity investment is permissible for an insured bank is section 24 of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1831a, which provides that an insured state bank may not, directly or indirectly, acquire or retain an equity investment of a type, or in an amount, not permissible for a national bank. 12 U.S.C. § 1831a(c)(1) and (f)(1)M.1
There is an exemption, however, for equity investments in qualified housing projects ("QHPs").
Notwithstanding any other provision of this subsection, an
insured State bank may invest as a limited partner in a
partnership, the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation, or new construction of a
qualified housing project.
While it appears that members of LLCs have greater protection from personal liability than limited partners in a limited partnership, the exemption in Section 24 applies solely to limited partnership interests. The legislative history to 12 U.S.C. § 1831a sheds no light on Congress's reasons for requiring that an insured state bank invest in QHPs as a limited partner in order to qualify for the exemption. Nor have we found any indication in the legislative history that the section should be read broadly. In addition, to the best of our knowledge, equity investments by national banks in LLCs are not among the investments that the OCC has approved across the board for national banks. In keeping with the basic tenet of statutory construction that exceptions are to be narrowly construed, we are reluctant to read the QHP exception broadly, and conclude that an insured state bank may not rely on the exception in 12 U.S.C. § 1831a(c)(3)(A) and make equity investments as a member/owner in an LLC, instead of as a limited partner.
On the other hand, there may be other ways to approach the issue. The March 4, 1993 redacted OCC letter opinion that you sent to the FDIC indicates that at least one equity investment in a State LLC met the OCC's requirements for a community development investment under 12 U.S.C. § 24 (Eighth) and (Eleventh) and Interpretive Ruling 7.7480 (replaced by 12 CFR Part 24). Thus, if the OCC found that the bank's proposed investment, were it made by a national bank, qualified under 12 U.S.C. § 24 (Eleventh) and 12 CFR Part 24 as a community development investment, the investment would fall outside the scope of Section 24 and Part 362.
For your information, we have enclosed a copy of an FDIC advisory memorandum that, among other things, sets forth the circumstances under which an investment made for public welfare purposes could be permissible for a state bank. If the investment is on the list of previously approved investments maintained by the OCC, or if the state bank (assuming it were a national bank) could take advantage of the OCC's self-certification mechanism, and, in both cases, certain other criteria are met, the investment would be permissible. If the foregoing are inapplicable, the state bank could request the FDIC's consent to hold the investment indirectly through a majority owned subsidiary provided that the bank meets its minimum capital requirements. If none of the foregoing are applicable, and because the FDIC defers to the OCC's determinations in such matters, the state bank could request that the FDIC seek the OCC's opinion whether the activity is permissible for a national bank. If the OCC were to determine that the investment meets its criteria for a national bank, the FDIC would accept that determination.
1"Equity investment" means, inter alia,
2A QHP is