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4000 - Advisory Opinions


Whether sale of an insurance subsidiary of a state chartered bank to another state chartered bank within the same holding company system would affect the insurance subsidiary's grandfather powers under § 24(d)(2)(B) of the FDI Act

FDIC--96--3

January 30, 1996

Patrick J. McCarty, Counsel

This is in response to your December 8, 1995 letter to Pamela LeCren, Esq., Senior Counsel, FDIC, requesting confirmation that the transfer/sale of an insurance subsidiary of a state chartered bank to another state chartered bank in the same bank holding company system would not affect the insurance subsidiary's grandfathered powers under Section 24(d)(2)(B) of the Federal Deposit Insurance Act ("FDI Act") 12 U.S.C. § 1831a(d)(2)(B). As discussed below, the FDIC hereby confirms your conclusion.

Your December 8, 1995 letter presents the following facts. Bank Holding Company A owns all of the shares of a well-capitalized insured, state nonmember bank ("Bank A"). Bank A is the sole owner of an insurance company ("Subsidiary"), which engages, as principal, in certain insurance underwriting activities that are grandfathered under Section 24(d)(2)(B) of the FDI Act. Bank Holding Company B owns all of the voting shares of an intermediate holding company, which, in turn, owns all of the voting shares of a well-capitalized insured, state nonmember bank located in the same state as Bank A ("Bank B"). Bank Holding Company A and Bank Holding Company B have entered into a merger agreement, with Bank Holding Company B being the survivor. Bank Holding Company A and B propose to transfer ownership of Subsidiary from Bank A to Bank B after the merger of the two bank holding companies as part of a larger corporate restructuring.

With certain exceptions, Section 24 of the FDI Act generally prohibits insurance underwriting by state chartered banks and their subsidiaries, except to the extent such activities are permissible for a national bank. 12 U.S.C. §§ 1831a(b)(1) and (d)(2). One of the major exceptions to the general prohibition is a "grandfathering" of insurance underwriting activities conducted through subsidiaries of well-capitalized insured state banks. 12 U.S.C. § 1831a(d)(2)(B). To be eligible for grandfathering status, the bank subsidiary must have been lawfully underwriting insurance as principal as of November 21, 1991. Id. Section 24 provides for the loss of an insurance subsidiary's grandfathered status in the event of a change in control of the parent bank in the case of a title insurance subsidiary. 12 U.S.C. § 1831a(d)(2)(C).

You have asked whether the grandfathered status of the Subsidiary will be affected by the proposed sale/transfer from Bank A to Bank B. You have represented that once the merger of bank holding companies A and B is consummated--after which both Bank A and Bank B will be part of the same bank holding company system--that the Subsidiary will be transferred/sold to Bank B. Both Bank A and B are chartered by, and located in, the same state.

The FDIC legal staff has opined in the past that the grandfather status of an insurance subsidiary under Section 24(d) is not lost in connection with a one bank holding company reorganization where no actual change in control occurs. See FDIC Advisory Opinion 94--36 (July 13, 1994). Your specific situation asks this to be extended to the merger of bank holding companies and where there is an actual change in control of the bank owning the grandfathered subsidiary. For many of the same reasons articulated in FDIC Advisory Opinion 94--36, the FDIC legal staff takes the position that a merger of bank holding companies which results in a change in control of the bank owning the grandfathered subsidiary, in and of itself, will not result in the loss of a subsidiary's grandfather status under Section 24(d)(2)(B).

The larger issue which you have raised is whether the sale/transfer of a grandfathered insurance subsidiary should nullify the statutory grandfathering. The facts in this situation are extremely important. The fact that the Subsidiary will remain within the same bank holding company system, will remain a subsidiary of a bank chartered and located in the same state, albeit a different bank, and the sale/transfer of the Subsidiary is part of a larger corporate restructuring leads us to conclude that the sale/transfer does not result in a material change in the subsidiary's position. For these reasons, the FDIC legal staff takes the position that the proposed sale/transfer of the Subsidiary from Bank A to Bank B, after consummation of the proposed merger of the two bank holding companies, would not result in the loss of its statutory grandfather under Section 24(d)(2)(B).

This conclusion is limited strictly to the facts and circumstances discussed above and may change if those facts or circumstances change in a material way. This opinion should not be interpreted as an indication of the FDIC legal staff's views on other issues, including, but not limited to, the effect on the grandfather status under Section 24 arising from the sale/transfer of a grandfathered subsidiary out of a bank holding company system. We note that the Subsidiary remains, of course, subject to the product line, customer and geographic limitations found in Section 24(d)(2)(B).

I hope this letter responds fully to your questions. Please feel free to contact me at (202) 898--8708 with any other questions or comments you may have.


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