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4000 - Advisory Opinions
Would section 24 of the FDI Act and 12 C.F.R. Part 362 prevent a
state chartered bank from acquiring and operating a wholly-owned
subsidiary engaged in the business of general insurance brokerage
FDIC--97--7
October 20, 1997
Jamey Basham, Counsel
This letter is to confirm in writing our telephone conversation of
July 18, 1997. Please accept my apologies for my delay.
You asked whether section
24 of the Federal Deposit Insurance Act and the FDIC's
regulations thereunder at 12 C.F.R.
Part 362 would prevent a state chartered bank from acquiring
and operating a wholly-owned subsidiary engaged in the business of
general insurance brokerage. In your follow-up correspondence of July
24, 1997, you also inquired about the same issue with regard to related
risk management functions.
Section 24 only applies to state bank activities conducted either
directly or through a subsidiary "as principal." Section 362.4(a)
of the FDIC's regulations specifically articulates this restriction.
Section 362.2(c) states that "[a]n activity is considered to be
conducted as principal if it is conducted other than as agent for a
customer, is conducted other than in a brokerage, custodial, advisory
or administrative capacity, or is conducted other than as trustee."
In the preamble accompanying the rule, the FDIC described the
definition as not covering, for example, acting as agent for the sale
of insurance, acting as agent for the sale of securities, acting as
agent for the sale of real estate, or acting as agent in arranging for
travel services. Likewise, providing safekeeping services, providing
personal financial planning services, and acting as trustee were
described as not being "as principal" activities. 58 Fed.
Reg. 64,462, 64,468 (Dec. 8, 1993). The FDIC's pending notice of
proposed rulemaking to revise part 362 would continue this approach,
albeit under a different structure. 62 Fed. Reg. 47969,
47972 (Sept. 12, 1997).
Also, as a general matter, analysis of this issue does not end with
a determination that a state bank is acquiring an operation generally
referred to as an "agency," such as a travel
{{12-31-98 p.4984.23}}agency, insurance agency, or real
estate agency. The various activities of the agency must be examined on
an unbundled basis.
The selling of insurance as an agent in connection with a general
insurance brokerage would not be an "as principal" activity
subject to section 24 or part 362. As for what you describe as related
risk management functions, I am not certain exactly what group of
activities this would encompass.
As for holding the general insurance brokerage as a subsidiary, this
is permitted, because section 24 and section 363.3 of the FDIC's
regulation expressly permit state banks to make an equity investment in
a majority owned subsidiary.
Your letter also asks whether the first-tier insurance brokerage
subsidiary could in turn own other second-tier subsidiaries or
interests in companies engaged in similar non-principal activities.
This is actually two separate questions.
If the first-tier insurance brokerage subsidiary held a majority of
the stock of one or more second-tier subsidiaries, the second-tier
subsidiaries would themselves be majority owned subsidiaries for
purposes of part 362, and the above analysis authorizing the bank's
equity investment in a majority-owned subsidiary and indirect conduct
of activities not as principal would apply to the second-tier
subsidiaries themselves. In other words, no further 362 analysis would
be required as long as there was majority ownership and the second-tier
subsidiary did not engage in any activity as principal.
As for your question about holding "interests" in similar
companies, this could be authorized by
section
362.4(c)(3)(iii)(D). In section 362.4(c)(3), the FDIC lists
certain activities and investments which the FDIC has determined do not
pose a significant risk of loss to the deposit insurance fund, and in
which an insured state bank may engage without obtaining the FDIC's
prior consent, provided that the bank meets and continues to meet the
applicable minimum capital standards as prescribed by the appropriate
Federal banking agency, and provided that the activity or investment in
question is authorized by state law, and is otherwise permitted under
federal law and regulations. Section 362.4(c)(3)(iii)(D) permits a
majority-owned subsidiary of a state bank to invest in fifty percent or
less of the stock of a corporation which engages solely in activities
which are not considered to be as principal. You should be aware,
however, that the FDIC's has proposed to add a requirement to this
authorization. Under the FDIC's proposed revision of part 362, the
state bank would also be required to control the corporation in which
its majority-owned subsidiary invests. I invite you to consult 62
Fed. Reg. 47,983 (Sept. 12, 1997) for the FDIC's discussion
of its thinking and our request for comment on this
point.
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