4000 - Advisory Opinions
Would Section 24 of the FDI Act Prevent a State Chartered Bank From Acquiring and Operating a Wholly-Owned Subsidiary Engaged in the Business of General Insurance Brokerage
October 20, 1997
Jamey Basham, Counsel, Regulation and Legislation
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 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 with 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 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.