FDIC Federal Register Citations

[Federal Register: February 13, 2003 (Volume 68, Number 30)]

[Rules and Regulations]

[Page 7301-7309]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr13fe03-1]

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 303

RIN 3064-AC53

Insurance of State Banks Chartered as Limited Liability Companies

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) has adopted a

final rule regarding whether and under what circumstances the FDIC will

grant deposit insurance to a State bank chartered as a limited

liability company (LLC). Pursuant to section 5 of the Federal Deposit

Insurance Act (FDI Act) the FDIC may grant deposit insurance only to

certain depository institutions. One of the statutory requirements for

a State bank to be eligible for Federal deposit insurance is that it

must be ``incorporated under the laws of any State.'' In the recent

past the FDIC received two inquiries regarding whether a State bank

that is chartered as an LLC (a ``Bank-LLC'') could be considered to be

``incorporated'' for purposes of that requirement. The final rule

provides that a bank that is chartered as an LLC under State law would

be considered to be ``incorporated'' under State law if it possesses

the four traditional, corporate characteristics of perpetual

succession, centralized management, limited liability and free

transferability of interests.

DATES: Effective date: March 17, 2003.

FOR FURTHER INFORMATION CONTACT: Mindy West Schwartzstein, Examination

Specialist, Division of Supervision and Consumer Protection, (202) 898-

7221, or Robert C. Fick, Counsel, Legal Division, (202) 898-8962,

Federal Deposit Insurance Corporation, 550 17th Street, NW.,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

Generally, the FDIC may grant deposit insurance only to depository

institutions that are engaged in the business of receiving deposits

other than trust funds.\1\ The term ``depository institution'' is

defined in the Federal Deposit Insurance Act (FDI Act) to mean any bank

or savings association.\2\ The term ``bank'' is also defined in the FDI

Act to include any State bank,\3\ and ``State bank'' means:

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\1\ See 12 U.S.C. 1815.

\2\ See 12 U.S.C. 1813(c)(1).

\3\ See 12 U.S.C. 1813(a)(1).

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Any bank, banking association, trust company, savings bank,

industrial bank * * * or other banking institution which--

(A) Is engaged in the business of receiving deposits other than

trust funds * * * and

(B) Is incorporated under the laws of any State or which is

operating under the Code of Law for the District of Columbia (except a

national bank),

Including any cooperative bank or other unincorporated bank the

deposits of which were insured by the Corporation on the day before

August 9, 1989.\4\

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\4\ 12 U.S.C. 1813(a)(2).

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Recently, two banks expressed an interest in obtaining Federal

deposit insurance for a State bank that would be chartered as an

LLC.\5\ The proponents have argued specifically that the term

``incorporated'' should not be interpreted to preclude an LLC from

becoming an insured depository institution. The phrase ``incorporated

under the laws of any State'' first appeared in the definition of

``State bank'' with the Banking Act of 1935,\6\ but the FDI Act

provides no definition of the term ``incorporated.'' Furthermore, there

is no legislative history nor judicial guidance regarding its meaning

as used in the FDI Act. Consequently, it is not clear how the term

``incorporated'' should be interpreted in the context of the FDI Act,

and specifically, whether an LLC could be considered to be

``incorporated'' for purposes of determining eligibility for Federal

deposit insurance.

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\5\ Currently, State law in 5 States expressly permits LLCs to

engage in the business of banking; the law in 14 other States would

not. An informal survey of these 14 States indicated that there

appears to be no particular reason for this prohibition.

Representatives of two of the States thought that one reason could

be that the corporate form lends itself to regulation and

supervision. Representatives of two other States mentioned that

legislation was being drafted or proposed to remove the prohibition.

\6\ See Banking Act of 1935, Pub. L. No. 74-305, sec. 101, 49

Stat. 684.

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II. The Nature of Corporations

At common law there were generally three types of business

entities: proprietorships, partnerships, and corporations. A

proprietorship is an individual carrying on a business for profit. A

partnership is generally an association of two or more persons to carry

on as co-owners a business for profit.\7\ Proprietorships and

partnerships had no existence separate and apart from their owners.

Corporations, on the other hand, were created and existed by virtue of

a grant of authority from the sovereign. Although there appears to be

no universally accepted definition of ``corporation,'' most definitions

of the term are pervaded by the notion of ``an `artificial legal

creation,' the continuance of which does not depend on that of the

component persons, and the being or existence of which is owed to an

act of state.''\8\ One of the earliest judicial definitions reflecting

that notion is that enunciated in the 1819 case of Trustees of

Dartmouth College v. Woodward.\9\ In Dartmouth College, Chief Justice

Marshall stated that

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\7\ See Unif. Partnership Act, sec. 101(6) (1997), 6 U.L.A. 61

(Supp. 2002).

\8\ 1 William Meade Flectcher et al., Flectcher's Cyclopedia of

the Law of Private Corporations Sec. 4 (perm. ed., rev. vol. 2001).

\9\ Trustees of Dartmouth College v. Woodward, 17 U.S. (4

Wheat.) 518 (1819).

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[A] corporation is an artificial being, * * * existing only in

contemplation of law. Being the mere creature of law, it possesses only

those properties which the charter of its creation confers upon it * *

* Among the most important are immortality and * * * individuality;

properties, by which a perpetual succession of many persons are

considered as the same, and may act as a single individual.\10\

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\10\ Id. at 636.

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Attributes of a Corporation

The lack of any universal agreement as to the characteristics of a

corporation

[[Page 7302]]

may have resulted from the fact that those characteristics have evolved

over time.\11\ However, it has been traditionally recognized that there

are four attributes of a corporation that distinguish it from other

forms of business entities; those attributes are: perpetual succession,

centralized management, limited liability, and free transferability of

interests.

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\11\ See Douglas Arner, Development of the American Law of

Corporations to 1832, 55 SMU Law Review 23, 43-54, 2002.

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Perpetual succession (also sometimes known as continuity of life)

is not generally construed to mean immortality; rather perpetual

succession means that the entity continues to exist independent of its

owners. For example, the death or withdrawal of a shareholder of a

corporation does not terminate the existence of the corporation.

Perpetual succession is an attribute that distinguishes corporations

from partnerships because partnerships are created and exist by

agreement of the owners (the partners). The death or withdrawal of a

partner generally terminates the partnership. A corporation, on the

other hand, is created and exists by virtue of a grant of authority

from the State, and the death or withdrawal of a shareholder does not

terminate the corporation.

Centralized management generally means that continuing, exclusive

authority to manage the entity is vested in a group of individuals

appointed or elected by the owners. The owners, therefore, do not have

the exclusive authority to directly manage the entity. For example, the

shareholders of the corporation elect a group of individuals (who may

or may not be owners) to be its Board of Directors, and the Board of

Directors manages the corporation. In a partnership, the general

partner(s) have the exclusive authority to manage the affairs of the

partnership.

Limited liability generally means that an owner of the entity is

not personally liable for the debts of the entity; rather, the maximum

potential liability of an owner is limited to the owner's investment in

the entity. For example, the shareholders of a corporation are

generally not liable for the corporation's debts, and the maximum

amount that a shareholder could lose if the corporation incurs

liabilities beyond its assets is his or her investment. This attribute

also distinguishes a corporation from a partnership because in a

partnership the general partners typically are fully liable for the

debts of the partnership.

Free transferability of interests generally means that an owner of

the entity may transfer an ownership interest in the entity without the

consent or approval of the other owners. For example, a shareholder of

a corporation can generally transfer all or a part of his or her shares

to another person without the consent or approval of any other

shareholder. However, in closely-held corporations, it is a common

practice for shareholders to enter into agreements requiring a selling

shareholder to obtain the prior approval of the remaining shareholders.

In partnerships, a partner generally cannot transfer his or her

interest without the consent of the other partners. This is so because

partnerships exist by virtue of an agreement among all of the owners.

However, even when the other partners consent, the original partnership

technically is terminated, and a new partnership is created.\12\

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\12\ See Flectcher, supra note 8, Sec. 20.

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Tax Treatment of Corporations vs. Partnerships

As noted above, a key distinction between a corporation and a

partnership is that a corporation is created by a grant of authority

from the State, whereas a partnership is created by agreement among the

co-owners. A corporation, unlike a partnership, is a legal entity

separate and apart from its owners, and the Federal income tax laws

reflect that separate existence. As a result, a corporation's income is

effectively taxed twice, once at the corporation level, and again at

the shareholders' level when the shareholders receive the corporation's

income as dividends. However, because a partnership is not a legal

entity separate from its owners, a partnership's income is not taxed at

the partnership level, but is attributed directly to the partners and

taxed only at the individual partners' level. This feature of a

partnership is sometimes called ``pass-through tax treatment,'' and is

generally considered to be a significant advantage over the tax

treatment of a corporation's income.

Since the characterization of a business entity as a

``corporation'' has significant tax implications, the Internal Revenue

Service (IRS) established rules to determine whether an entity would be

taxed as a corporation or a partnership. Prior to its amendment in

1997, Treas. Reg. Sec. 301.7701-2 classified an association of two or

more persons who had the purpose of carrying on a business and dividing

the profits as either a partnership or a corporation depending upon

whether the association possessed more corporate characteristics than

noncorporate characteristics. The four corporate characteristics that

the IRS utilized were: continuity of life (perpetual succession),

centralized management, limited liability, and free transferability of

interests. Under the former IRS regulations, if an association

possessed at least three of the four corporate characteristics, it

would be treated as a corporation for federal income tax purposes. As

noted above, after 1996 the IRS no longer utilized the corporate

characteristics test and now permits business entities that are not

specifically classified as corporations in the regulation to elect

partnership tax treatment.\13\ In that regard, we note that one of the

entities specifically classified as a corporation in the regulation is

a ``[s]tate-chartered business entity conducting banking activities, if

any of its deposits are insured under the Federal Deposit Insurance

Act.'' \14\ As a result, an FDIC-insured, State bank that is chartered

as an LLC would not qualify under existing IRS regulations for

partnership tax treatment. Nevertheless, proponents of permitting

Federal deposit insurance for Bank-LLCs argue that if the FDIC

determines that Bank-LLCs are eligible for Federal deposit insurance,

they would then seek a change in the IRS regulations. The proponents

argue that they have considered subchapter S status but found it too

limiting.

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\13\ See Treas. Reg. Sec. Sec. 301.7701-2, 7701-3 (1997).

\14\ Treas. Reg. Sec. 301.7701-2(b)(5) (1997).

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In August 1996 Congress amended the Internal Revenue Code to allow

eligible financial institutions to elect subchapter S status for

federal income tax purposes.\15\ A principal advantage of such status

is that a subchapter S corporation is taxed the same as a partnership,

i.e., a subchapter S corporation is entitled to pass-through tax

treatment. There are, however, limits on both the number and type of

shareholders permissible for a subchapter S corporation. The maximum

number of shareholders of a subchapter S corporation is 75, and only

individuals, estates, certain trusts, and certain tax-exempt

organizations may be shareholders.\16\ Furthermore, there can only be

one class of stock in a subchapter S corporation, and no nonresident

aliens may be shareholders.\17\

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\15\ See Small Business Job Protection Act, Pub. L. 104-188

Sec. 1315, 26 U.S.C. 1361(b) (1996).

\16\ See 26 U.S.C. 1361(b) (1996).

\17\ See Id.

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These limitations on the number and type of permissible

shareholders have been cited as principal reasons why subchapter S

status does not provide banks with a practical way of gaining

[[Page 7303]]

pass-through tax treatment. It is recognized that in the past several

bills have been introduced in Congress to increase the number of

permissible shareholders for subchapter S corporations, but to date

none have been enacted into law. Consequently, the proponents have

sought a determination from the FDIC regarding the eligibility of Bank-

LLCs for deposit insurance. In issuing this final rule it is not the

FDIC's intent to influence the IRS either way. This final rule is

focused on responding to a request for a determination as to whether

under the FDI Act a bank that is chartered as an LLC could be

considered to be ``incorporated'' and therefore eligible to apply for

Federal deposit insurance as a State bank. Specifically, the FDIC takes

no position on how such an entity should be taxed. We note that

supporters of deposit insurance for Bank-LLCs argue that even if the

IRS declines to amend its regulations to provide pass-through tax

treatment for a Bank-LLC, there are still advantages to the LLC

structure. State tax laws may provide the desired pass-through tax

treatment with respect to State income taxes. Furthermore, it is argued

that the increased flexibility provided by the LLC structure is itself

a significant advantage over the corporation structure.

III. The Nature of Limited Liability Companies

Generally, an LLC is a business entity that combines the limited

liability of a corporation with the pass-through tax treatment of a

partnership.\18\ Wyoming was the first State to authorize LLCs in 1977;

since that time the remaining 49 States and the District of Columbia

have all enacted LLC statutes. Generally, LLC statutes were crafted to

authorize a business entity that is neither a partnership nor a

corporation, but an entity that has some of the more desirable features

of each.\19\ As a result, an LLC has characteristics of both a

partnership and a corporation. However, because an LLC is neither a

partnership nor a corporation, State partnership laws and State

corporation laws generally do not apply. For example, State corporation

laws that require a board of directors, that specify how ownership

interests (shares) may be issued, and that impose capital requirements

generally do not apply to an LLC. LLC statutes generally allow the

owners broad discretion in setting up an LLC. According to some legal

scholars, ``[w]hole bodies of corporate law doctrine . . . are rendered

irrelevant'' when an LLC is utilized.\20\

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\18\ See Mark A. Sargent & Walter D. Schwidetzky, Limited

Liability Company Handbook Sec. 1:3 (rev. 2002).

\19\ See ``Unif. Limited Liability Company Act,'' Prefatory

Note, (amended 1996) 6A U.L.A. 426 (Supp. 2002).

\20\ See Sargent & Schwidetzky, supra note 18, Sec. 1:3.

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An LLC is established by filing articles of organization with the

State. These articles are roughly equivalent to a corporation's

articles of incorporation. Every LLC has an operating agreement which

is a contract executed by the members that sets forth the manner in

which the business of the LLC will be conducted. The operating

agreement establishes the rights, powers, duties, and liabilities of

the members with respect to each other and with respect to the LLC. It

contains provisions detailing such matters as the LLC's management

structure, capital contributions, accounting, distributions, transfers

of a member's interest, and dissolution. As used in many LLC statutes,

a ``member'' of an LLC is a person who owns an interest in the LLC and

is roughly equivalent to a shareholder of a corporation. Furthermore, a

``member's interest'' in an LLC is generally the member's ownership

interest in the LLC, and is sometimes evidenced by a certificate which

is roughly equivalent to a stock certificate of a corporation.

Consistency of the LLC Structure With Corporate Attributes

Many LLC statutes authorize entities that do not possess the four

corporate attributes. First, some State LLC statutes require, or permit

LLC members to provide in the operating agreement, that the LLC will

automatically terminate, or dissolve, or that its operations will be

suspended pending the consent of the remaining members, upon the death,

disability, bankruptcy, withdrawal, or expulsion of a member, or upon

the happening of some other specified event.\21\ These automatic

termination/dissolution/suspension provisions are inconsistent with the

notion of perpetual succession because the continued existence and

operation of the entity directly depends upon the existence, condition,

or status of its owners. Second, some State LLC statutes require, or

permit LLC members to provide in the operating agreement, that the LLC

will be managed solely and directly by the members.\22\ Such member-

management also tends to be inconsistent with the corporate attribute

of centralized management because exclusive authority to manage the

institution is vested in the owners who may or may not possess adequate

expertise to manage the institution and who, as a group, may be so

large or so small as to present operational or supervisory problems for

the entity. Third, while members of an LLC generally have limited

liability, some LLC statutes permit the LLC to provide for one or more

full liability members, i.e., members who are fully liable for all of

the liabilities, debts, and obligations of the LLC.\23\ Finally, some

State LLC statutes require, or permit LLC members to provide in the

operating agreement, either that LLC members may not transfer their

interests in the LLC without the consent of the remaining members, or

that a member may not transfer the managerial or voting rights that

accompany an owner's economic interest in the LLC without the consent

of the remaining members.\24\ Such a provision tends to be inconsistent

with the concept of free transferability of interests because the

requirement for prior consent prevents, or at least restricts, an

owner's transfer of his or her ownership interest.

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\21\ See, e.g., Nev. Rev. Stat. Sec. 86.491 (2001); Mass. Ann.

Laws ch. 156C, Sec. 43 (2002).

\22\ See, e.g., Mich. Comp. Laws Sec. 450.4401 (2002); Ala.

Code Sec. 10-12-22(a) (2002).

\23\ See, e.g., Vt. Stat. Ann., tit. 11, Sec. 3043(b) (2002);

Cal. Corp. Code Sec. 17101(e).

\24\ See, e.g., Mich. Comp. Laws Sec. 450.4506 (2002); Pa.

Stat. Ann. tit. 15, Sec. 8924 (2002).

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IV. Overview of Comments Received

On July 23, 2002, the FDIC published a notice of proposed

rulemaking in the Federal Register (67 FR 48054) (the ``notice of

proposed rulemaking'') which generally proposed that a bank chartered

as an LLC would be considered to be ``incorporated'' if it had the four

traditional, corporate attributes. The notice of proposed rulemaking

also requested comments on three specific questions regarding the

proposed rule. The FDIC received 23 comment letters from 22

organizations. All of the comment letters were generally in favor of

granting deposit insurance to State banks organized as LLCs. The

organizations filing comments included nine State trade associations,

six State banks, three national trade associations, two law firms, an

organization of State bank supervisors, and a State banking

commissioner.

The three questions posed and a discussion of the responses

received with respect to those questions, as well as the FDIC's

analysis of those responses follow.

[[Page 7304]]

1. Should the FDIC Permit a State Bank That Is Organized as an LLC To

Obtain Federal Deposit Insurance?

All of the commenters favored, at least, in general, a

determination that a State bank that is organized as an LLC is eligible

to apply for Federal deposit insurance.

2. If So, Should the FDIC Interpret the Term ``Incorporated'' Utilizing

Some, All, or None of the Traditional Four Corporate Attributes?

Ten commenters thought the FDIC should not use any of the four

corporate attributes in determining eligibility for Federal deposit

insurance; four commenters thought we should use three of the four

corporate attributes; three commenters thought we should use all four

attributes; and five commenters did not respond specifically on this

question.

Arguments Against Using Any of the Four Corporate Attributes

Of the 10 commenters who opposed using any of the four corporate

attributes in determining a Bank-LLC's eligibility to apply for deposit

insurance, eight specifically thought that if the particular State

permits a bank to be organized as an LLC, and if the FDIC determines

that the institution could be operated in a safe and sound manner, that

should be sufficient for the entity to be eligible for Federal deposit

insurance.

In support of their position the 10 commenters offered their views

on the appropriateness of using specific corporate attributes to

determine eligibility for Federal deposit insurance.

With regard to the corporate attribute of perpetual succession,

several commenters construed the perpetual succession attribute to mean

perpetual existence. Several commenters pointed out that in the past

many FDIC-insured banks had limited lives (e.g., the legal existence of

some banks would terminate after 50 years). Since limited-life banks

had never been a problem for the FDIC in the past, the commenters

argued, they should not be a problem for the FDIC now. However,

perpetual succession does not mean immortality. Rather, perpetual

succession means that the existence of an entity is not dependent on

the existence, condition, or status of any of its owners, and the

death, disability, withdrawal, or bankruptcy of one or more of the

owners of the entity does not terminate, dissolve, or suspend the

entity. As noted above, some State LLC laws require, or permit an LLC

to provide in its organizational documents, that the LLC will

automatically terminate, dissolve, or be suspended upon the death,

disability, bankruptcy, withdrawal or expulsion of an owner of an LLC

or upon the happening of some other specified event. If a Bank-LLC were

subject to such automatic termination, dissolution, or suspension

provisions, without any advance warning, depositors in that institution

might be denied access to their deposits due to an automatic

termination of the institution's existence. Generally, the triggers for

such automatic provisions may be wholly unrelated to the financial

condition of the entity. Consequently, an institution that is well-

capitalized, that is otherwise highly-rated for safety and soundness,

and that is not subject to any enforcement actions could suddenly be

closed for the sole reason that one of the owners died. Depositors

would never know with certainty if their bank will be in existence on

the day and time when they may need to withdraw their money.

Furthermore, without such advance notice, the FDIC would not be

prepared to handle the institution's closure and meet its deposit

insurance obligation in a timely manner. In addition, not only would a

customer be denied access to his or her deposits, but also any checks

in transit that had not yet been paid by the bank would be rejected.

The uncertainty, confusion, and disruption caused by such a closing

would not only cause serious damage to public confidence in the

nation's banking system, but also serious disruption to the community.

Finally, without an opportunity to locate a healthy institution to

purchase the assets and assume the deposits of the institution on a

going-concern basis, the cost of the resolution could be substantially

higher than necessary. For these reasons, the FDIC continues to believe

that it is not only reasonable, but essential, that the term

``incorporated'' be interpreted to include the corporate attribute of

perpetual succession.

With regard to the corporate attribute of centralized management,

one commenter recognized that in a theoretical sense there may be

concerns when a Bank-LLC with a large number of members is proposed to

be managed directly by its members. However, rather than requiring a

board of directors for every Bank-LLC, the commenter suggested that the

FDIC could require a board of directors only if the number of members

exceeded 25. The FDIC believes that centralized management is an

important attribute for a bank for a couple of reasons. First, if the

authority to manage the bank is limited to the owners of the

institution, management expertise would necessarily also be limited.

The quality of the management of a bank is a key factor in a bank's

success or failure. In order to provide the best chance for a bank to

compete successfully and to operate profitably, a bank should be free

to enlist the best qualified managers available to it. Too small of a

group of owners may not provide sufficient management expertise. Too

large of a group may dilute the influence of those owners who do have

adequate management expertise. For example, even if some of the owners

possess adequate expertise, their ability to manage the institution may

be negated by a larger segment of the owners that lacks such expertise.

Second, management by a group that is too small could severely impair

the bank's ability to respond to supervisory and regulatory direction.

The volume and complexity of the demands of operating a bank might put

too small of a group under excessive pressure and could result in

management that is not responsive or at least so slow as to imperil the

bank's effectiveness. Too large of a group may make it unwieldy or

excessively difficult to disseminate information and get decisions in a

timely manner because so many voices are entitled to be heard and

considered. For these reasons, the FDIC believes that centralized

management is also an important attribute that a bank should have in

order to be eligible for deposit insurance.

With regard to the corporate attribute of limited liability, one of

the 10 commenters while generally disagreeing with the use of the four

corporate attributes, nevertheless thought that requiring limited

liability was reasonable, since unlimited liability would certainly

reduce the number of prospective shareholders. Another of the 10

commenters thought that in some cases the FDIC might conclude that

unlimited liability of one or more members actually reduces the risk to

the deposit insurance fund. Furthermore, the commenter argued that bank

organizers should be permitted to explain the reasons for unlimited

liability and show how unlimited liability impacts the bank's risk to

the fund.

The FDIC believes that limited liability tends to attract more

potential investors than unlimited liability and, furthermore, that the

more attractive an investment generally the greater the chances that

the entity will be able to maintain adequate capital. Consequently, the

FDIC believes that limited liability is also a very important attribute

for a bank to possess.

[[Page 7305]]

With regard to the corporate attribute of free transferability of

interests several of the 10 commenters also thought it inappropriate to

require that attribute. The commenters argued that since many existing,

FDIC-insured banks are closely-held corporations that have restrictive

share-transfer agreements, it would be inconsistent for the FDIC to

require free transferability of interests with respect to a bank that

is chartered as an LLC. Furthermore, two of those commenters suggested

that rather than requiring free transferability for every Bank-LLC, a

better solution would be to require that the Bank-LLC's organizational

documents provide that if the primary regulator determines that the

institution's capital is inadequate, then the current owners would be

required to restore capital or permit free transferability of the

interests. The FDIC believes that the free transferability of ownership

interests is an important attribute because it tends to ensure that the

bank will have the best opportunity to attract and maintain adequate

capital. Even well-run business entities can experience economic stress

when there is a downturn in their markets or the industry as a whole.

Adequate capital provides a cushion that helps a business weather the

periods of economic stress. If an owner of an interest in an LLC must

obtain the consent of the other owners in order to transfer his or her

interest, the transfer may be delayed until that consent can be

obtained, or it may be rejected altogether if the consent is not

granted. Either circumstance tends to reduce a bank's ability to

attract and maintain adequate capital. Indeed, the mere presence of

such a consent requirement may discourage investors who can choose from

other, more liquid and, perhaps, more familiar investments. As noted

above, since an LLC is neither a corporation nor a partnership, State

corporation laws and State partnership laws generally would not apply.

That fact, coupled with the relative novelty of the LLC form of

business entity, may discourage potential investors. Many investors are

familiar with, or can readily determine, the general structure of

corporations and the rights, powers, privileges, duties and liabilities

of a corporation's shareholders, officers, and directors. With an LLC,

its structure and the rights, powers, privileges, duties and

liabilities of the LLC's owners, officers and managers are all

generally subject to modification according to the wishes of the

members. Unlike investing in a corporation, a potential investor in an

LLC may not be able to rely, to any extent, on his or her general

familiarity with corporate law in making an investment decision. A

potential investor would have to examine carefully the operating

agreement of the particular LLC to determine the LLC's operating

structure and the rights, powers, privileges, duties, and liabilities

of the LLC's owners, officers, and managers. Such additional burden may

also tend to discourage new investors and further reduce the bank's

ability to attract and maintain capital. Furthermore, the alternative

suggested by one commenter would not cure these problems. The commenter

suggested that the FDIC might require a provision in the LLC's

organizational documents that if capital fell below a certain level

then the existing owners would have to replenish capital or waive the

consent requirement. However, if a bank's capital were to fall below

the minimum capital requirements, it might then be too late to try to

attract new investors. It is not clear that many investors would want

to get involved with a bank that has an unfamiliar legal structure at a

time when its capital is depleted. Consequently, the FDIC believes that

a Bank-LLC should have the corporate attribute of free transferability

of interests.

Several of the 10 commenters also offered general comments on how

to determine eligibility and suggested some alternative uses for the

four corporate attributes. Several thought that the key to eligibility

for Federal deposit insurance should simply be whether the bank is

chartered in accordance with State banking law. If so, they argue, that

should be enough to qualify for eligibility for deposit insurance. The

FDIC disagrees with this notion entirely. Congress conferred upon the

FDIC the authority to grant Federal deposit insurance to certain

institutions described in the FDI Act. Allowing the individual States

to determine which institutions are eligible would (i) require the FDIC

to ignore the express language of the FDI Act, (ii) require the FDIC to

abdicate its statutory responsibility to make such determinations, and

(iii) potentially result in a wide variety of notions as to what types

of institutions are eligible for deposit insurance. As a result, the

FDIC's ability to manage the risks posed to the insurance fund would be

seriously jeopardized. The FDIC does not believe such an approach is

either reasonable or consistent with the purposes of the FDI Act.

Two commenters pointed out that the four corporate attributes are

not mentioned in the factors listed in section 6 of the FDI Act, 12

U.S.C. 1816, (the ``section 6 factors'') that are required to be

considered in approving applications for deposit insurance. Therefore,

they believe that the FDIC should determine who is eligible for deposit

insurance solely by reference to the section 6 factors. One commenter

argued that while the ultimate question is whether the bank is a legal

entity under State law, it thought that the FDIC could consider the

four corporate attributes in assessing whether the institution could be

operated in a safe and sound manner. In that regard the commenter

thought that perpetual succession and centralized management were

important for safety and soundness and should be accorded greater

weight, while free transferability of interests was less important. The

FDIC believes that while the section 6 factors are required to be

considered in determining whether to grant deposit insurance, they do

not determine an institution's eligibility to apply for deposit

insurance. Eligibility is a threshold issue that must be determined

before the section 6 factors are considered. To focus only on the

section 6 factors would again require that we ignore the express

language of the FDI Act. Congress carefully set out what it meant by a

``State bank,'' and the FDIC declines to ignore that language.

One commenter noted that national banks only need to be chartered

pursuant to the National Bank Act (the ``NBA'') to be eligible for

Federal deposit insurance and that, therefore, the FDIC should only

require that state banks be chartered under State law. The FDIC agrees

that in accordance with the language of the FDI Act a national bank is

eligible to apply for deposit insurance if it is chartered as a

national bank under the NBA. However, the NBA describes a national bank

as a ``body corporate'' \25\, and national banks are structured and

operate essentially the same as corporations. Consequently, requiring a

State-chartered, Bank-LLC to have the four corporate attributes does

not represent treatment inconsistent with that applicable to national

banks.

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\25\ 12 U.S.C. 24.

---------------------------------------------------------------------------

Arguments in Favor of Using Three of the Four Corporate Attributes

As noted above, four commenters thought we should use three of the

four corporate attributes. Three of those four commenters disagreed

specifically with requiring free transferability of interests for a

Bank-LLC, but concurred with requiring the other three attributes. The

other commenter while generally disagreeing with the free

transferability requirement thought that the FDIC should require any

three out of the four

[[Page 7306]]

corporate attributes. Two of the commenters who specifically disagreed

with the free transferability requirement repeated the argument

mentioned above that the free transferability requirement has not been

viewed by the FDIC in the past as a significant impairment of an

institution's ability to raise capital and, therefore, should not be

required for Bank-LLCs. As discussed above, the FDIC believes that a

Bank-LLC should have the corporate attribute of free transferability of

interests. The FDIC's analysis of the need for this attribute is

detailed above and will not be repeated here. However, in summary, the

FDIC believes that free transferability of interests is necessary to

ensure that a Bank-LLC will be able to attract and maintain adequate

capital. With regard to the suggestion that the FDIC require any three

of the four corporate attributes as its test for eligibility for

deposit insurance, the FDIC does not believe that such an approach

would be consistent with the purposes of the FDI Act and could lead

again to a wide variety of notions about what types of institutions are

eligible for deposit insurance. Each of the attributes has its own

significance for purposes of the FDI Act, and each is independently

justifiable as an essential requirement for the FDIC to determine that

a Bank-LLC is ``incorporated.'' Among other things, a three-out-of-four

approach would permit a Bank-LLC that does not have perpetual

succession to be considered ``incorporated'' for purposes of

eligibility for deposit insurance. As fully discussed above, an

institution that could terminate without warning could cause

substantial harm to depositor confidence in the nation's banking

industry, seriously disrupt the communities where the bank operated,

and increase the costs of resolutions. Furthermore, the wide variety of

institutions that such an approach could permit would jeopardize the

FDIC's ability to manage the risks to the insurance fund. Consequently,

the FDIC does not believe that a three-out-of-four approach would be

consistent with the FDI Act and declines to adopt it.

Comments in Favor of Using All Four Corporate Attributes

Three commenters endorsed the FDIC's use of all four of the

corporate attributes. One commenter also expressed the strong belief

that the full range of safety and soundness and enforcement mechanisms

that currently apply to state banks should also apply to Bank-LLCs. For

the reasons discussed above, the FDIC believes that the corporate

attributes are not only appropriate, but essential to determining

whether a Bank-LLC could be considered to be ``incorporated.'' The FDIC

specifically concurs with the comment that the full range of safety and

soundness and enforcement mechanisms needs to apply to Bank-LLCs. In

that regard, the final rule includes some revisions to further clarify

this point. The final rule clarifies that for purposes of the FDI Act

(including section 8 of the FDI Act) and the FDIC's regulations, the

members, managers, and officers of a Bank-LLC would be equivalent to

shareholders, directors, and officers, respectively, of a bank

chartered as a corporation. Also, the certificates or other evidences

of ownership interests in a Bank-LLC would be equivalent to voting

stock, voting shares and voting securities.

3. If the FDIC Should Not Utilize Any of the Four Corporate Attributes,

How Should It Interpret the Term ``Incorporated?''

Six commenters thought that the FDIC should interpret

``incorporated'' to mean chartered under State law. Two other

commenters thought that an institution should be deemed to be

``incorporated'' if it is chartered under State law and can operate in

a safe and sound manner. Another commenter thought that

``incorporated'' should mean ``organized'' or ``operating'' as a bank

under State law. Yet another thought that ``incorporated'' should

simply mean ``chartered and regulated'' under State law and thought the

FDIC should focus on whether the particular structure is consistent

with the section 6 factors. All of these suggestions have been fully

analyzed and considered above, and will not be repeated here. Central

to all of these suggestions is the notion that if the State's laws

would charter an entity as a bank, that should be enough for the FDIC.

Following that argument, the FDIC should consider to be

``incorporated'' whatever type of institution a State may charter as a

bank under its laws. As fully discussed above, such an approach would

mean that (i) the FDIC would have to ignore the express language of the

FDI Act, (ii) the FDIC would have to abdicate its responsibility under

the FDI Act, and (iii) the potential variety of notions about what

could be chartered as a bank would seriously impair the FDIC's ability

to manage the risks to the insurance fund. For those reasons the FDIC

declines to adopt such an approach.

V. Interpretation of ``Incorporated''

In order to determine whether an LLC could qualify as a State bank

for purposes of Federal deposit insurance, it is necessary to determine

if an LLC could be considered to be ``incorporated.'' In resolving any

ambiguity in a statute it is always helpful to try to determine what

Congress intended by its choice of the particular words of the statute.

In this case, as noted above, there is no legislative or judicial

guidance on the meaning of the term ``incorporated'' as used in the FDI

Act. Consequently, the FDIC believes that the best approach is to

interpret the term in a manner consistent with, and in aid of, the

purposes of the FDI Act.

Congress created the Federal Deposit Insurance Corporation in 1933

to restore and maintain public confidence in the nation's banking

system by, among other things, promoting the safety and soundness of

the institutions whose deposits the FDIC insures.\26\ Consequently, the

FDIC is charged with maintaining public confidence in the nation's

banking system, and promoting the safety and soundness of the

institutions that it insures is a critical component of its duty.

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\26\ See FDIC v. Philadelphia Gear Corp., 106 S.Ct. 1931, 1935

(1986), FDIC v. Eckert, 754 F.Supp. 22, 24 (E.D. N.Y. 1990); FDIC v.

Rockelman, 460 F.Supp. 999, 1001 (E.D. WI 1978).

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A common understanding of the term ``incorporated'' is ``formed or

constituted as a legal corporation.''\27\ In addition, Black's Law

Dictionary defines ``incorporate'' as ``to form a legal

corporation.''\28\ An institution that is labeled as a corporation

under State law would then be ``incorporated'' under the common

understanding of the term. One approach that the FDIC could take,

therefore, is to treat as incorporated only those entities that are

labeled as ``corporations'' under State law. Such an interpretation

would be consistent with the language of the statute. However, such an

approach might be too narrow in that it may not include all of the

State banks that are currently operating as insured institutions even

though they are structured and operate with the same characteristics as

a corporation. Furthermore, limiting the interpretation to only those

entities that are labeled as ``corporations'' would seem unduly

restrictive in that it would tend to unnecessarily limit the

flexibility, and stifle the innovativeness, of State banking. Thus,

such an approach could arguably impair or harm the viability of the

nation's banking system.

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\27\ The Random House Dictionary of the English Language 968 (2d

ed. 1987).

\28\ Black's Law Dictionary 769 (7th ed. 1999).

---------------------------------------------------------------------------

Another approach to interpreting the term ``incorporated'' is to

focus on the attributes of the entity. In other words, if the entity

has the four corporate

[[Page 7307]]

attributes, it should be considered to be ``incorporated'' regardless

of how it is labeled under State law.\29\ Clearly, the actual nature of

an entity is much more important than its label.

---------------------------------------------------------------------------

\29\ This approach is not unprecedented. In Morrissey v.

Commissioner of Internal Revenue, 296 U.S. 344, 359, 56 S.Ct. 289,

296 (1935) the Supreme Court held that a trust created for the

purpose of carrying on a business that had continuity of life,

centralized management, limited liability, and free transferability

of interests is sufficiently analogous to a corporation to justify

taxation as a corporation.

---------------------------------------------------------------------------

Within the confines of Federal law, and subject to safety and

soundness, banks need to be able to take advantage of new forms of

business organization in order to maintain maximum viability. Some of

these new forms of business entities were never envisioned at the time

that Congress passed the FDI Act almost 70 years ago. Part of the

FDIC's duty in administering the FDI Act is to interpret it to carry

out the purposes of the FDI Act in the modern world. Consistent with

that duty, the FDIC believes that it is more reasonable to focus on the

essential characteristics of a corporation that distinguish it from

other forms of business entities rather than to focus on the presence

or absence of a label.

Therefore, mindful of the need to maintain the viability of the

nation's banking system, and consistent with the purposes of the FDI

Act, the FDIC believes that the better approach, is to interpret the

term ``incorporated'' to include those LLCs that have the four

traditional corporate attributes.

As noted above, the attributes that are commonly identified as

distinguishing a corporation from other forms of business organizations

are: perpetual succession, centralized management, limited liability,

and free transferability of interests.

Perpetual Succession

The first attribute, perpetual succession, is essential to the

FDIC's efforts to promote public confidence in the nation's banking

industry. An institution that automatically terminated, dissolved, or

suspended operations upon the happening of some event would most likely

have a substantial, adverse effect on public confidence. A depositor in

such an institution would have no way of knowing from one day to the

next whether the institution will continue in existence, and whether he

or she will be able to retrieve his or her money when the need arises.

Furthermore, such an automatic termination, dissolution, or suspension

feature would have a significantly adverse effect on the FDIC's efforts

to resolve failed institutions. The FDIC is not only charged with

promoting the safety and soundness of banking institutions, but is also

charged with the duty of resolving failed institutions in an orderly,

least costly manner. The FDIC would have no practical opportunity to

plan and execute an orderly, least-costly resolution of an institution

that, without any warning or advance notice, was terminated or

dissolved or whose operations were suspended. Most likely it would not

be possible to arrange for a healthy institution to purchase the assets

and assume the deposit liabilities of the failed institution in order

to continue to serve the affected community with the least disruption.

Checks that were in transit at the time of the bank's failure, but that

had not yet been paid, would be rejected. The disruption to the

community could be substantial. The cost to the insurance fund of

resolving such an institution could be significantly higher than

necessary as a result, and the higher costs would tend to deplete the

insurance fund more rapidly. Consequently, the FDIC believes that

perpetual succession is an essential prerequisite for an insured

depository institution, and that automatic termination/dissolution/

suspension features are inconsistent with the FDIC's duties and the

purposes of the FDI Act.

Centralized Management

Centralized management in the form of a board of directors provides

the FDIC and other banking regulators with a discrete group of

individuals who are authorized to act for, and represent, the

institution in virtually all matters. The typical rights, liabilities,

powers, and responsibilities of a board of directors are well-

established. On the other hand, management of an institution directly

and solely by all of its owners presents a variety of problems both

from an operational standpoint and from an enforcement standpoint.

First, if the authority to manage the bank is limited to the owners of

the institution, management expertise would necessarily also be

limited. The quality of the management of a bank is a key factor in a

bank's success or failure. In order to provide the best chance for a

bank to compete successfully and to operate profitably, a bank should

be free to enlist the best qualified managers available to it. If there

are too few owners, the group may not provide sufficient management

experience and expertise. Too large of a group may also mean that even

if adequate banking expertise is represented among the owners, it may

be negated by a larger segment of the owners that lacks adequate

expertise. Second, management by a group that is too small could

severely impair the bank's ability to respond to supervisory and

regulatory direction. The volume and complexity of the demands of

operating a bank might put too small of a group under excessive

pressure and could result in management that is not responsive or, at

least so slow as to imperil the bank's effectiveness. Too large of a

group may make it unwieldy or excessively difficult to disseminate

information, arrange meetings, ensure that all members have the

opportunity to be heard, and get decisions in a timely manner. Finally,

with a member-managed Bank-LLC, merely determining who represents the

institution and the extent of his or her authority could represent a

significant task for regulators. Consequently, centralized management

is also an important attribute for purposes of the FDIC Act.

Limited Liability

Limited liability, of course, encourages investment in the

enterprise. Potential owners are more likely to invest in an enterprise

when their liability is limited to the amount of their investment.

Attracting and maintaining sufficient capital helps to ensure an

adequate cushion to protect an institution during periods of economic

stress. Since banks are subject to periods of economic stress just as

other businesses are, the FDIC believes that the owners of banks should

have limited liability to encourage the maintenance of adequate

capital.

Free Transferability of Ownership Interests

The free transferability of ownership interests also tends to aid

in attracting and maintaining adequate capital. Conversely, requiring

the prior consent of the other owners in order to transfer an ownership

interest may decrease the bank's ability to attract and maintain

adequate capital. At worst, prior consent to a transfer limits the pool

of available investors; at best, it delays interested, potential

investors. While the FDIC currently insures approximately 700 mutual

institutions (that issue no stock) and more than 1,700 closely-held

institutions (some of which may have stock-transfer restrictions in the

form of shareholder agreements), the FDIC has substantial experience

with their structure, operations, and capital maintenance capabilities.

The FDIC has no similar experience with institutions organized as LLCs,

and that lack of similar experience argues for facilitating, rather

than impairing, the maintenance of a capital cushion.

[[Page 7308]]

Indeed, the mere presence of such a prior consent requirement may

discourage investors who can choose from other, more liquid and,

perhaps, more familiar investments. As noted above, since an LLC is

neither a corporation nor a partnership, State corporation laws and

State partnership laws generally would not apply. That fact, coupled

with the relative novelty of the LLC form of business entity, may also

discourage potential investors. Many investors are familiar with, or

can readily determine, the general structure of corporations and the

rights, powers, privileges, duties and liabilities of a corporation's

shareholders, officers, and directors. With an LLC, its structure and

the rights, powers, privileges, duties and liabilities of the LLC's

owners, officers and managers are all generally subject to modification

according to the wishes of the members. Unlike investing in a

corporation, a potential investor in an LLC may not be able to rely, to

any extent, on his or her general familiarity with corporate law in

making an investment decision. A potential investor in an LLC would

have to examine carefully the operating agreement of the particular LLC

to determine its operating structure and the rights, powers,

privileges, duties, and liabilities of the LLC's owners, officers, and

managers. Such additional burden may tend to discourage new investors

and further reduce the bank's ability to attract and maintain capital.

Consequently, the FDIC believes that the free transferability of

ownership interests is an important attribute for a bank.

In summary, the FDIC believes that an LLC should have all of the

four corporate attributes in order to be ``incorporated.'' Therefore, a

banking institution that is chartered as an LLC under the law of any

State and that has all of the above four corporate attributes would be

considered to be ``incorporated'' under the law of the State for

purposes of the definition of ``State bank.'' Furthermore, such a

banking institution would be eligible to apply for Federal deposit

insurance as a State bank under section 5 of the FDI Act, 12 U.S.C.

1815.

The final rule reflects these conclusions. In general, the rule

provides that a banking institution that is chartered by a State as an

LLC will be deemed to be ``incorporated'' if (i) it is not subject to

any automatic termination/dissolution/suspension provisions, (ii) the

exclusive authority to manage the institution is vested in a board of

directors or managers, (iii) neither State law nor the LLC's

organizational documents provide that any owner is liable for the debts

of the institution beyond his or her investment, and (iv) neither State

law nor the LLC's organizational documents require the consent of any

other owner in order to transfer all or a part of an ownership

interest. The final rule also specifies that for purposes of the FDI

Act and the FDIC's regulations, an owner of an interest in an LLC is a

``stockholder'' and a ``shareholder;'' a manager of an LLC is a

``director;'' an officer of an LLC is an ``officer;'' and a certificate

or other evidence of an ownership interest in an LLC is a ``voting

share,'' ``voting security,'' and ``voting stock.'' These provisions

are intended to remove any ambiguity as to how the rest of the FDI Act

and the FDIC's regulations apply to banking institutions chartered as

LLCs, including the enforcement provisions of the FDI Act and the

FDIC's regulations.

VI. Paperwork Reduction Act

The final rule does not involve any collections of information

under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

Consequently, no information has been submitted to the Office of

Management and Budget for review.

VII. Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (5

U.S.C. 601 et seq.) the FDIC hereby certifies that the final rule will

not have a significant economic impact on a substantial number of small

entities. The final rule will apply to all depository institutions that

are currently insured under the FDI Act as well as those applying for

Federal deposit insurance. The final rule clarifies the circumstances

when a banking institution that is chartered under State law as a

limited liability company would be considered to be ``incorporated''

for purposes of the definition of ``State bank'' in 12 U.S.C.

1813(a)(2). It does not require any banking institution to organize as,

or convert to, a limited liability company, and it imposes no new

reporting, recordkeeping or other compliance requirements. Accordingly,

the requirements relating to an initial and final regulatory

flexibility analysis are not applicable.

VIII. Impact on Families

The FDIC has determined that this final rule will not affect family

well-being within the meaning of section 654 of the Treasury and

General Government Appropriations Act, enacted as part of the Omnibus

Consolidated and Emergency Supplemental Appropriations Act of 1999

(Pub. L. 105-277, 112 Stat. 2681).

IX. Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996

(SBREFA) (Pub. L. 104-121) provides generally for agencies to report

rules to Congress for review. The reporting requirement is triggered

when the FDIC issues a final rule as defined by the Administrative

Procedure Act (APA) at 5 U.S.C. 551. Because the FDIC is issuing a

final rule as defined by the APA, the FDIC will file the reports

required by SBREFA. The Office of Management and Budget has determined

that this final rule does not constitute a ``major rule'' as defined by

SBREFA.

List of Subjects in 12 CFR Part 303

Administrative practice and procedure, Authority delegations

(government agencies), Bank deposit insurance, Banks, Banking, Bank

merger, Branching, Foreign branches, Foreign investments, Golden

parachute payments, Insured branches, Interstate branching, Reporting

and recordkeeping requirements, Savings associations.

The Board of Directors of the Federal Deposit Insurance Corporation

hereby amends part 303 of title 12 of the Code of Federal Regulations

as follows:

PART 303--FILING PROCEDURES AND DELEGATIONS OF AUTHORITY

1. The authority citation for part 303 continues to read as

follows:

Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817, 1818, 1819

(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1,

1831w, 1835a, 1843(l), 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.

2. New Sec. 303.15 is added to read as follows:

Sec. 303.15 Certain limited liability companies deemed incorporated

under State law.

(a) For purposes of the definition of ``State bank'' in 12 U.S.C.

1813(a)(2) and this Chapter, a banking institution that is chartered as

a limited liability company (LLC) under the law of any State is deemed

to be ``incorporated'' under the law of the State, if

(1) The institution is not subject to automatic termination,

dissolution, or suspension upon the happening of some event (including,

e.g., the death, disability, bankruptcy, expulsion, or withdrawal of an

owner of the institution), other than the passage of time;

(2) The exclusive authority to manage the institution is vested in

a board of

[[Page 7309]]

managers or directors that is elected or appointed by the owners, and

that operates in substantially the same manner as, and has

substantially the same rights, powers, privileges, duties,

responsibilities, as a board of directors of a bank chartered as a

corporation in the State;

(3) Neither State law, nor the institution's operating agreement,

bylaws, or other organizational documents provide that an owner of the

institution is liable for the debts, liabilities, and obligations of

the institution in excess of the amount of the owner's investment; and

(4) Neither State law, nor the institution's operating agreement,

bylaws, or other organizational documents require the consent of any

other owner of the institution in order for an owner to transfer an

ownership interest in the institution, including voting rights.

(b) For purposes of the Federal Deposit Insurance Act and this

Chapter,

(1) Each of the terms ``stockholder'' and ``shareholder'' includes

an owner of any interest in a bank chartered as an LLC, including a

member or participant;

(2) The term ``director'' includes a manager or director of a bank

chartered as an LLC, or other person who has, with respect to such a

bank, authority substantially similar to that of a director of a

corporation;

(3) The term ``officer'' includes an officer of a bank chartered as

an LLC, or other person who has, with respect to such a bank, authority

substantially similar to that of an officer of a corporation; and

(4) Each of the terms ``voting stock,'' ``voting shares,'' and

``voting securities'' includes ownership interests in a bank chartered

as an LLC, as well as any certificates or other evidence of such

ownership interests.

By order of the Board of Directors.

Dated in Washington, DC, this 31st day of January, 2003.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Resolution

Whereas, the Board of Directors (``Board'') of the Federal Deposit

Insurance Corporation (``FDIC'') is responsible for administering the

Federal Deposit Insurance Act (``FDI Act''); and

Whereas, the FDIC is authorized under section 5 of the FDI Act (12

U.S.C. 1815) to approve or disapprove applications for deposit

insurance for State banks as well as other depository institutions; and

Whereas, in order for a banking institution to qualify as a ``State

bank'' eligible to apply for deposit insurance, section 3(a) of the FDI

Act (12 U.S.C. 1813(a)) generally requires that it be engaged in the

business of receiving deposits other than trust funds and that it be

``incorporated under the laws of any State''; and

Whereas, the FDI Act does not define the term ``incorporated,'' and

there is some uncertainty as to the meaning of the term

``incorporated''; and

Whereas, on July 23, 2002, the Board authorized the publication in

the Federal Register of a proposed rule entitled Insurance of State

Banks Chartered as Limited Liability Companies, describing the

circumstances under which a bank chartered as a limited liability

company would be considered to be ``incorporated'' and, therefore,

eligible to apply for deposit insurance; and

Whereas, the Board requested public comment on the proposed rule

and received 23 comment letters, and

Whereas, the staff has reviewed and the Board has considered the

comments submitted by the public in response to the proposed rule; and

Whereas, the staff has recommended that the Board adopt a final

rule entitled Insurance of State Banks Chartered as Limited Liability

Companies as set forth in the attached Federal Register document; and

Whereas, the Board has decided to adopt the proposed rule entitled

Insurance of State Banks Chartered as Limited Liability Companies as a

final rule with certain modifications.

Now, therefore, be it resolved, that the Board does hereby adopt a

final rule entitled Insurance of State Banks Chartered as Limited

Liability Companies amending 12 CFR part 303 in the manner set forth in

the attached Federal Register document.

Be it further resolved, that the Board hereby authorizes

publication in the Federal Register of the attached final amendment to

part 303.

Be it further resolved, that the Board hereby directs the Executive

Secretary, or his designee, to cause the attached final rule to be

published in the Federal Register in a form and manner satisfactory to

the General Counsel, or his designee, and the Executive Secretary, or

his designee.

Be it further resolved, that the Board hereby delegates authority

to the General Counsel, or the General Counsel's delegate(s), and to

the Executive Secretary, or the Executive Secretary's delegate(s) to

make technical, non-substantive changes to the text of the attached

Federal Register document.

[FR Doc. 03-3387 Filed 2-12-03; 8:45 am]

BILLING CODE 6714-01-P