FDIC Federal Register Citations

October 10, 2002

Mr. Robert D. Feldman

VIA E-MAIL: comments@fdic.gov

RE: Insurance of State Banks Chartered as Limited Liability Companies

Dear Mr. Feldman.

The Community Bankers Association of Indiana (CBAI) strongly supports allowing chartered state banks to be chartered or converted to limited liability companies or comparable types of entities (LLCs) to be eligible for FDIC insurance. CBAI is a trade association representing approximately 115 independent community banks in Indiana.

The FDIC request for public comment on the proposed rule clarifying whether a state bank that is chartered as a LLC could be considered eligible for federal deposit insurance is responded to as follows:

1. Should the FDIC permit a state bank organized as an LLC to obtain federal deposit insurance?

Answer: Yes. The critical inquiry for the FDIC should be whether the states' banking laws offer a choice to incorporators in the state between the more traditional "corporate" form of ownership and the LLC form of ownership. The operative state law should provide the criteria for the bank charter. If these criteria meet the underlying objectives of safety and soundness to the banking system and other objectives of the FDI Act, then the fact that the charter is an LLC should be irrelevant to a determination as to whether the entity is eligible for deposit insurance.

2. If so, should the FDlC interpret the term "incorporated" utilizing some, all, or none of the traditional four corporate attributes?

Answer: If it is imperative that the FDIC and the national legislature set forth rules of incorporation for financial institutions to qualify for FDIC insurance then we believe that the attributes of perpetual succession, centralized management, and limited liability should be contained in the classification of incorporation. However, we do not believe that the element of "free transferability of ownership interests" is a necessary requirement for incorporation. Most significantly, CBAI feels that individual states should determine what constitutes that qualification. In Indiana, financial institutions, such as banks, are required to file articles of organization. CBAI believes that if the Indiana Department of Financial Institutions finds these articles of organization to be sufficient for incorporation then that shall be the set standard. Nevertheless, must a national standard be set, CBAI recommends that the attributes of perpetual succession, centralized management, and limited liability be utilized.

It is the view of the CBAI that the element of “free transferability of ownership interests” is not a vital characteristic of the corporate form of ownership. We would request that it be omitted from the requirement of incorporation for LLCs. Such a constraint would invalidate already existing financial institutions which have such restrictions currently in place. Many closely held corporations have such restrictions on transferability and many others which are owned by closely held holding companies have similar restrictions at the holding company level. In the past, the FDIC has not viewed this as a significant impairment of the ability of these entities to raise capital. Therefore, a requirement of "free transferability" should not be imposed solely on those banks which choose to adopt an LLC structure.

CBAI does consent to the value of perpetual succession, centralized management and limited liability. Each of these elements will maintain uniformity of treatment amount financial institutions which seek to become LLCs. As previously stated, we suggest that the element of “free transferability” be disregarded for LLCs as an essential attribute of insurability since it is the approach the FDIC has traditionally taken in regard to closely held corporate banks and bank holding companies

3. If the FDIC should not utilize any of the four corporate attributes, how should it interpret the term "incorporated"?

Answer: CBAl recommends that individual states should determine what constitutes that qualification. In many states, financial institutions, such as banks, are required to file articles of organization, or incorporation for LLCs. CBAI believes that if the Department of Financial Institutions finds these articles of organization to be sufficient for incorporation then that shall be the set standard. Nevertheless, must a national standard be set, CBAI recommends that the attributes of perpetual succession, centralized management, and limited liability be utilized.

Thank you for the opportunity to comment,