From:
abjones@americanbank.com
Sent: Monday, October 21, 2002 12:05 PM
To: Comments
Subject: For Mr. Robert D. Feldman Attn. Comments/OES
Dear Mr. Feldman,
Our bank, American Bank, Corpus Christi, Texas has long been involved in
promoting the limited liability company concept for community banks and we
appreciate the opportunity to comment on the questions raised by the FDIC
regarding insurance of state banks chartered as limited liability
companies.
The questions posed by the FDIC in its posting are responded to as
follows:
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 limited
liability company form or, in the case of Texas, the LBA charter. The
operative state law should provide the criteria for the bank charter. If
these criteria meet underlying objectives of safety and soundness to the
banking system and other objectives of the Federal Deposit Insurance Act,
then the fact that the charter is an LLC or LBA should be irrelevant to a
determination as to whether the entity is eligible for deposit insurance.
If so, should the FDIC interpret the term "incorporated" utilizing some,
all, or none of the traditional four corporate attributes?
Answer: Not necessarily. In fact, we would point out that the attributes
identified in the proposal are not necessarily "traditional" for state
bank charters. In fact, in Texas, banks do not obtain a corporate charter
from the Secretary of State. They do not file articles of incorporation.
Rather, they use articles of association and obtain their charter from the
Department of Banking.
A good discussion of early law in Texas is found in Law of Banks and
Banking in Texas by Ocie Speer, published in 1952 by the Thomas Law Book
Company. In the first chapter, which discusses the nature and kinds of
banks, Mr. Speer observes that state chartered banks are different from
private banks. A private bank is an association or group of individuals.
They pay no franchise tax because they have no franchise or charter. A
private bank was not insured by the FDIC either. By contrast, in Texas the
LBA is subject to the state franchise tax and is chartered by the State of
Texas. Looking from an historical perspective, the true distinction for
whether a bank is "incorporated" under state law is whether it has
obtained a charter from the Department of Banking.
Furthermore, at the time Mr. Speer wrote, state banks in Texas had a
limited life of only 50 years. This was changed in recent times, and state
chartered banks now have perpetual existence or continuation until
dissolution as provided in § 33.208 of the Texas Finance Code. An LBA may
dissolve at the expiration of a period fixed for its duration much as was
provided in earlier Texas banking law. However, it may continue if
remaining participants elect in writing to continue the business of the
association. Just as limited life posed no public policy concern in the
last century, it should be acceptable in the 21st.
We would also point out that many, if not most, closely held banks,
whether state chartered or national, frequently have shareholder
agreements in place limiting transferability as between the shareholders,
such as buy-sell agreements. Thus, a majority shareholder group may agree
that they will first offer shares within the group before selling to an
outsider. Provisions are very common also to handle death or divorce among
controlling shareholders. Clearly, these limit transferability. However,
banks with such arrangements among shareholders are still appropriately
chartered banks for purposes of FDIC insurance. Artificially imposing a
requirement drawn from the Tax Code definition of a corporation will
achieve no policy objective with regard to the deposit fund.
It is rather surprising that the FDIC would suggest that a state-chartered
entity must be a "corporation" or have the indicia of a corporation in
order to qualify for insurance. Until very recently, almost all savings
and loan associations were owned as mutual organizations, not
corporations. Similarly, credit unions are mutual organizations rather
than corporations. Yet, they are insured by the NCUA. Certainly, these
mutuals have centralized management and limited liability for the
depositors. Yet, they are clearly not traditional corporations.
If the FDIC should not utilize any of the four corporate attributes, how
should it interpret the term "incorporated"?
Answer: The key here is whether the entity is "chartered" in accordance
with state banking law. Certainly, the FDIC is free to impose other
requirements for insurance that maintain the protection of
the fund and assure that the public interest is served. However, an
artificial requirement of a corporate form of charter unnecessarily
restricts the flexibility of states to act as crucibles of change.
The dual banking system has long served as a source of innovation and
flexibility, providing greater creativity in the financial institution
system of the United States. Tying the hands of state legislatures and
state regulators with a requirement for certain corporate attributes
artificially selected by IRS do not serve any public purpose. In fact,
they limit and hamper innovation without any accompanying benefit.
While the request for comments on this proposed rule was specific in
nature, it would appear that the FDIC should strongly consider the broader
public policy implications in reaching a final decision on this issue.
We support tax incentives for community banks to encourage not only
entrepreneurial capital investment, but also to ensure the maintenance of
a viable and healthy community banking sector. This important sector of
the financial services industry has experienced substantial diminution of
market share, and faces legislatively mandated challenges from both credit
union and regional bank competitors.
Some reasonable tax structure modifications for community banks will help
ensure an efficient flow of credit, especially to small business and
agriculture borrowers, as well as an important choice for consumers.
We strongly supports approving limited liability companies and LBAs for
deposit insurance provided they meet other criteria as established by law
and regulations. The peculiar requirements for corporations imposed by the
tax laws are not necessary and should not be applied.
Thank you for this opportunity to comment.
Sincerely,
Alfred B. Jones
President and CEO
American Bank, Corpus Christi, Texas
