Mr. Robert D. Feldman
Executive Secretary
Attn: Comments/OES
Federal Deposit Insurance Corporation
550 17th St NW
Washington, DC 20429
Re: Insurance of State Banks Organized as Limited Liability Companies.
Dear Mr. Feldman:
This firm represents banks and thrifts throughout the United States and
its principals have been actively involved in promoting flow through tax
treatment for financial institutions for over a decade. As such we are
very familiar with the issues raised by the FDIC proposal since similar
issues were raised in connection with FDIC consideration of Federal
deposit insurance for the Texas limited banking association charter form
in the mid 1990s.
We strongly support the FDICs proposal to allow State banks organized as
Limited Liability Companies (LLCs) to obtain Federal deposit insurance.
Additionally, we recommend an amendment to the FDICs proposal to also
allow State banks organized as Limited Banking Associations (LBAs) to
obtain Federal deposit insurance. The proposed regulations do not provide
LBAs the same treatment proposed for LLCs. Texas LBAs have very similar
characteristics to LLCs. As such, we are of the opinion that LBAs should
receive the same treatment regarding Federal deposit insurance as LLCs.
Our responses to the FDICs specific questions regarding the proposed
regulations follow.
1. Should the FDIC permit a state bank organized as an LLC to obtain
federal deposit insurance?
Answer: Yes. As long as an entity meets State bank charter requirements,
no matter the legal entity form, such entity should be allowed to obtain
Federal deposit insurance. Under Texas law, banks may be organized as
banking associations or as LBAs. The proposed FDIC regulations should
explicitly state that LBAs, as well as LLCs, are eligible for Federal
deposit insurance. Disparate treatment of LBAs and LLCs is not reasonable
or necessary.
2. If so, should the FDIC interpret the term incorporated utilizing
some, all, or none of the traditional four corporate attributes?
Answer: No. The FDIC should not interpret the term incorporated
utilizing the four so called traditional corporate attributes. The term
incorporated under the laws of any state should rightly be interpreted
to mean organized or chartered as a bank under the laws of any state.
Any entity meeting all State requirements for organizing a state bank
should be allowed to obtain Federal deposit insurance. Under Texas law,
banks may be organized as banking associations or as LBAs. As long as a
banking association or LBA meets Texas law requirements for organizing a
State bank, the banking association or LBA should be eligible for Federal
deposit insurance.
The four so called traditional corporate attributes were established by
the Internal Revenue Service (IRS) to determine whether an entity would
be taxed as a corporation or a partnership. As noted in the Notice of
Proposed Rulemaking, the IRS no longer makes such determination based on
the four corporate attributes. We see no benefit in reviving an outdated
rule that has been abandoned by the IRS for quite some time.
Perpetual Succession: Making perpetual succession a requirement for
Federal deposit insurance is clearly not warranted. Historically, Texas
banks had a limited duration of only 50 years. Today, Texas banking
associations may have perpetual existence; however, Texas LBAs may
continue until dissolved at the expiration of a period fixed for its
duration. Just as limited life posed no public policy concern in the past,
it should be acceptable today.
Free Transferability of Interest: The FDIC is certainly aware of the fact
that closely held banks, both state and national, usually have shareholder
agreements in place which limit the transferability of bank stock. Such
agreements usually contain buy-sell provisions limiting the
transferability of bank stock with respect to divorcing shareholders,
deceased shareholders and withdrawing shareholders. Nevertheless, closely
held banks operate in a safe and sound manner to the same extent as banks
with widely held ownership. Limiting the availability of Federal deposit
insurance to only those LLCs with no transferability restrictions is not
consistent with current regulations which impose no such requirements on
banks not organized as LLCs.
Centralized Management: The FDICs argument in support of a centralized
management ignores the reality of a typical LLC or LBA. Generally, such
entities have a relatively small number of equity owners, and even though
the whole group may act in the capacity of a typical board of directors,
their number is discrete and ascertainable at any given time. Moreover,
the group would generally be less fluid than a typical shareholder pool of
a widely held corporation. In addition, the equity holders would either
have to be qualified themselves to run the day to day operations of the
bank, or would hire professional management to fulfill such duties.
Limited Liability: Requiring that bank owners be afforded limited
liability, that is liability limited to their investment in the bank,
seems reasonable. The prospects of unlimited liability for the debts of
the bank would certainly reduce the number of prospective shareholders.
Nevertheless, a huge amount of business in this country is transacted by
sole proprietorships and partnerships which expose owners to unlimited
liability.
3. If the FDIC should not utilize any of the four corporate attributes,
how should it interpret the term incorporated?
Answer: The term incorporated should be interpreted to mean organized
or operating as a bank under the laws of any state. The FDI Act
definition of State bank is instructive on this issue. The FDI Act
defines a State bank as any bank which is incorporated under the laws of
any State or which is operating under the Code of Law for the District of
Columbia.[1] The term incorporated should not be considered in isolation
but should be interpreted in the context of the definition of State bank.
A reading of the FDI Act definition of State bank clearly shows that the
term incorporated is interchangeable with the word operating. The
definition of State bank simply means that a State bank is any bank
incorporated or operating under State law.[2] If the drafters of the Act
wanted to make it a requirement to be incorporated in order to be
considered a State bank, the definition of State bank would likely read as
follows:
The term State bank means any bank which is incorporated under the laws
of any State or which is incorporated under the Code of Law for the
District of Columbia.
In summary, the term incorporated should be interpreted to mean
organized or operating under the law of any State. As such, any state
banking association of LBA should be eligible for Federal deposit
insurance. Therefore, the proposed regulations should clarify that Federal
deposit insurance is available to any State bank, including state banks
organized as LLCs and LBAs.
Very truly yours,
Jorge M. Gutierrez
--------------------------------------------------------------------------------
[1] 12 U.S.C. 1813(a)(2) (emphasis
added).
[2] The term State means any State of the United States, the District
of Columbia . 12 U.S.C. 1813(a)(3).