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FDIC Federal Register Citations

Kennedy, Baris & Lundy, L.L.P.
Attorneys at law
Suite 2550
112 East pecan Street
San Antonio, Texas 78205
(210) 228-9500
Fax: (210) 228-0781
 

October 21, 2002

Via E-Mail: comments@FDIC.gov

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 1990’s.

We strongly support the FDIC’s proposal to allow State banks organized as Limited Liability Companies (“LLCs”) to obtain Federal deposit insurance. Additionally, we recommend an amendment to the FDIC’s 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 FDIC’s 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 FDIC’s 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
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[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).


 

Last Updated 10/22/2002 regs@fdic.gov

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