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4000 - Advisory Opinions


Whether an Application Under Section 24 of the FDI Act Would Have to be Filed in Connection With the Establishment and Maintenance of a Charitable Foundation by a Bank

October 4, 2000

FDIC--00--7

Douglas H. Jones

Senior Deputy General Counsel

On behalf of General Counsel William F. Kroener III, I want to thank you for your letter on August 2, 2000 on behalf of          (the "Bank"), City, California, and respond to your request for our concurrence in your interpretation of Section 24 of the Federal Deposit Insurance Act. I understand from your letter that the Bank is a state, non-member insured bank with approximately $1.4 billion in total assets.

Facts As Relayed in Your Letter

I understand from your letter that the Bank intends to establish a charitable foundation (the "Foundation"). The Foundation will be formed under the Nonprofit Public Benefit Corporation Law of California and will be organized exclusively for charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. The Foundation will be named Bank Charitable Foundation.

The Foundation will take and make contributions, including contributions from the Bank. The Foundation will maintain separate books and records and will be deemed for legal purposes as a separate nonprofit corporation distinct from the Bank and the Bank's parent holding company. As a nonprofit corporation, the Foundation will not issue securities and there will be no "owners" or "shareholders" of the Foundation.

The Bank desires to proceed with the Foundation to serve as the charitable donations mechanism for the Bank. Any donation requests received by the Bank would be referred to the Foundation. The Bank anticipates making annual contributions to the Foundation as part of its budgetary process and management has indicated that the amount of such contributions are anticipated to be consistent with the Bank's historical level of contributions. The Bank does not intend to "guarantee" the Foundation a minimum yearly contribution. Rather, the Bank will make a decision about the amount of any contribution to the Foundation during the Bank's usual annual budget preparation process. The Foundation, through its Board, will determine how its annual budget will be deployed within the Bank's service areas. Among the possible advantages of the Foundation to the Bank, as stated in your letter, are:

* To provide a definite amount for donations by the Bank;

* To facilitate centralizing and tracking donation requests;

* To provide a mechanism for gracefully saying "no" when funds are limited; and

* To obtain § 501(c)(3) status that would permit deductible gifts from third parties.

As stated in your letter, the Bank, on a volunteer basis, from its existing officers, employees and directors would select the Board and management of the Foundation.

Your Request

You have requested the FDIC's concurrence that no application under Section 24 of the Federal Deposit Insurance Act or the related regulations is required in connection with the establishment and maintenance of this Foundation by the Bank.

Conclusion and Legal Analysis

Based on the facts presented, it is our view that this Bank need not file an application under Section 24 of the Federal Deposit Insurance Act or the FDIC's implementing regulations.

The requirement to file an application in this instance appears to depend upon the definition of "activity." The term is defined in § 362.2(b) to mean "the conduct of business by a state chartered depository institution, including acquiring or retaining an equity investment or the investment."

On page 66283 of the FDIC's Federal Register notice on the final rule dated December 1, 1998 (63 FR 66276), the FDIC stated as follows:

It is noted that no comments were received regarding the proposed suggestion also to modify the "activity" definition to incorporate a recent interpretation by the agency that determined that the act of making a political campaign contribution does not constitute an "activity" for purposes of part 362. The referenced interpretation uses a three prong analysis to help determine whether particular conduct should be considered an activity and therefore subject to review under part 362 if the conduct is not permissible for a national bank.

First, any conduct that is an integral part of the business of banking as well as any conduct which is closely related or incidental to banking should be considered an activity. In applying this factor, it is important to focus on what banks do that makes them different from other types of businesses. For example, lending money is clearly an "activity" for purposes of part 362. The second factor asks whether the conduct is merely a corporate function as opposed to a banking function. For example, paying dividends to shareholders is primarily a general corporate function and not one associated with banking because of some unique characteristic of banking as a business. Generally, activities that are not general corporate functions will involve interaction between the bank and its customers rather than its employees or shareholders. The third factor asks whether the conduct involves an attempt by the bank to generate a profit. For example, banks make loans and accept deposits in an effort to make money. However, contracting with another company to generate monthly customer statements should not be considered to be an activity in and of itself as it simply is entered into in support of the "activity" of taking deposits. If at least two of the factors yield a conclusion that the conduct is part of the authorized conduct of business by the bank, the better conclusion is that the conduct is an activity. Because of the lack of interest received on expanding the definition to reflect this interpretation, no change is made to the definition proposed. The FDIC intends to continue to apply the above analysis when determining whether particular conduct should be considered an activity.

In applying these criteria to the proposed activity, we agree with your suggestion that the establishment of the Foundation does not constitute the conduct of an activity governed by section 24 and part 362. First, the establishment of the Foundation does not meet the first criterion because the establishment of a foundation is not an integral part of the business of banking or closely related or incidental to banking. Second, the establishment of the Foundation does not meet the second criterion because the conduct is more closely related to a corporate function than the banking business. Third, the establishment of a Foundation does not meet the third criterion because the bank has no profit motive associated with the establishment of the Foundation. Since the establishment of the Foundation does not meet any of these criteria, the establishment of the Foundation is clearly not the conduct of an activity governed by section 24 and part 362. Thus, the Bank need not file an application or consider whether the establishment of the Foundation would be permissible for a national bank.

Thank you for making this inquiry. Should you have any additional questions, please feel free to contact us.


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