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4000 - Advisory Opinions

Request for Exemption Under § 348.4(b)(3) to Permit Management Interlock


February 12, 1982

Pamela E. F. LeCren, Attorney

The following is in response to your request for the Legal Division's comments regarding an application on behalf of *** and *** for permission to establish a management official interlock between *** *** and ***. The request is made pursuant to § 348.4(b)(3) of Part 348 of FDIC's regulations which implements the Depository Institutions Management Interlocks Act (12 U.S.C. 3201 et sec., "Interlocks Act"). Section 348.4(b)(3) provides that a management official of an insured nonmember bank may enter into an otherwise prohibited management official interlock if one of the depository organizations has been found by its primary federal supervisory agency to face conditions that endanger its safety or soundness and the appropriate federal supervisory agency or agencies determine the relationship to be necessary to provide management or operating expertise. It is within the authority of the Board of Directors to impose other conditions in addition to or in lieu of the above.

The facts regarding the request are as follows. Both the *** and *** are located in the *** SMSA. They are not affiliated. *** has total assets in excess of $20 million. The provision of the Interlocks Act and Part 348 that would permit two banks located in the same SMSA to interlock if neither has assets in excess of $20 million is therefore inapplicable. *** and *** are both currently serving as directors of *** and each holds a 24% interest in ***.1

A determination by the OCC that the national bank faces conditions which endanger its safety or soundness is a prerequisite under § 348.4(b)(3), therefore, it will be necessary to obtain the opinion of the OCC regarding the condition of ***. Assuming that OCC makes a favorable determination on that issue, the exemption would be available if both the OCC and FDIC find that *** and *** are "necessary" to provide operating or management expertise to the national bank. As the Legal Division has indicated in the past, necessity of service is an inherently flexible standard. Necessity in the context of an institution which faces conditions that endanger its safety or soundness may vary from necessity in the context of a newly-chartered bank.2 Where an "endangered" institution is involved, it is our opinion that the condition of the institution would warrant a broad reading of the term necessity as little if any time may be available to locate management. In any event, as the institution in need of management or operating expertise in this instance is a national bank, it may be appropriate to defer to the OCC on the question of necessity. According to OCC Washington staff, the application had not been received in the Washington office as of February 10th. Therefore, no indication of how the OCC might act with regard to the application can be provided at this time.

We would recommend that action on the application be deferred until the OCC has indicated whether or not *** is in fact facing conditions that endanger its safety or soundness.3 If the change in control has materially altered the condition of the bank; persons are available who could provide management or operating expertise without violating the Interlocks Act; and the OCC is not strongly in support of the application; a denial may be appropriate.

1 It is our understanding that the 24% interests of *** and *** *** came about as a result of a change in bank control. It should be noted that if the pending application is denied, the possibility of a prohibited management official interlock still exists due to the stock interests held by *** and ***.
  The Interlocks Act not only prohibits direct management official interlocks but also proscribes indirect interlocks by defining any person who has a representative or nominee sitting as a management official to also be a management official. Section 348.2(k) defines the term "representative or nominee" to include persons who have an express or implied obligation to act on behalf of another. Factors that may be evidence of such an obligation include the ability and exercise of ability by a shareholder to elect a director. The Legal Division has had occasion to indicate that a representative or nominee relationship may necessarily arise where a shareholder owns a substantial portion of the stock of a bank, i.e., the larger the holding, the harder it would be to establish that persons voted into office were not the representative of the shareholder.
  We do not feel that a 24% shareholding by itself is sufficient to necessarily result in representative or nominee status. The combined holdings of *** and *** (48%) may, depending upon the facts, be sufficient to preliminarily result in a determination of representative or nominee status. We are unable, however, based upon the information submitted to us at this time to conclude whether it would be appropriate to consider persons voted into office as a result of their combined votes to be the representatives or nominees of one or both men. Go back to Text

2 It has been the opinion of the Legal Division in the case of a newly-chartered bank that the applicant needs to demonstrate that a search was conducted for persons to serve the bank whose service would not violate the Interlocks Act. The underlying premise is that if other capable persons are available to serve, the interlocking service is not "necessary" in order to provide management or operating expertise. Go back to Text

3 Regional Director Sarsfield's February 3, 1982 memorandum indicates that, until its purchase, the national bank was characterized by OCC as a serious problem bank and had nearly failed. The change in control may or may not have substantially altered the present condition of the bank. Go back to Text

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