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4000 - Advisory Opinions

Permissibility of Management Consulting under the Depository Institution Management Interlocks Act


March 8, 1982

William M. Lloyd, Regional Counsel

This is in response to your letter to Regional Director Sarsfield dated February 23, 1982 concerning the applicability of the Depository Institution Management Interlocks Act ("Interlocks Act") and FDIC Part 348 to your management consulting business. Your letter asked for an opinion from this office as to why these "consulting functions are illegal for me and my firm to perform . . . ".

Before discussing the permissibility of management consulting under the Interlocks Act, it is important to review the reason why the examiner criticized your role as director emeritus at ***. As the examiner indicated, and as is apparent from the considerable amount of correspondence between that bank and this office, your service as a director with the bank is prohibited by section 348.3(b) of FDIC Part 348, in that you would be serving as a management official of both the bank and other nonaffiliated banks within the *** SMSA with assets of 20 million dollars or more. Since you were not also serving as a director of this bank on November 10, 1978, your services were not grandfathered under section 348.5. We had thought this matter was resolved when on March 2, 1981 the president of the bank advised the Chicago Regional Office that "you would not stand for re-election to the Board at the annual shareholders meeting on March 24, 1981." However, our examiner states that immediately after that shareholders meeting, the Board of Directors elected you as a director emeritus. A director emeritus is an advisory or honorary director under section 348.2(h) of the regulation to the extent management functions are performed. Therefore, our position in this matter has never been that management consulting is per se contrary to the Interlocks Act and Part 348, but only that your service as a director emeritus was in violation of the law and regulation and should be terminated immediately. Please notify this office as to your current status as a director emeritus.

With regard to the question of management consulting generally, we are of the opinion that an individual who is a management official either as a director, officer or employee of one bank may not perform "management functions" for another, unaffiliated bank in the same SMSA under the title of management consultant. An individual performing in such a capacity would be viewed as an honorary or advisory director. Such a position is taken for obvious reasons.

To hold otherwise would create a loophole in the Interlocks Act prohibitions, since an individual prohibited from serving two financial institutions could merely change his title to that of a management consultant while continuing to actively participate in the management of the affairs of the institution.

Since you operate a management consulting business and apparently perform such services for banks for which you are not otherwise identified, this office would have no objection to you performing these services, so long as they are confined to legitimate management consulting services in the usual sense of the word and are not substitutes for management functions. In making that determination, the examiner would carefully review the nature of the service rendered, the extent to which you attend Board meetings and participate in management decisions, the method of compensation, and the degree to which such services are apparently required by the bank. An examiner would also review the consulting contract or letter agreement. Suffice it to say, we would view as a possible circumvention of the Interlocks Act, a consulting arrangement (unless substantially justified) on a full time basis covering a wide variety of topics and requiring attendance for the duration of Board meetings. On the other hand, and unless the facts dictate otherwise, we would have no objection to you performing clearly identified management consulting projects that require reporting to management or to the Board for that project only.

In your letter of February 23rd, you indicate that your practice is no different from what other consulting firms perform for banks in the way of special projects, such as establishing calling programs, development of business, reviewing policy, reviewing loans, reviewing operations and reporting to the Board and management on these projects. Although these projects may be structured in such a way as to constitute legitimate management consulting services, it is impossible to tell from your letter as to how any one of these would be structured at any one bank. However, if the services are performed in a manner so as not to rise to the level of management function (participating in management decisions as to how your advice will be implemented) and the scope of the project is sufficiently specific, we do not see why you could not perform these management consulting services for banks with which you could not serve as a director, officer or employee under the Interlocks Act and Part 348.

Should you need to discuss this letter further do not hesitate to contact me.

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