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4000 - Advisory Opinions

Request for Exemption from Interlocks Act


July 21, 1982

Pamela E. F. LeCren, Senior Attorney

As per your request, the Legal Division has reviewed the subject application requesting, on behalf of ***, permission under § 348.4(b)(1) of FDIC's regulations to engage in an otherwise prohibited management official interlock. Based on that review, and as more fully explained below, it is our opinion that the exemption provided by § 348.4(b)(1) may be granted ***.


Section 348.4(b) of FDIC's regulations provides for certain exemptions from the prohibitions of Part 348 which implements the Depository Institution Management Interlocks Act ("Interlocks Act", 12 U.S.C. 3201 et seq.). In brief, the Interlocks Act and Part 348 prohibit unaffiliated depository institutions from sharing management officials if the institutions or their depository affiliates are located in the same SMSA or local community (city, town, or village) or are of major assets size ($1 billion and $500 million respectively). All of the exemptions require prior approval by the Board of Directors with the exception of the "safety or soundness" exemption (§ 348.4(b)(3)) approval of which was delegated to the Director of the Division of Bank Supervision by § 303.11(14). Section 348.4(b)(1) provides that an individual may serve two depository institutions where the interlock would otherwise be prohibited if one of the depository institutions is "controlled or managed" by persons who are members of minority groups, and the appropriate federal supervisory agency or agencies determine that the relationship is necessary to provide management or operating expertise to the institution so controlled or managed.

In the instant case *** (a proposed bank) is slated to have twenty-two directors a majority of which (twelve) will be Black. Although section 348.4(b)(1) neither defines the term "minority" nor the phrase "controlled or managed", we note that Blacks are a commonly recognized minority group and are of the opinion that where a majority of a bank's board of directors are Blacks, the bank can be said to be "controlled or managed" by members of a minority group. Thus, we are of the opinion that *** Bank meets the threshold test under section 348.4(b)(1) i.e., *** Bank is a minority bank for the purposes of that exemption.

All three individuals seeking permission under section 348.4(b)(1) to serve *** Bank are currently serving as management officials of institutions located in ***1 thus their dual service will be prohibited unless the exemption is granted. In order to do so the Board of Directors, in addition to finding that *** Bank is controlled or managed by members of a minority group, needs to find that the service of these three individuals is "necessary to provide management or operating expertise" to that bank. As demonstrated in Regional Director Paul Fritts' July 13, 1982 memorandum, all three persons possess banking expertise that should prove beneficial to the new bank thus their relationship with *** Bank should serve to provide management or operating expertise to that institution. The question of "necessity" is, however, slightly more complicated.

While the Legal Division has found in the case of newly organized banks, that in order for the "necessity" standard to be met, the institution in question must demonstrate that it conducted a search for persons who could provide it with management or operating expertise without violating the Interlocks Act, we have also indicated that "necessity" of service is a flexible standard. Whether or not an individual's service is "necessary" may vary with the facts in particular instances. Of particular relevance in the context of a bank in organization is whether the denial of the exemption would effectively block the bank's organization. It is clear from the description of the efforts to organize *** Bank (said efforts spanning nearly a ten-year period which was plagued with funding problems and included numerous changes in the proposed directorate) that the removal of any of the three individuals from the board may result in the ultimate collapse of the effort to establish *** first minority banking institution.

While we do not mean to imply that a bank's organizers can ignore federal law while putting a bank together and then claim at the last minute that the federal law, if applied to them, would unfairly result in the failure of the enterprise, we do feel that in some instances an individual's service may be found "necessary" where not to do so would completely terminate the organizational effort. In view of the Legal Division's past observation that "necessity" varies according to the facts in particular instances, the subject application would, in our opinion, seem to present facts that would warrant finding *** "necessary" to provide *** Bank with management or operating expertise.2 Finally, it should be noted that *** will need to obtain the prior approval of the Federal Home Loan Bank Board as well as the FDIC's approval as his interlocking service will involve a savings and loan association.

1 Mr. Russell is currently a director of ***. *** is currently a director of ***. *** is currently a director of *** Federal Savings and Loan Association, ***. Go back to Text

2 The facts as outlined in Regional Director Fritts' memorandum are somewhat unusual. We do not intend for our memorandum to be read to say that organizers of banks should be accorded special treatment simply because they are organizers. In that vein we remind the Division of Bank Supervision of the following discussion in our October 14, 1981 memorandum to Quinton Thompson regarding an application under § 348.4(b)(2) involving ***.
  We have been and continue to be of the opinion that an applicant, in order to establish the necessity of an individual's service, must at least demonstrate that an unsuccessful effort was made to locate management expertise that would not cause a problem under the Interlocks Act. Just how much effort must be put forth in order for the applicant to satisfy its burden would of
  course vary from circumstance to circumstance, i.e., the standard is inherently flexible. It is conceivable that a favorable determination could be made when no search was conducted where the Regional Office has concluded, based upon its knowledge of the local banking community, that any search would have been fruitless, (i.e., in the case of a bank located in an SMSA, few banks with assets of less than $20 million whose management would be both acceptable and available for service are present) or where, based upon other facts or due to policy reasons, the Board determines that the exemption is warranted. . . .
  We would not be opposed to adopting a more lenient standard of necessity on a case by case basis where organizers are involved should the Board of Directors feel it appropriate. That approach should, however, in our opinion be confined to instances where the presence of the individual in question at the newly-chartered bank was critical to the grant of a charter by the State banking authority. This would be more in keeping with FDIC's past practice. Even then it would be appropriate to inquire whether the organizers were aware of the Interlocks Act and the problem the individual's service would cause thereunder, as well as if any steps had been taken to substitute alternative management. If no steps were taken; the State authority would have been amenable to alternate management; and adequate management was available without creating an interlock; it would, in our opinion, be inappropriate to extend the exception. Go back to Text

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