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4000 - Advisory Opinions

Request for Exemption Pursuant to Section 348.4(b)(2)


November 16, 1982

Pamela E. F. LeCren, Senior Attorney

The following is in response to the Division of Bank Supervision's request for the comments and opinion of the Legal Division concerning the subject application.

In brief this application is a request by *** currently a Director Emeritus of *** for approval by the board of directors of the FDIC to continue to serve as chairman of the Board of Directors of *** while continuing to serve ***. Both *** and *** are located in the *** SMSA. The request is being made pursuant to section 348.4(b)(2) of FDIC's regulations which permits two financial institutions to engage in an otherwise prohibited management official interlock where one of the financial institutions is newly-chartered and the service of the individual in question at the newly-chartered institution has been found necessary to provide management or operating expertise to that institution.1 The excepted service requires prior approval by FDIC's Board of Directors and may not continue for more than two years after the newly-chartered institution opens its doors for business. In the instant case *** qualifies as a newly-chartered institution for the purpose of section 348.4(b)(2) as it has been in operation for less than two years.2 If the exception were granted, *** could continue to serve both banks until October 16, 1983.3

In addition, to his current service at *** is the chairman of the board of *** Savings and Loan Association, *** ***. The *** management official interlock is grandfathered pursuant to section 348.5 of FDIC's regulations as the dual service predated November 10, 1978.4

On April 14, 1982 the Office of Examinations and Supervision, *** Federal Home Loan Bank Board, recommended conditional approval of the interlock between *** and ***. As *** is a member bank, approval was conditioned upon approval being received from the Federal Reserve Board. According to Regional Director Fritt's memorandum, the Federal Home Loan Bank Board is reported to be of the opinion that it will take no final action on *** application until the Federal Reserve Board has determined whether or not *** is in need of his expertise.


We note that the Regional Director memorandum indicates that, ***, as director emeritus at *** does not vote at the board of directors meetings, but does attend board meetings and receives a directors fee for each meeting attended. The Interlocks Act defines the term "management official" to include an advisory director or honorary director. Although neither the statute nor Part 348 defines either term, the Legal Division has determined that, a director emeritus who attends board meetings but does not vote; who speaks to the matters of business before the board; and who receives the same directors' fee as the voting members of the board would be considered an advisory director. On the other hand, we would not consider anyone to be an advisory director if he or she neither attends nor is authorized to attend board of directors meetings; does not advise the voting members of the board; nor has access to information presented to the board.

Applying the earlier precedent to the facts in the instant case, ***, as director emeritus of *** would not be considered an advisory director/management official of ***, if he were to cease attending the board of directors meetings and did not advise the voting members of the board regarding any matters to be brought before the board. As such an arrangement may be amenable to ***, we would initially recommend that the regional office contact ***, and explore the possibility of his restructuring his relationship to *** so that he would not be considered an advisory director of that bank. If *** were to so limit his relationship with *** the exemption request could be withdrawn.

Assuming that *** opts to maintain his present relationship with *** it will be necessary to determine whether or not the exemption request meets the requirements set forth in section 348.4(b)(2). As stated earlier, that exemption provides that where an individual's service at a newly-chartered institution is found necessary to provide that institution with management or operating expertise, the Board of Directors may grant permission for the individual to serve the newly-chartered institution as well as another financial institution for a period not to exceed two years after the former opens its doors for business. The operative work in the provision is the term "necessary". The Legal Division has interpreted that term to imply that (1) the subject individual has a certain degree of expertise to provide the institution in question, and (2) adequate expertise is not available to the institution without utilizing the services of an individual currently serving elsewhere whose service would violate the Interlocks Act. The underlying premise of the second element is that if other capable persons are available to serve the institution, the interlock is not "necessary" in order to provide management or operating expertise. In the case of a newly-chartered institution it has been the opinion of the Legal Division that the institution seeking to utilize the services of the individual needs to demonstrate that a search was conducted for persons whose service would not be in conflict with the Interlocks Act.

While *** apparently possesses expertise that would be valuable for ***, neither the letter application nor any of the other material provided to the Legal Division shows *** service to be "necessary" as that term has been defined by the Legal Division. In view of the lack of supporting data and in light of the fact that one half of the maximum excepted service period has elapsed, we find no reason to concur with the regional office recommendation for approval. If the applicant can supply the FDIC with additional information demonstrating that *** service is "necessary" over the next year in order for the institution to successfully function or that having to replace *** before October 16, 1983 would present an undue hardship to the bank, we might reconsider our position. In the absence of such information, we are firm in our belief that the exception is not warranted.


It is the conclusion of the Legal Division, based upon the information provided, that the instant application under section 348.4(b)(2) does not meet the threshold tests as set out therein. The exemption is therefore, in our opinion, unavailable. We reiterate, however, that no prohibited interlock would exist between *** and *** if *** were to limit his relationship to *** by not attending *** board of directors meetings and not advising the voting members of the board as to matters before the board.

1 Part 348 of FDIC's regulations implements the Depository Institution Management Interlocks Act (12 U.S.C. § 3201 et seq., "Interlocks Act"). Go back to Text

2 ***, a member bank, received Federal Reserve Board approval of its charter on December 23, 1980 and subsequently was granted FDIC insurance coverage on February 3, 1981. The bank opened its doors for business on October 16, 1981. Go back to Text

3 ***, who was one of the *** organizers, has been serving as a director of the bank since it began operations in 1981. He is presently serving in violation of section 348.3(b)(1) of FDIC's regulations which prohibits unaffiliated institutions located in the same SMSA from sharing management if one or both has total assets in excess of $20 million. He is thus subject to removal pursuant to section 8(e) of the FDI Act as amended by section 427(d)(1) of the Garn - St Germain Depository Institutions Act of 1982. Section 427(d)(1) amended section 8(e) so as to allow for removal of a management official who is serving in violation of the Interlocks Act. Go back to Text

4 *** served as a Director of *** for a period of 48 years after which he became a Director Emeritus. His service as chairman of the board of directors at *** dates from 1951. Go back to Text

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