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4000 - Advisory Opinions

Request for Exception to Interlocks Act


October 11, 1983

Pamela E. F. LeCren, Senior Attorney

As per your request, the Legal Division has reviewed the above referenced application under section 348.4(b)(2) of FDIC's regulations for an exception from the prohibitions of the Depository Institution Management Interlocks Act (12 U.S.C. 3201 et seq., "Interlocks Act"). An exception is being sought to permit * * * to serve as directors of * * * (a bank in organization) while continuing to serve as directors of * * *. * * * also presently serves as a director of * * *.1 All of the institutions are located in the * * * SMSA. Absent the grant of the exception, the subject interlocks would violate section 348.3(b)(1) of FDIC's regulations as * * * and * * * have total assets in excess of $20 million.

Section 348.4(b)(2) permits an otherwise prohibited interlock between two institutions if one of the institutions is newly-chartered (i.e. has been in operation less than two years) and the interlock is necessary to provide the newly-chartered institution with management or operating expertise (i.e. such management or operating expertise is not available without utilizing the services of persons already serving financial institutions located elsewhere in the same community or same SMSA). Applicants' counsel has submitted an affidavit from the CEO of * * * which recites that "I have canvassed the possibilities of finding directors with the requisite qualifications, who are not already serving on boards within the * * * SMSA, but I have not been able to find anyone who qualifies".2 Applicants' counsel also recites in the application that "the only sources of banking experience available to serve as directors of a new bank, are either connected with a bank in the area or are retired". Neither the affidavits nor the application specifically indicate whether or not any management official of a depository institution with total assets of less than $20 million was considered as a director candidate for the new bank. (Such an individual's service would be permissible under FDIC's regulations.) Persons falling within that category may not have been considered.3

Despite the fact that an adequate search for management may have been conducted, our ultimate assessment of the application does not rest on the question of whether a search for alternative management was conducted.4 It appears, based upon the regional office's investigation, that * * * is not in need of shared management in order to obtain management or operating expertise.5 We therefore conclude that the newly-chartered bank is not, in this instance, in need of management or operating expertise that could only be provided through a management official interlock.6 As the bank has not demonstrated the need for the management interlock, the exception is, in our opinion, not available to * * *.

1According to Regional Attorney Norton's September 9, 1983 memorandum, * * * dual service at * * * and * * * is grandfathered. Go back to Text

2 Ten additional affidavits from persons associated with * * * were also submitted each reciting that the affiant is not aware of persons other than the applicants with sufficient background to provide management or operating expertise to the new bank who are willing and able to serve as directors and who are not management officials of another depository institution in the * * * SMSA. Go back to Text

3 Applicants' counsel states the following in the exception request, "given the size of the prohibited area. . . anyone presently connected with an institution with over $20 million in assets within the * * * SMSA is not eligible. This leaves fully retired * * * SMSA bankers and out of SMSA bankers as the only possible legal sources of alternative expertise under the. . . regulations." Go back to Text

4 The Legal Division has indicated in the past that in the case of the newly-chartered bank exception, the institution needs to demonstrate that it unsuccessfully attempted to locate management whose service was permitted under the Interlocks Act. Go back to Text

5 The regional office memorandum indicated that, "while it is obvious that these three individuals, who admittedly all have impressive credentials, would in fact be quite helpful to new management, their participation cannot be considered necessary to the success of the new bank, especially in light of their choice of an experienced individual, also with solid credentials, as president and CEO. Under these circumstances, a board of directors composed solely of local businessmen of sound business judgment, even though they may be short of banking experience, should be sufficient to guide the bank and assure its success." The application itself states that * * * has had twelve years of banking experience with * * * and * * *. He is presently serving as vice president and manager of the main office of * * *. Go back to Text

6 Applicants' counsel, in addition to requesting the exception, argued that the Interlocks Act does not prohibit the interlocks in question as (1) the institutions will not actually compete, and (2) the Interlocks Act does not prohibit institutions in the same SMSA from sharing management so long as one of the two institutions has total assets of less than $20 million. We disagree. The Interlocks Act is an antitrust statute and as such is to be strictly construed, i.e., it presumes that two institutions in the same SMSA compete. Upon a strict reading of the Act's SMSA prohibition (see 12 U.S.C. 3202) it is equally clear that both institutions need to be under $20 million in assets in order for the small bank statutory exception to apply. Applicants' counsel has not presented any persuasive argument to the contrary. Go back to Text

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