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4000 - Advisory Opinions

Request for Exemption from the Interlocks Act under Sections 348.4(b)(3) and (b)(5)


April 3, 1984

Pamela E. F. LeCren, Senior Attorney

The following is in response to your request for the Legal Division's comments and opinion on the above-captioned request for an exemption from the Interlocks Act1 under sections 348.4(b)(3) and (b)(5) of FDIC's regulations. Section 348.4(b)(3) permits an otherwise prohibited management official interlock between two depository institutions if one of the institutions faces conditions that endanger its safety and soundness and the relationship is necessary to provide such institution with management or operating expertise. The authority to grant but not deny requests under section 348.4(b)(3) has been delegated to the Director of the Division of Bank Supervision and, where confirmed in writing by the Director, to the appropriate regional director (see section 303.11(a)(14)). Section 348.4(b)(5) permits an institution to phase out an existing management official interlock over a thirty-month period in circumstances where the institution faces the loss of 30 percent or more of its directors or other management officials due to a change in circumstances that has caused the interlock to become prohibited. Prior to the November 30, 1983 amendment to Part 348, both exemptions (as well as the other exemptions found in section 348.4(b)) required approval of more than one federal financial supervisory agency if the institutions involved were supervised by different agencies. As amended, however, only the supervisory agency of the institution falling within an enumerated category, in this instance the endangered institution, need approve the exemption.

In the instant case, * * * is requesting approval to become a director of * * * while continuing to serve as a director of * * *. As both institutions are located in the * * * MSA2 and * * * has total assets in excess of $20 million, the interlock would be prohibited under section 348.3(b)(1) of FDIC's regulations. The FDIC is the only agency that need act on the request as an insured nonmember bank, * * * is the depository institution which is seeking management or operating expertise due to its condition.

Our comments are few. We agree with Regional Director Dorbad's conclusion that the exemption in section 348.4(b)(5) is inapplicable on its face. As to the request under section 348.4(b)(3), we will only comment, as we have had occasion to previously indicate, that the necessity standard set forth in the exemptions is inherently flexible. While Regional Director Dorbad's memorandum correctly recites the necessity standard as it has been construed from time to time, the Regional Director's memorandum overlooks the Legal Division's prior statements that a strict reading of the standard is not appropriate in the context of an institution which faces conditions that endangers its safety and soundness.

If it is determined that * * * does face conditions which endanger its safety and soundness (and there seems to be a basis upon which such a determination could rest), the exemption would be available if * * * service can be found to be necessary. A finding of necessity could legitimately be made, in our opinion, if the following questions are favorably resolved: (1) is it expected that * * * service will substantially benefit * * * and (2) is the need for additional expertise in order to avoid further deterioration of the institution's condition, immediate, i.e., is it unrealistic to expect that other means to provide the needed expertise can be explored without putting the institution at risk?

We recommend that the Administration and Corporate Applications Branch in assessing this application apply the standard set forth above rather than that recited in Regional Director Dorbad's memorandum. If it is determined that the exemption may be granted, we remind you that approval may be granted by the Director of the Division of Bank Supervision under delegated authority.

1 Depository Institution Management Interlocks Act, 12 U.S.C. § 3201 et seq., "Interlocks Act." Go back to Text

2 Section 203(1) of the Interlocks Act was amended by the Garn-St. Germain Act so as to delete the reference to SMSA in the prohibitions on interlocking management. Inserted in its place was a prohibition on management interlocks where the institutions have offices located in the same Metropolitan Statistical Area ("MSA") or the same Primary Metropolitan Statistical Area ("PMSA"). On February 21, 1984 the Board of Directors adopted a final amendment to Part 348 making the requisite terminology changes. The amendment has not been published in the Federal Register as of yet, however, as the other agencies participating in the joint register notice have not yet adopted the amendment to their respective regulations. Go back to Text

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