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4000 - Advisory Opinions

Application for Deposit Insurance


March 26, 1987

J. William Via, Jr., Counsel


You have raised the question whether, for purposes of 12 C.F.R. § 337.4, the applicant would be an "affiliate'' of the investment banking firm of *** (a partnership). The term "affiliate" means "any company that directly or indirectly, through one or more intermediaries, controls or is under common control with an insured nonmember bank." The term "company" includes, among other entities, a partnership, as well as a corporation (other than a bank). See 12 C.F.R. § 337.4(a)(1),(2). Thus, if *** "controls" the applicant, the affiliation contemplated by the regulation exists.

The term "control" means, for these purposes, "the power to directly or indirectly vote 25 per centum or more of the voting stock of a bank or company, the ability to control in any manner the election of a majority of a bank's or company's directors or trustees, or the ability to exercise a controlling influence over the management and policies of a bank or company." 12 C.F.R. § 337.4(a)(4). It seems, on the face of it, that *** is controlled by one ***, the senior partner. A letter to Regional Director Lutz from ***, a general partner in *** represents that, under the partnership agreement, *** "exercises sole power [i.e., without the approval of other partners] with respect to the management and policies of ***, including setting the percentage interest of each partner and the right to admit new partners and require certain partners to retire." ***, then, as a matter of economic (and psychological) reality, has enormous leverage over *** partners and over those aspiring to be partners (including present non-partner employees and former partners who may wish to return.2 *** will own 1700 shares of applicant's stock and control another 800 shares owned by his sister (who is a limited partner in ***). Thus, he has a financial stake in the applicant (which will offer no loans, but will invest its funds in securities).

According to the stockholder list that you furnished, *** will own the entire 8000 shares of common stock (of 10,000 shares authorized) that applicant will issue initially. The applicant will also issue "Series A Convertible Preferred Stock", which has no voting rights but is convertible at the option of the holder into common stock (and is convertible without consent if sold in an offering to the public); this preferred stock (7500 shares) is treated (because of the leverage that goes with convertibility) as the equivalent of common stock. Of these 15,500 combined shares of common stock and of "Series A Convertible Preferred Stock", *** will own or control 11.41% and eleven other *** partners (or employees) will own 13.87% making 25.28% for this group (which does not include the departing ***, who will own, respectively, 43.85% and 1.04%).

The applicant is authorized to have not more than 21 directors and initially will have only nine, two of whom will be ***. Of the seven other designated as directors, five are *** partners (or employees).

Section 337.4, it will be recalled, does not require actual control, but only the "power" or "ability" to control, for an affiliation to exist. The circumstances in this case, it seems to me, provide a reasonable basis for the FDIC, in construing its own regulation to conclude that *** will have the requisite control over applicant to make them affiliates.

2 ***, applicant's principal shareholder and proposed chairman and CEO, is a general partner in ***, a position that it is said he will relinquish. ***, a minor shareholder in applicant and a proposed officer (EVP) and director, will also terminate his association with ***. The third top officer proposed for applicant is also terminating a relationship with an investment banking firm. Go back to Text

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