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4000 - Advisory Opinions

Prohibited Management Official Interlocks


March 13, 1980

Pamela E. F. LeCren, Attorney

The following is in response to correspondence between the *** Regional Office and the Washington Office regarding a potential management official interlock between *** and *** which may violate the Depository Institution Management Interlocks Act (Title II of FIRIRCA, the "Interlocks Act") and FDIC's implementing regulations (Part 348). The history of the association of the two banks and actions by the FDIC to date are detailed below.

*** and *** are located in communities that are approximately eight miles from one another at their closest points. Section 348.3(a) of FDIC's regulations would prohibit a management official interlock between *** and *** as they are located in "adjacent" communities as that term is defined in section 348.2(a).1 On February 13, 1979, at *** annual stockholders' meeting, *** (a director and president of ***) nominated a new slate of directors including two members of *** law firm (***) and ***, a director of ***. At the time of election *** owned 200 shares of ***.2 At that meeting he voted his shares (along with several proxies) giving him, in conjunction with ***, control of 50.6% of the total outstanding stock. Only two of the six previous directors were re-elected (***), *** President, Senior Vice President, and Vice President all submitted their resignations the day before the annual meeting. *** resigned from the board of directors at an organizational meeting held on February 19, 1979. *** son, ***, was elected by the board to fill this vacancy. A former vice president of *** was elected to be *** chief executive officer.

*** was informed in writing on March 12, 1979 that his service as a director of *** and *** was in violation of the Depository Institution Management Interlocks Act and was asked to take steps to correct the situation He was not eligible for grandfather rights under section 206 of the Interlocks Act as he began his dual service after November 10, 1978. On March 20, 1979 *** requested an exception from the prohibitions of the Act in response to which he was informed that consideration thereof was premature. The FDIC had not yet adopted regulations permitting excepted service. Such a regulation was subsequently adopted and became effective on July 19, 1979. *** pursued his request for an exception and sought approval by the Board of Directors of the FDIC to continue to serve both banks under section 348.4(b)(1). That section permits dual service when one institution is located in a low income or other economically depressed area and the person's service is necessary to provide operating or management expertise. The Board of Directors considered the request on February 25, 1980. It was denied.

On July 2, 1979 the Legal Division forwarded an opinion to the *** Regional Office indicating that, based on the facts then available, we could not find that either *** or *** was the representative or nominee of *** or that *** law firm had representatives or nominees serving *** and ***. If either was the case, there would be a prohibited management official interlock between *** and *** under the Interlocks Act.3 Since the date of that opinion, both *** and *** have left *** board of directors. In addition, "representative or nominee" has been defined so that indirect interlocks involving business entities are not covered by Part 348. (See Footnote 3.) Because of these facts, the question presented in the July 2, 1979 memorandum is no longer relevant.

On December 10, 1979, the *** Regional Office informed *** in writing that, in the opinion of the Regional Office, *** was himself unlawfully serving *** as a management official4 while concurrently serving as president and director of *** 5 In addition, it was the opinion of the Regional Office that *** was acting as his father's representative or nominee based on the family relationship.6 *** responded to the above in a letter dated December 17, 1979. According to that letter, *** was serving *** in the capacity of secretary to the board. Furthermore, that relationship was necessitated by the retainer agreement between *** and *** law firm which required that a member of the firm must attend all board meetings to render legal advice and assist the board by preparing the minutes.7 *** was said not to be his father's representative, despite the family relationship, because (1) his father (who is not a member of the board) played no role in his election, (2) he is an independent adult, (3) he is qualified to be a director because of his past association with *** as a director, and (4) he maintains a separate domicile.

We are of the opinion that *** is acting as a management official of *** despite the bank's characterization of *** relationship with *** as that of an attorney-client relationship. We come to this conclusion based on the information supplied to the *** Office by the *** Financial Institutions Bureau which is conducting an investigation of the relationship between *** and ***. According to that information, *** role at *** goes way beyond that of an attorney advising a client or that of a secretary preparing minutes for a board.8 *** is regarded as dominating the board in all its decisions, has hired bank employees without board approval or direction, has been known to confer with bank officials regarding interest rates on loans to customers and actually set rates as well as other terms, and is considered to be primarily responsible for the withdrawal of *** application to establish a branch in ***. The branch would have caused *** and *** to compete in the same immediate market. Prior to the introduction of the new slate of directors and *** association with *** the establishment of the branch had the full backing of *** board of directors and the business community in ***. According to a market study regarding the efficacy of a branch in ***, the proposed site was favorable. In short, there was little reason, if any, to withdraw the application other than to stay competition between *** and ***.9

Although *** is not a salaried employee in the common understanding of that term, nor an elected director, nor officially an advisory director, nor officially an officer, he does in actuality wield management responsibilities associated with those positions and is involved in the daily operations of the bank. He is thus in our opinion a management official within the meaning of that term as defined in section 348.2(h) of FDIC's regulations. We find this conclusion especially appropriate in view of the purpose of the Interlock Act to further competition between nonaffiliated banks by prohibiting the same persons from making management decisions regarding both. His continued association with *** and *** is in violation of section 348.3(a) of FDIC's regulations and he should immediately sever the interlocking relationship. How that is done is up to ***. We do, however, recommend that he disassociate himself from *** and have no further contact with its directors (or other management officials) regarding the bank's business. It may or may not be found necessary for *** to sell his stock in *** (or to place it in a blind trust) in order that the interlocking relationship be truly severed.10

The retainer agreement with *** law firm may also need to be terminated inasmuch as any partner or associate of the firm fulfilling the requirement to attend board meetings may be found to be ***, representative or nominee. In the alternative and at the very least, a board resolution stating that the person fulfilling the retainer agreement is not authorized to participate in board meetings except with regard to legal matters would be necessary. Of course, the individual must in fact limit his or her participation to such matters. We wish to make clear that it is not our intention to say that a member of a law firm who attends board of directors meetings pursuant to a retainer agreement is automatically considered a management official of the particular institution. Normally, the attorney-client relationship is separate and distinct from that of a management official relationship and will not be considered to be the latter absent other circumstances.

On the question of whether or not *** is his father's representative or nominee, it is our opinion that the bank's statement that *** was selected to fill a vacancy without any influence from his father is more than suspect given the information we have concerning the father's dominance of the board. It also appears to be something more than a coincidence that the son's only banking experience comes from his association with ***, a bank where his father is a director and president. We find sufficient reason to make the determination that *** has an implied obligation to act on his father's behalf with regard to management responsibilities in view of the family relationship in addition to all the facts outlined at length above. It is our opinion therefore that *** is his father's representative or nominee, the result being that not only must *** disassociate himself from *** but that *** should terminate his association with *** as a director of that institution.

The Legal Division is reviewing the material obtained from the *** Financial Institutions Bureau in order to determine whether or not the facts warrant an investigation into possible violations of section 2 of the Sherman Act. Should we determine such an investigation is warranted, we will refer the matter to the Justice Department.

1 Adjacent communities are defined to be cities, towns or villages that are within ten miles of one another at their closest points. Go back to Text

2 He has since acquired an additional 1,000 shares. Go back to Text

3 The Act defines the term "management official" to include any person who has a "representative or nominee" serving in the capacity of a management official. Thus, in the first instance *** could be considered a management official of *** by virtue of having a representative or nominee serving *** and in the second instance his law firm could be considered a management official of *** and *** since members of the firm serve both institutions. At the time that opinion was written, a definition of the term "representative or nominee" was proposed as an amendment to Part 348. The following definition was adopted on March 3, 1980 but will not be effective until thirty days after publication in the Federal Register.
  (k) "Representative or nominee" means a person who serves as a management official and has an express or implied obligation to act on behalf of another person with respect to management responsibilities. Whether a person is a "representative or nominee" depends upon the facts in individual cases. The appropriate Federal supervisory agency or agencies will determine, after giving the affected persons the opportunity to respond, whether a person is a "representative or nominee". Certain relationships (including family, employment, and agency relationships), or the ability and exercise of ability by a shareholder of a depository organization to elect a director, may be evidence of such an express or implied obligation. For the purposes of this subsection, person shall include only natural persons.
  Under this definition, business entities are incapable of having representatives or nominees therefore a business entity cannot be a management official. Go back to Text

4 The term "management official" is defined in section 348.2(h) to mean an employee or officer with management functions (including a branch manager), a director (including an advisory or honorary director), a trustee of a mutual savings bank or any person who has a representative or nominee serving in any of the above capacities. Go back to Text

5 This opinion was reached based on information regarding *** extensive involvement with ***. Go back to Text

6 The proposed definition of representative or nominee outstanding at the writing of the December 10, 1979 letter indicated that a family relationship would normally be considered sufficient to establish the existence of an express or implied duty to act on another's behalf with regard to management responsibilities. Go back to Text

7 *** prior retainer agreement with a law firm other than *** was terminated at the February annual shareholders' meeting. It was resolved that all legal services would henceforth be obtained from *** firm. Go back to Text

8 By the bank's own admission, *** relationship with *** is viewed as beneficial based on his prior involvement with *** which is said to have helped turn that bank around. Because of his success at State his advice and assistance was sought out and is considered appropriate by the bank. We find the above to clearly indicate that, in *** own opinion, *** service goes beyond that normally associated with an attorney-client relationship. Go back to Text

9 Competition between the two banks has indeed decreased since the new slate of directors was put into office and *** began his association with ***. In addition, it is the opinion of the Regional Office, as evidenced in a January 25, 1980 memorandum concerning *** request for an exception, that *** overall condition has declined since the management change. Go back to Text

10 Based on his past association with *** anyone *** would place into office as a director through the exercise of his own voting rights, the exercise of proxies given him by others, or acting in concert with others would be suspect as being *** representative or nominee. Go back to Text

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