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4000 - Advisory Opinions

Employee Stock Ownership Plan: Collateral Loan

FDIC-90-18 April 24, 1990 Gerald J. Gervino, Senior Attorney

This letter is written in response to your telephone calls of April 2 and 3, as well as your letter dated April 5, and your supplementary letter dated April 17, 1990.

*** Bank, a *** bank ("Bank"), in stock form with its deposits insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"), has previously established an Employee Stock Ownership Plan and Trust ("ESOP").

Under the facts set forth in your supplementary letter, the bank wishes to borrow funds from a third-party lender ("Lender"), with the proceeds of the loan lent by the bank to the ESOP, which will use the funds for the purchase of the outstanding common stock of the bank in open-market transactions. Stock so purchased will be pledged to the bank as collateral for its loan to the ESOP. No purchases would be made that would bring the ESOP's percentage ownership of bank stock above ten percent.

Your original request had asked for an opinion as to the permissibility of a bank guarantee of the affiliates obligation under Part 332 of our regulations. Since you have changed the facts in you supplementary letter to eliminate any guarantee, we will not respond to your original letter in this respect.

You also asked if the ESOP might be considered an "affiliate" within the meaning of § 23A of the Federal Reserve Act, 12 USC § 371c (1988) ("§ 23A''). It is perhaps conceivable that the ESOP might be in a position where the bank could "control" the ESOP for the "benefit" of its shareholders, ¶ (b)(1)(C)(i) of § 23A. This is irrelevant, since under the exemption for non-bank subsidiaries contained in ¶ (b)(2)(A) of § 23A the ESOP would not be considered an "affiliate'' for purposes of § 23A. If the ESOP were to obtain a percentage of ownership beyond the maximum indicated (10%) or in some other way "control" the bank within the meaning of (b)(1)(A) of § 23A, it would then be an "affiliate'' of the bank and the restrictions and prohibitions applicable to transactions between a bank and its "affiliate" would apply.

We wish to point out that the bank's lending of money secured by its own stock is generally prohibited by State law or regulation. We suggest that you contact your local banking authority for advice on the legality of the collateralization which you have proposed. In the event that there is no local prohibition on a loan of this nature, we wish to point out that § 18(i) of the Federal Deposit Insurance Act, 12 USC § 1828(i) (1988), prohibits the reduction of any amount of the bank's stock without the prior consent of the FDIC.

If you have any further questions, feel free to write or call me at (202) 898-3723.

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