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4000 - Advisory Opinions


Whether Incorporation of a Minimally Capitalized Shell Subsidiary Constitutes Establishment of a Subsidiary for Purposes of 12 C.F.R. § 303.13(f)

FDIC 91-44 May 15, 1991 Pamela E. F. LeCren, Counsel

The following is in response to your request for an opinion on whether, in the circumstances outlined below, your client, *** ("[Savings Bank]") must provide the FDIC with thirty days prior notice before incorporating a service corporation subsidiary.

According to your letter, [Savings Bank] proposes to enter into an arrangement with ***, a registered broker-dealer, and ***, a legal reserve life insurance company (collectively hereinafter referred to as "[X]") pursuant to which [X] will offer tax-deferred annuities, mutual funds, and other insurance and securities products to [Savings Bank]'s customers at various [Savings Bank] branches. As regulations adopted by the Office of Thrift Supervision ("OTS") prohibit federal savings associations from entering directly into any third-party contract with a broker-dealer, [Savings Bank] contemplates establishing a service corporation that would enter into the necessary agreements with [X]. This type of activity qualifies as a preapproved activity for a federal savings association service corporation.1

[X] has indicated that it will not proceed to recruit, hire, train, obtain licenses for, or employ the necessary personnel, for the described venture unless and until the service corporation is formed and it enters into a written agreement with [X] evidencing the service corporation's intent to proceed with the program. The recruitment process is expected to take up to 90 days or longer. In order to avoid delays in implementing the program, [Savings Bank] proposes to incorporate a minimally capitalized shell service corporation for the purpose of the shell corporation entering into the requisite agreements. The agreements would recite that no activities or services could be conducted either by [X] or the service corporation unless and until all necessary regulatory approvals have been obtained and all required notification periods have expired. The service corporation would not acquire any assets or conduct any business whatsoever until all necessary approvals are received and/or all necessary notice periods have expired. [X] is prepared to incur the risk that [Savings Bank] does not receive approval. If approval is not forthcoming, [Savings Bank] will not incur any appreciable financial loss.

As you are aware, section 303.13(f) of the FDIC's regulations (12 C.F.R. § 303.13(f)) provides that no insured savings association may "establish'' a subsidiary without providing the regional director for the Division of Supervision for the region in which the savings association's principal office is located thirty days prior notice of its intent to do so. The contemplated service corporation is a subsidiary within the meaning of the regulation. In essence your letter invites us to conclude that the incorporation of a minimally capitalized shell subsidiary does not constitute the establishment of a subsidiary for the purposes of section 303.13(f), i.e., thirty days prior notice need not be given to the FDIC before the shell company is formed and enters into one or more contingent contracts. Subject to the following caveats, we concur.

The purpose of section 303.13(f), which implements section 18(m) of the FDI Act as added thereto by FIRREA, is to provide the FDIC with an opportunity to evaluate the potential impact on an insured savings association of its proposed establishment of a subsidiary and to evaluate the potential impact of that action on the insurance fund. If the provision is to achieve its purpose, it is critical that that opportunity occur before the savings association incurs expenses in connection with the formation of the subsidiary and before the subsidiary enters into binding agreements obligating it for some future performance. Although the incorporation of a subsidiary does entail some expense, the incorporation of a shell company without giving the FDIC thirty days prior notice should not undermine the purpose of section 303.13(f) of the FDIC's regulations and section 18(m) of the FDI Act provided that: (1) the subsidiary is capitalized at only the most minimal of levels; (2) the subsidiary does not conduct any business or incur any expenses and neither purchases nor commits itself to purchase any assets until after the FDIC is given notice and the thirty-day notice period expires (or the savings association is informed prior to the expiration of the thirty days that the FDIC has no objection); (3) any and all agreements the shell corporation enters into during the notice period regarding its future conduct of business specifically provide that the agreements are not binding unless and until all necessary regulatory approvals are received and/or all necessary notification periods have expired; and (4) the savings association files with the FDIC the notice required pursuant to section 303.13(f) promptly upon the formation of the shell company.

If the above conditions are met, the FDIC will not consider the formation of a service corporation by [Savings Bank] and the execution of one or more agreements by the service corporation to necessitate thirty days prior notice to the FDIC under section 303.13(f).

1See 12 C.F.R. § 545.74(c)(4). Go back to Text


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