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4000 - Advisory Opinions


Prior Notice Provision of 12 C.F.R. § 337.4 Applies Where Insured Nonmember Bank Establishes Subsidiary and Transfers Its Investment Portfolio to Subsidiary

FDIC-91-74 August 28, 1991 Pamela E.F. LeCren, Counsel

The purpose of this memorandum is to confirm the advice previously given by this office to the Chicago Regional Office to the effect that the prior notice provision of section 337.4 of the FDIC's regulations does apply in the event that an insured nonmember bank establishes a subsidiary and transfers its investment portfolio thereto. The subsidiary will thereafter manage the bank's investment portfolio. These arrangements are apparently common in Wisconsin as a way to avoid higher franchise taxes that would otherwise be owed by the parent institution.

The notice provision in section 337.4 is to be broadly construed as it serves as an informational tool. As managing a securities portfolio arguably can be characterized as a securities activity, and section 337.4 requires prior notice in the event an insured nonmember bank intends to establish or acquire a subsidiary that will engage in any securities activity, the notice provision applies.

The fact that an insured nonmember bank must provide notice to the FDIC before establishing a subsidiary that engages in any securities activity does not, however, automatically mean that the bank's investment in the subsidiary must be deducted from the bank's capital. As George Masa's April 26, 1991 correspondence to *** indicates, an insured nonmember bank is only required to deduct its investment in a securities subsidiary from the bank's capital if that subsidiary is required to be a bona fide subsidiary. The regulation only requires that subsidiaries be bona fide if they engage in securities activities that are not permissible for a bank under the Glass-Steagall Act. Under that test, I do not believe that a bank's investment in a securities portfolio subsidiary of the type described in your August 16 correspondence is required to be deducted from the parent bank's capital.


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