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4000 - Advisory Opinions

Application of Section 19 of the FDI Act to Contractual Agreement Between Bank and Company Owned by Individual Convicted of Crime Involving Dishonesty and Breach of Trust


May 8, 1992

Alfred J.T. Byrne,

General Counsel

This will respond to your December 20, 1991 letter and the exhibits and related information submitted to Nancy L. Alper of the Legal Division, concerning the inquiry of your client, [Bank], with respect to certain contractual relationships with entities owned by [X], including [Company], and its divisions, [Subsidiary A], [Subsidiary B], and [Subsidiary C] (formerly known as ***).

We hope that our delay in responding to your inquiry has not inconvenienced your client, but you will no doubt appreciate that the question you presented warranted careful and exhaustive consideration and analysis.

In arriving at our conclusion, we have considered all of the materials you submitted to us, including, without limitation: (a) the Marketing Agreement, dated October 15, 1991, between the Bank and [Company]; (b) the sole ownership of [Company] by [X]; (c) the fact that [X] is a person convicted of a crime involving dishonesty and breach of trust; and (d) such other matters as we have deemed necessary or relevant.

Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. § 1829, in pertinent part prohibits "any person convicted of a crime of dishonesty or breach of trust. . .from otherwise participat[ing], directly or indirectly, in the conduct of the affairs of any insured depository institution" without the prior written consent of the Federal Deposit Insurance Corporation. The statute also prohibits any insured depository institution from permitting such a person to participate in the conduct of its affairs without the prior written consent of the FDIC.

Based upon the foregoing, the FDIC Legal Division has concluded that [Company] and its divisions are participating indirectly in the conduct of the affairs of the Bank and that the Bank, accordingly, must file a section 19 application pursuant to 12 U.S.C. § 1829.

We have arrived at this determination following an in-depth analysis of the materials submitted to us. For example, based upon our analysis of the Marketing Agreement, we have concluded that [Company] and its divisions perform on a regular and material basis various aspects of the credit card business of the Bank, including marketing on behalf of the Bank and leasing of credit card equipment used by merchants to process credit card and check guarantee transactions for the Bank.

The Marketing Agreement demonstrates the extent of [Company]'s involvement in the Bank's credit card operations. Section 2.1 of the Marketing Agreement "appoints [Company] as its marketing and sales representative to market the Bank's Merchant Credit Card Services to prospective Merchants. . . ." Pursuant to the terms of the Marketing Agreement, [Company] also is given access to the database on the Bank's processing operation by means of a communications data circuit. Furthermore, pursuant to section 2.10, [Company] is required to lease the credit card hardware, called "point-of-sale terminals," to the merchants to process credit card and check guarantee transactions and, if a merchant defaults on its lease, [Company]--not the Bank--is responsible for the costs.

Moreover, the Bank has authorized [Company] to enter into contractual relations with other independent marketing organizations which also market the Bank's Merchant Credit Card Services. Under the terms of the Marketing Agreement, [Company] is required to monitor those organizations to make certain that no misleading or deceptive marketing practices are used; to require each organization to submit proposed marketing plans on a quarterly basis; and to review with the Bank each proposed marketing plan submitted, which may be implemented only after express written approval has been obtained from both the Bank and [Company].

Based upon the foregoing analysis, we have concluded that [Bank] is required to file an application on behalf of [Company], its divisions, and [X]. A copy of the application form is enclosed for completion and filing with the FDIC's Kansas City Regional Office, 7400 West 110th Street, Suite 400, Overland Park, Kansas 66210.

If you have any further questions concerning the foregoing, please contact Ms. Alper of the Legal Division at (202) 898-3720.

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