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4000 - Advisory Opinions

Profit-Sharing Plan Controlled by Large Shareholder of Bank is an Affiliate Under Section 23A of the Federal Reserve Act


August 2, 1993

Gerald J. Gervino, Senior Attorney

You have asked us to review your memorandum of July 20, 1993 and enclosed materials relating to the *** ("bank") purchase of loans made by the bank's profit sharing plan and its pension plan. You specifically ask if a profit sharing plan is an affiliate under § 23A of the Federal Reserve Act, 12 U.S.C. § 371c (1988). (""§ 23A'').

The loans were removed from the two plans because of an objection by the Department of Labor under the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1001 (1988) ("ERISA"). They were sold to the bank. This occurred at a time when the loans possessed characteristics that would bring them into the category of "low quality assets" for the purposes of § 23A(b)(10).

The definition of "affiliate", includes "company", which includes, among other things, business trusts, associations, and similar organizations. 12 U.S.C. § 371c(b)(6) (1988). As you indicated in your memorandum, the Board of Governors of the Federal Reserve System has taken, and successfully defended the position, that an Employee Stock Ownership Plan ("ESOP") is a "company" within the meaning of § 23A. 71 Fed. Res. Bull. 804 (1985); First National Bank of Blue Island Employee Stock Ownership Plan v. Board of Governors of the Federal Reserve System, 802 F.2d 291 (7th Cir. 1986).

As a "company" controlled by over 25 percent of the shareholders of the bank, the profit sharing plan would have met the definition of "affiliate" in § 23A(b)(1)(C)(i). While the profit sharing plan does not issue voting securities, it is "controlled" within the meaning of this provision. The ownership of voting securities set out in § 23A(b)(3)(A)(i), the control of the selection of trustees contained in § 23A(b)(3)(A)(ii), as well as the Board of Governors determination provided for in § 23A(b)(3)(A)(iii), are not the exclusive means of control recognized by the statute.

Our examiner has found that the large shareholder, who is also the bank's president, a beneficiary, and a trustee of the profit sharing plan, exercised a controlling influence in the operations of the profit sharing plan. His control position is demonstrated by his use of the profit sharing plan in a self-interested way.

Since the profit sharing plan was controlled by a large shareholder of the bank, it is an affiliate under § 23A(b)(1)(C)(i). Ownership of stock in the entity is not necessary. Greenberg v. Board of Governors, 968 F.2d 164 (2nd Cir. 1992).

We have discussed this question with the staff of the Board of Governors of the Federal Reserve System. If you have any further questions, please write or call me at (202) 898-3723. My Fax number is (202) 898-3715.

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