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4000 - Advisory Opinions

Meaning of Term "Publicly Traded" as Used in Section 306(o) of FDICIA


March 15, 1994

Pamela E.F. LeCren, Senior Counsel

The following is in response to your February 16, 1994 letter wherein you ask the FDIC's opinion as to the meaning of the phrase "publicly traded" as used in Section 306(o) of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).

Section 306(o) of FDICIA amended Section 22(h) of the Federal Reserve Act (12 U.S.C. 375b) by, among other things, adding a provision to Section 22(h) which requires an executive officer or director of an insured depository institution, a bank holding company, or a savings and loan holding company, the shares of which are not publicly traded, to report annually to the board of directors of the institution or holding company the outstanding amount of any credit that was extended to such executive officer or director that is secured by shares of the institution or the holding company.

Section 306(o) does not contain a definition of the phrase "publicly traded". Nor does the Federal Reserve Board regulation implementing Section 22(h), Regulation O (12 CFR Part 215), contain any definition. We have reviewed the legislative history regarding Section 306(o) and although that legislative history does not explicitly address the meaning to be given "publicly traded", the legislative history does reveal the purpose of the reporting requirement.

Senator Brown, a co-sponsor for Section 306(o) which was added as one of several manager's amendments to S.543, the Senate version of FDICIA, described the purpose of Section 306(o) as follows:

The purpose of this amendment is to ensure that boards of directors are aware that directors or officers have pledged shares of that institution or holding company to secure credit. The amendment does not prohibit any director or officer from pledging shares that the director or officer may own; rather, it simply ensures such an action is reported.

The information provided formally to the board of directors must then be maintained in the bank or holding company's official records. The Federal Reserve and other bank regulators would then have access to the information during annual audits, and thus, be better able to track who actually controls U.S. banking institutions. We have attempted here to increase the accountability of our banking system without requiring a significant new load of paperwork on bank officers, directors or regulatory agencies.

Cong. Rec. S17349, daily ed. November 21, 1991.

In view of the above, it is appropriate in our opinion for purposes of Section 306(o) to construe a bank as being "publicly traded" if the bank has issued any class of equity securities subject to the registration requirements of section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78(1)). Thus, if an insured nonmember state bank is registered under the Securities and Exchange Act, its officers and directors are not required to report annually to the bank's board of directors in accordance with Section 306(o).

We think that this position is consistent with the intent of the section as its effect will be to afford banks (and ultimately the federal regulators) the information Congress felt they should have without requiring banks which already collect such information to duplicate those efforts. Insured nonmember state banks whose shares are registered under the Securities Exchange Act are already required by federal regulation to collect and disclose significant amounts of information including information regarding changes in beneficial ownership of their shares and the pledge of their shares. For example, 12 CFR 335.212 item 5(f) requires such banks to disclose on their proxy statements any arrangements, known to the bank, including any pledge by any person of securities of the bank or any of its parents, the operation of which may at a subsequent date result in a change in control of the bank. In addition, Section 7(j) of the FDI Act (12 U.S.C. 1817(j)) requires advance notice to the FDIC before any person acquires control of an insured nonmember state bank through the purchase, assignment, transfer, pledge or other disposition of voting stock of the bank. Section 303.4 of the FDIC's regulations (12 CFR 303.4) which implements Section 7(j) of the FDI Act provides that any person who will through a purchase, assignment, transfer, pledge or other disposition of voting stock will acquire ownership, control or the power to vote 10 percent or more of a class of voting securities of an insured nonmember state bank will be presumed to acquire the power to direct the bank's management or policies if the bank has issued any class of securities subject to registration under section 12 of the Securities Exchange Act.

We have been in contact with staff of the Federal Reserve Board and have been told that that agency has informally adopted a similar position to that described above.

I hope that this has been responsive to your request. If you have any questions, please feel free to contact me at (202) 898-3730.

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