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4000 - Advisory Opinions


Dual Service as Bank Director under Depository Institution Management Interlocks Act

FDIC-81-26

December 4, 1981

Pamela E. F. LeCren, Attorney

The following is in response to your September 15, 1981 letter to Hoyle L. Robinson, Executive Secretary, of the Federal Deposit Insurance Corporation ("FDIC") setting forth your opinion that the dual service by your client, *** at *** and *** is not prohibited under the Depository Institution Management Interlocks Act (12 U.S.C. § 3201 et seq, "Interlocks Act"). In brief, your letter indicates that the prohibitions of the statute should not be applied to the interlock in question due to the applicability of section 3205(l) of the statute or, in the alternative, that the prohibitions of the statute do not apply due to the fact that *** is grandfathered in his dual service at both banks.

The facts of the particular case are as follows. *** is currently serving as a director of *** and a director of ***. He has served in these positions for approximately 11 years. The two banks are not affiliated and until June 30, 1980 were not located in the same city, town or village. On June 30, 1980, *** acquired a portion of the assets of ***. As a result of that acquisition, *** is now operating a branch in the city of ***. At the time of the acquisition, *** was in the process of being liquidated by the FDIC.

Section 3205(1) provides that the prohibitions of the Interlocks Act shall not apply in the case of a depository institution or depository holding company which has been placed formally in liquidation or which is in the hands of a receiver, conservator, or other official exercising a similar function. It is your contention that the above language exempts *** service at *** and ***, even though neither institution has been placed in formal liquidation or is in the hands of a receiver, conservator, or other official exercising a similar function. Section 3205(1) applies in your estimation because the interlock in question became subject to the prohibitions when *** purchased a branch office of *** that had been placed in formal liquidation. Furthermore, it is your contention that the exemption must apply to situations such as the one in question inasmuch as there are no others to which it could apply, i.e., an institution placed in liquidation or in the hands of a receiver, conservator, or other person exercising a similar function has no directors and therefore cannot be involved in an interlock.

We have carefully reviewed your argument that Section 3205(1) insulates *** dual service and have concluded that the statutory exemption is inapplicable. Initially, we have concluded that your construction of the exemption is in conflict with the literal language of Section 3205(1) which provides that an interlock with an institution that has been placed formally in liquidation, etc. may engage in an interlock that is otherwise prohibited. Neither bank involved in the interlock under the instant fact situation is a bank that has been placed formally in liquidation. Not only is your reading in conflict with the literal language of Section 3205(1), the reading is inconsistent with the overall provision. Section 3205(1) sets forth six types of entities with which a depository institution may share management without regard to the prohibitions of the Interlocks Act. In all cases, the exemptions permit shared management with entities where the interlock would pose no threat to competition. In the case of an institution placed in liquidation, the exemption recognizes that such institutions no longer conduct a day-to-day business. A broad reading of Section 3205(1) as proposed by you, would permit a viable bank to enter a market and retain or establish an interlock with another competing bank. Rather than allowing dual service where competition could not be affected due to the nature of the institutions, your reading of Section 3205(1) would allow direct competitors to be managed by the same individuals.

We also take issue with your contention that no other situation can exist to which the exemption can apply. Clearly an institution placed in voluntary dissolution retains its directors. The directors are responsible for winding up the affairs of the bank or appointing a liquidating committee to wind up the affairs under the direction of the board of directors. Even in the case of involuntary dissolutions, directors can retain a limited role even where oversight functions have been transferred to a receiver, etc. For example, the Louisiana banking code (LA. REV. STAT. ANN. 6:384 (West)) provides that the board of directors of a bank placed in liquidation by the Commissioner of banks may appoint a liquidator to assist the Commissioner in the duty of liquidation and distribution. We therefore are of the opinion that Section 3205(1) would allow a director of a bank that has been placed in liquidation, whether voluntary or involuntary, to become a management official of another institution prior to the termination of the liquidation and return of any remainder to the stockholders of the bank. Additionally, to the extent that an individual may be appointed a receiver, conservator, or other official exercising a similar function, Section 3205(1) would allow such an individual to conduct his or her responsibilities while serving as a management official elsewhere.

Although your September 15, 1981 letter is not entirely clear regarding your argument that *** is entitled to serve both banks until November 10, 1988, please be advised that Part 348 of FDIC's regulations implementing the Interlocks Act (12 C.F.R. § 348) recognizes his service as being grandfathered (see Section 348.5) inasmuch as he served both banks prior to November 10, 1978 and his service was not then in violation of Section 8 of the Clayton Act (15 U.S.C. § 19). The purchase of the branch office, however, constitutes a change in circumstances under Section 348.6(a)(ii). The change in circumstances necessitates ***; resignation from one of the institutions. It is the opinion of the Legal Division that the FDIC acted within its authority in adopting Section 348.6 and that the provision is a reasonable interpretation of the statute. Inasmuch as the fact situation falls clearly within Section 348.6(a)(ii), it is our continued opinion that *** may no longer serve both institutions.

In view of the above, should you wish to pursue reconsideration of *** request for an exemption under Section 348.4(b)(1) as indicated in your letter, you should submit your request, along with any additional information, to FDIC's Memphis Regional Office. Please be advised that you need not submit any data concerning the economic condition of *** or *** as this office has already made the determination that *** is located in a low income or other economically depressed area. As it was the finding of the Board of Directors with regard to *** initial request that the necessity of his service at *** and the unavailability of others to serve the bank was unsubstantiated, it would be appropriate to submit information addressing those two points.

Should you have any questions or comments regarding the substance of this opinion, please feel free to call me.


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