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4000 - Advisory Opinions

State Banks May Hold the Stock of a Company Which Operates an EFT System of Which They Are Members


November 1, 1995

Jeffrey M. Kopchik, Counsel

This is in response to your October 13, 1995 letter to Alan J. Kaplan concerning XYZ Corporation ("XYZ"). According to your letter, XYZ is currently organized as a State #1 nonstock corporation. It has three classes of members: 435 Class A members that are financial institutions based in State #1 and State #2 that became members prior to June 23, 1994; five Class B members not based in State #1; and 30 Class C members that are financial institutions based in State #1 that became members after June 23, 1994.

XYZ operates an electronic funds transfer ("EFT") system that permits customers of its financial institution members to use a plastic card with magnetically encoded information to perform banking transactions through any automated teller machine ("ATM") that is part of the network. XYZ also operates a point-of-sale ("POS") program under which cardholders can purchase goods and services from retailers that have installed network POS devices in their stores.

You state that XYZ has found that its nonstock corporate structure severely limits its ability to compete in the EFT industry because it cannot merge with another network or attract new capital for research and development. Thus, XYZ has formed a nonstock State #3 corporation. XYZ plans to merge into the State #3 corporation, with the State #3 corporation as the survivor. That corporation will then convert to a State #3 stock corporation which will be qualified to do business and have its headquarters in State #1. This resulting corporation would be referred to as "NEW XYZ." New XYZ would issue voting common stock, nonvoting common stock and preferred stock. Class A members of XYZ will receive voting common stock of New XYZ. XYZ's Class B and Class C members will not receive any New XYZ stock.

Your letter enclosed copies of letters from the Office of the Comptroller of the Currency and the Office of Thrift Supervision opining that it is permissible for national banks and federal savings associations, respectively, to acquire New XYZ stock as described in your letter. You have asked us to confirm that pursuant to sections 24 and 28 of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §§ 1831a & 1831e, a state chartered bank and a state savings association, respectively, may acquire and retain New XYZ stock.

Section 24(c) of the FDI Act provides that "[a]n insured state bank may not, directly or indirectly, acquire or retain any equity investment of a type that is not permissible for a national bank." This provision is implemented by § 362.3 of the FDIC's regulations. Section 28(c) of the FDI Act contains the analogous provision which applies to state savings associations. In view of the OCC's May 2nd and May 15 letters and the OTS' September 15th letter, I concur with your view that state banks and savings associations which are currently members of XYZ may acquire and retain stock in New XYZ since such an equity investment is permissible for national banks and federal savings associations.

In reaching this conclusion, I have relied on the facts as presented in your October 13, 1995 letter to Alan J. Kaplan, as summarized above. If you have any further questions, please contact me at 202-898-3872.

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