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FDIC Federal Register Citations

October 21, 2002

Via e-mail: comments@fdic.gov

Mr. Robert E. Feldman
Executive Secretary
Attn: Comments Front/OES
Federal Deposit Insurance Corporation
550 - 17th Street, N.W.
Washington, DC 20429

Re: 12 C.F.R. Part 303 - Deposit Insurance for State Banks Chartered as Limited Liability Companies

Dear Mr. Feldman:

This office represents the Iowa Bankers Association (“IBA”). The membership of IBA is comprised of approximately 411 state and national banks and savings associations located throughout Iowa, representing more than 90% of the banks and savings associations in the State of Iowa.

IBA strongly supports the proposal to amend 12 C.F.R. Part 303 in order that a state bank organized as a limited liability company (“LLC”) may be considered as “incorporated under state law” within the meaning of 12 U.S.C. 1813, and thereby eligible for federal deposit insurance. In its Supplementary Information, the FDIC staff describes four corporate attributes that distinguish corporations from other forms of business entity, including: perpetual succession; centralized management; limited liability; and free transferability of interests. Under proposed Rule 303.15, an LLC may be eligible for federal deposit insurance only if the LLC possesses all four of the above-described corporate attributes.

IBA agrees that, in order to be eligible for federal deposit insurance, the existence of an LLC should be perpetual, its management should be centralized, and the liability of its members limited. IBA suggests, however, that the FDIC review the requirement of proposed Rule 303.15(3) that “each ownership interest in the LLC, including all management rights and voting rights, is transferable without the consent of any other owner of the LLC ...”

Since adoption of the so-called “check-the-box” rules in 1996, a business entity, including an LLC, that is not specifically classified as a corporation, may elect to be taxed as a partnership. Prior to the check-the-box rules, the Internal Revenue Service considered the same four characteristics as set forth in the proposed rule to determine whether or not a business entity should be taxed as a corporation. If an entity possessed at least three of the corporate characteristics, it would be treated as a corporation for federal income tax purposes. IBA believes that the same test could be applied by the FDIC and, if an LLC possesses at least three of the four corporate characteristics, the LLC could be treated as a corporation eligible for federal deposit insurance. Accordingly, an LLC could be eligible for federal deposit insurance, even though the transfer of its units is subject to certain restrictions.

Most state banks are entirely owned by bank holding companies, and their shares are freely transferable at the discretion of the bank holding company. Many other banks, however, remain owned by bank holding companies with individual minority stockholders or by groups comprised of individuals together with trusts, corporations, and other entities. The shares of many of those banks are subject to various arrangements that restrict the transferability of their shares. Examples include, without limitation:
1. Bylaw provisions that may require shares to be first offered to the corporation or other
    shareholders prior to sale;

2. Shareholder buy-sell agreements that prohibit the transfer of shares unless the shares
    are first offered to the corporation or to the other shareholders; and

3. Restrictions on the transfer of shares in order to comply with, or prevent registration
    under, certain state and federal securities laws.
All such banks are currently classed as corporations eligible for federal deposit insurance. We know of no reason why the same arrangements should not be available to a duly organized LLC. IBA submits that there is little, if any, basis to conclude that the depositors of a bank, and hence the FDIC, are any better protected or the bank is any more sound because the transfer of the bank’s shares is restricted. Existing banks whose shares are subject to various kinds of transfer restrictions may maintain required capital levels by the sale of additional shares to existing shareholders, the sale of existing shares to new shareholders who agree to be bound by existing restrictions, and the issuance of other capital instruments. Transfer restrictions may, in many instances, attract capital because of the comfort that ownership stability brings to the investment.

The availability of federal deposit insurance to a state bank organized as an LLC may provide a needed alternative to the use of Subchapter S. A state bank organized as an LLC would not be subject to the existing restrictions that prevent certain banks from electing to be taxed under Subchapter S. Such restrictions include the number of shareholders that may own a Subchapter S corporation, and limitations on the types of shareholders that may own shares in a Subchapter S corporation, and the requirement for a single class of shares.

While IBA strongly supports the proposal to provide deposit insurance for state banks organized as LLCs, your consideration of the foregoing comments in connection with the proposed addition to 12 C.F.R. Part 303 would be appreciated.

Please advise if we may furnish further information or clarification.

Yours very truly,
DAVIS, BROWN, KOEHN, SHORS & ROBERTS, P.C.
Robert A. Gamble
RAG/crw
cc: John K. Sorenson, President
Iowa Bankers Association
 

Last Updated 10/23/2002 regs@fdic.gov

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