[Federal Register: February 13, 2003 (Volume 68, Number 30)]
[Rules and Regulations]
[Page 7301-7309]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13fe03-1]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
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[[Page 7301]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 303
RIN 3064-AC53
Insurance of State Banks Chartered as Limited Liability Companies
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Final rule.
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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) has adopted a
final rule regarding whether and under what circumstances the FDIC will
grant deposit insurance to a State bank chartered as a limited
liability company (LLC). Pursuant to section 5 of the Federal Deposit
Insurance Act (FDI Act) the FDIC may grant deposit insurance only to
certain depository institutions. One of the statutory requirements for
a State bank to be eligible for Federal deposit insurance is that it
must be ``incorporated under the laws of any State.'' In the recent
past the FDIC received two inquiries regarding whether a State bank
that is chartered as an LLC (a ``Bank-LLC'') could be considered to be
``incorporated'' for purposes of that requirement. The final rule
provides that a bank that is chartered as an LLC under State law would
be considered to be ``incorporated'' under State law if it possesses
the four traditional, corporate characteristics of perpetual
succession, centralized management, limited liability and free
transferability of interests.
DATES: Effective date: March 17, 2003.
FOR FURTHER INFORMATION CONTACT: Mindy West Schwartzstein, Examination
Specialist, Division of Supervision and Consumer Protection, (202) 898-
7221, or Robert C. Fick, Counsel, Legal Division, (202) 898-8962,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Generally, the FDIC may grant deposit insurance only to depository
institutions that are engaged in the business of receiving deposits
other than trust funds.\1\ The term ``depository institution'' is
defined in the Federal Deposit Insurance Act (FDI Act) to mean any bank
or savings association.\2\ The term ``bank'' is also defined in the FDI
Act to include any State bank,\3\ and ``State bank'' means:
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\1\ See 12 U.S.C. 1815.
\2\ See 12 U.S.C. 1813(c)(1).
\3\ See 12 U.S.C. 1813(a)(1).
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Any bank, banking association, trust company, savings bank,
industrial bank * * * or other banking institution which--
(A) Is engaged in the business of receiving deposits other than
trust funds * * * and
(B) Is incorporated under the laws of any State or which is
operating under the Code of Law for the District of Columbia (except a
national bank),
Including any cooperative bank or other unincorporated bank the
deposits of which were insured by the Corporation on the day before
August 9, 1989.\4\
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\4\ 12 U.S.C. 1813(a)(2).
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Recently, two banks expressed an interest in obtaining Federal
deposit insurance for a State bank that would be chartered as an
LLC.\5\ The proponents have argued specifically that the term
``incorporated'' should not be interpreted to preclude an LLC from
becoming an insured depository institution. The phrase ``incorporated
under the laws of any State'' first appeared in the definition of
``State bank'' with the Banking Act of 1935,\6\ but the FDI Act
provides no definition of the term ``incorporated.'' Furthermore, there
is no legislative history nor judicial guidance regarding its meaning
as used in the FDI Act. Consequently, it is not clear how the term
``incorporated'' should be interpreted in the context of the FDI Act,
and specifically, whether an LLC could be considered to be
``incorporated'' for purposes of determining eligibility for Federal
deposit insurance.
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\5\ Currently, State law in 5 States expressly permits LLCs to
engage in the business of banking; the law in 14 other States would
not. An informal survey of these 14 States indicated that there
appears to be no particular reason for this prohibition.
Representatives of two of the States thought that one reason could
be that the corporate form lends itself to regulation and
supervision. Representatives of two other States mentioned that
legislation was being drafted or proposed to remove the prohibition.
\6\ See Banking Act of 1935, Pub. L. No. 74-305, sec. 101, 49
Stat. 684.
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II. The Nature of Corporations
At common law there were generally three types of business
entities: proprietorships, partnerships, and corporations. A
proprietorship is an individual carrying on a business for profit. A
partnership is generally an association of two or more persons to carry
on as co-owners a business for profit.\7\ Proprietorships and
partnerships had no existence separate and apart from their owners.
Corporations, on the other hand, were created and existed by virtue of
a grant of authority from the sovereign. Although there appears to be
no universally accepted definition of ``corporation,'' most definitions
of the term are pervaded by the notion of ``an `artificial legal
creation,' the continuance of which does not depend on that of the
component persons, and the being or existence of which is owed to an
act of state.''\8\ One of the earliest judicial definitions reflecting
that notion is that enunciated in the 1819 case of Trustees of
Dartmouth College v. Woodward.\9\ In Dartmouth College, Chief Justice
Marshall stated that
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\7\ See Unif. Partnership Act, sec. 101(6) (1997), 6 U.L.A. 61
(Supp. 2002).
\8\ 1 William Meade Flectcher et al., Flectcher's Cyclopedia of
the Law of Private Corporations Sec. 4 (perm. ed., rev. vol. 2001).
\9\ Trustees of Dartmouth College v. Woodward, 17 U.S. (4
Wheat.) 518 (1819).
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[A] corporation is an artificial being, * * * existing only in
contemplation of law. Being the mere creature of law, it possesses only
those properties which the charter of its creation confers upon it * *
* Among the most important are immortality and * * * individuality;
properties, by which a perpetual succession of many persons are
considered as the same, and may act as a single individual.\10\
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\10\ Id. at 636.
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Attributes of a Corporation
The lack of any universal agreement as to the characteristics of a
corporation
[[Page 7302]]
may have resulted from the fact that those characteristics have evolved
over time.\11\ However, it has been traditionally recognized that there
are four attributes of a corporation that distinguish it from other
forms of business entities; those attributes are: perpetual succession,
centralized management, limited liability, and free transferability of
interests.
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\11\ See Douglas Arner, Development of the American Law of
Corporations to 1832, 55 SMU Law Review 23, 43-54, 2002.
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Perpetual succession (also sometimes known as continuity of life)
is not generally construed to mean immortality; rather perpetual
succession means that the entity continues to exist independent of its
owners. For example, the death or withdrawal of a shareholder of a
corporation does not terminate the existence of the corporation.
Perpetual succession is an attribute that distinguishes corporations
from partnerships because partnerships are created and exist by
agreement of the owners (the partners). The death or withdrawal of a
partner generally terminates the partnership. A corporation, on the
other hand, is created and exists by virtue of a grant of authority
from the State, and the death or withdrawal of a shareholder does not
terminate the corporation.
Centralized management generally means that continuing, exclusive
authority to manage the entity is vested in a group of individuals
appointed or elected by the owners. The owners, therefore, do not have
the exclusive authority to directly manage the entity. For example, the
shareholders of the corporation elect a group of individuals (who may
or may not be owners) to be its Board of Directors, and the Board of
Directors manages the corporation. In a partnership, the general
partner(s) have the exclusive authority to manage the affairs of the
partnership.
Limited liability generally means that an owner of the entity is
not personally liable for the debts of the entity; rather, the maximum
potential liability of an owner is limited to the owner's investment in
the entity. For example, the shareholders of a corporation are
generally not liable for the corporation's debts, and the maximum
amount that a shareholder could lose if the corporation incurs
liabilities beyond its assets is his or her investment. This attribute
also distinguishes a corporation from a partnership because in a
partnership the general partners typically are fully liable for the
debts of the partnership.
Free transferability of interests generally means that an owner of
the entity may transfer an ownership interest in the entity without the
consent or approval of the other owners. For example, a shareholder of
a corporation can generally transfer all or a part of his or her shares
to another person without the consent or approval of any other
shareholder. However, in closely-held corporations, it is a common
practice for shareholders to enter into agreements requiring a selling
shareholder to obtain the prior approval of the remaining shareholders.
In partnerships, a partner generally cannot transfer his or her
interest without the consent of the other partners. This is so because
partnerships exist by virtue of an agreement among all of the owners.
However, even when the other partners consent, the original partnership
technically is terminated, and a new partnership is created.\12\
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\12\ See Flectcher, supra note 8, Sec. 20.
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Tax Treatment of Corporations vs. Partnerships
As noted above, a key distinction between a corporation and a
partnership is that a corporation is created by a grant of authority
from the State, whereas a partnership is created by agreement among the
co-owners. A corporation, unlike a partnership, is a legal entity
separate and apart from its owners, and the Federal income tax laws
reflect that separate existence. As a result, a corporation's income is
effectively taxed twice, once at the corporation level, and again at
the shareholders' level when the shareholders receive the corporation's
income as dividends. However, because a partnership is not a legal
entity separate from its owners, a partnership's income is not taxed at
the partnership level, but is attributed directly to the partners and
taxed only at the individual partners' level. This feature of a
partnership is sometimes called ``pass-through tax treatment,'' and is
generally considered to be a significant advantage over the tax
treatment of a corporation's income.
Since the characterization of a business entity as a
``corporation'' has significant tax implications, the Internal Revenue
Service (IRS) established rules to determine whether an entity would be
taxed as a corporation or a partnership. Prior to its amendment in
1997, Treas. Reg. Sec. 301.7701-2 classified an association of two or
more persons who had the purpose of carrying on a business and dividing
the profits as either a partnership or a corporation depending upon
whether the association possessed more corporate characteristics than
noncorporate characteristics. The four corporate characteristics that
the IRS utilized were: continuity of life (perpetual succession),
centralized management, limited liability, and free transferability of
interests. Under the former IRS regulations, if an association
possessed at least three of the four corporate characteristics, it
would be treated as a corporation for federal income tax purposes. As
noted above, after 1996 the IRS no longer utilized the corporate
characteristics test and now permits business entities that are not
specifically classified as corporations in the regulation to elect
partnership tax treatment.\13\ In that regard, we note that one of the
entities specifically classified as a corporation in the regulation is
a ``[s]tate-chartered business entity conducting banking activities, if
any of its deposits are insured under the Federal Deposit Insurance
Act.'' \14\ As a result, an FDIC-insured, State bank that is chartered
as an LLC would not qualify under existing IRS regulations for
partnership tax treatment. Nevertheless, proponents of permitting
Federal deposit insurance for Bank-LLCs argue that if the FDIC
determines that Bank-LLCs are eligible for Federal deposit insurance,
they would then seek a change in the IRS regulations. The proponents
argue that they have considered subchapter S status but found it too
limiting.
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\13\ See Treas. Reg. Sec. Sec. 301.7701-2, 7701-3 (1997).
\14\ Treas. Reg. Sec. 301.7701-2(b)(5) (1997).
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In August 1996 Congress amended the Internal Revenue Code to allow
eligible financial institutions to elect subchapter S status for
federal income tax purposes.\15\ A principal advantage of such status
is that a subchapter S corporation is taxed the same as a partnership,
i.e., a subchapter S corporation is entitled to pass-through tax
treatment. There are, however, limits on both the number and type of
shareholders permissible for a subchapter S corporation. The maximum
number of shareholders of a subchapter S corporation is 75, and only
individuals, estates, certain trusts, and certain tax-exempt
organizations may be shareholders.\16\ Furthermore, there can only be
one class of stock in a subchapter S corporation, and no nonresident
aliens may be shareholders.\17\
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\15\ See Small Business Job Protection Act, Pub. L. 104-188
Sec. 1315, 26 U.S.C. 1361(b) (1996).
\16\ See 26 U.S.C. 1361(b) (1996).
\17\ See Id.
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These limitations on the number and type of permissible
shareholders have been cited as principal reasons why subchapter S
status does not provide banks with a practical way of gaining
[[Page 7303]]
pass-through tax treatment. It is recognized that in the past several
bills have been introduced in Congress to increase the number of
permissible shareholders for subchapter S corporations, but to date
none have been enacted into law. Consequently, the proponents have
sought a determination from the FDIC regarding the eligibility of Bank-
LLCs for deposit insurance. In issuing this final rule it is not the
FDIC's intent to influence the IRS either way. This final rule is
focused on responding to a request for a determination as to whether
under the FDI Act a bank that is chartered as an LLC could be
considered to be ``incorporated'' and therefore eligible to apply for
Federal deposit insurance as a State bank. Specifically, the FDIC takes
no position on how such an entity should be taxed. We note that
supporters of deposit insurance for Bank-LLCs argue that even if the
IRS declines to amend its regulations to provide pass-through tax
treatment for a Bank-LLC, there are still advantages to the LLC
structure. State tax laws may provide the desired pass-through tax
treatment with respect to State income taxes. Furthermore, it is argued
that the increased flexibility provided by the LLC structure is itself
a significant advantage over the corporation structure.
III. The Nature of Limited Liability Companies
Generally, an LLC is a business entity that combines the limited
liability of a corporation with the pass-through tax treatment of a
partnership.\18\ Wyoming was the first State to authorize LLCs in 1977;
since that time the remaining 49 States and the District of Columbia
have all enacted LLC statutes. Generally, LLC statutes were crafted to
authorize a business entity that is neither a partnership nor a
corporation, but an entity that has some of the more desirable features
of each.\19\ As a result, an LLC has characteristics of both a
partnership and a corporation. However, because an LLC is neither a
partnership nor a corporation, State partnership laws and State
corporation laws generally do not apply. For example, State corporation
laws that require a board of directors, that specify how ownership
interests (shares) may be issued, and that impose capital requirements
generally do not apply to an LLC. LLC statutes generally allow the
owners broad discretion in setting up an LLC. According to some legal
scholars, ``[w]hole bodies of corporate law doctrine . . . are rendered
irrelevant'' when an LLC is utilized.\20\
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\18\ See Mark A. Sargent & Walter D. Schwidetzky, Limited
Liability Company Handbook Sec. 1:3 (rev. 2002).
\19\ See ``Unif. Limited Liability Company Act,'' Prefatory
Note, (amended 1996) 6A U.L.A. 426 (Supp. 2002).
\20\ See Sargent & Schwidetzky, supra note 18, Sec. 1:3.
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An LLC is established by filing articles of organization with the
State. These articles are roughly equivalent to a corporation's
articles of incorporation. Every LLC has an operating agreement which
is a contract executed by the members that sets forth the manner in
which the business of the LLC will be conducted. The operating
agreement establishes the rights, powers, duties, and liabilities of
the members with respect to each other and with respect to the LLC. It
contains provisions detailing such matters as the LLC's management
structure, capital contributions, accounting, distributions, transfers
of a member's interest, and dissolution. As used in many LLC statutes,
a ``member'' of an LLC is a person who owns an interest in the LLC and
is roughly equivalent to a shareholder of a corporation. Furthermore, a
``member's interest'' in an LLC is generally the member's ownership
interest in the LLC, and is sometimes evidenced by a certificate which
is roughly equivalent to a stock certificate of a corporation.
Consistency of the LLC Structure With Corporate Attributes
Many LLC statutes authorize entities that do not possess the four
corporate attributes. First, some State LLC statutes require, or permit
LLC members to provide in the operating agreement, that the LLC will
automatically terminate, or dissolve, or that its operations will be
suspended pending the consent of the remaining members, upon the death,
disability, bankruptcy, withdrawal, or expulsion of a member, or upon
the happening of some other specified event.\21\ These automatic
termination/dissolution/suspension provisions are inconsistent with the
notion of perpetual succession because the continued existence and
operation of the entity directly depends upon the existence, condition,
or status of its owners. Second, some State LLC statutes require, or
permit LLC members to provide in the operating agreement, that the LLC
will be managed solely and directly by the members.\22\ Such member-
management also tends to be inconsistent with the corporate attribute
of centralized management because exclusive authority to manage the
institution is vested in the owners who may or may not possess adequate
expertise to manage the institution and who, as a group, may be so
large or so small as to present operational or supervisory problems for
the entity. Third, while members of an LLC generally have limited
liability, some LLC statutes permit the LLC to provide for one or more
full liability members, i.e., members who are fully liable for all of
the liabilities, debts, and obligations of the LLC.\23\ Finally, some
State LLC statutes require, or permit LLC members to provide in the
operating agreement, either that LLC members may not transfer their
interests in the LLC without the consent of the remaining members, or
that a member may not transfer the managerial or voting rights that
accompany an owner's economic interest in the LLC without the consent
of the remaining members.\24\ Such a provision tends to be inconsistent
with the concept of free transferability of interests because the
requirement for prior consent prevents, or at least restricts, an
owner's transfer of his or her ownership interest.
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\21\ See, e.g., Nev. Rev. Stat. Sec. 86.491 (2001); Mass. Ann.
Laws ch. 156C, Sec. 43 (2002).
\22\ See, e.g., Mich. Comp. Laws Sec. 450.4401 (2002); Ala.
Code Sec. 10-12-22(a) (2002).
\23\ See, e.g., Vt. Stat. Ann., tit. 11, Sec. 3043(b) (2002);
Cal. Corp. Code Sec. 17101(e).
\24\ See, e.g., Mich. Comp. Laws Sec. 450.4506 (2002); Pa.
Stat. Ann. tit. 15, Sec. 8924 (2002).
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IV. Overview of Comments Received
On July 23, 2002, the FDIC published a notice of proposed
rulemaking in the Federal Register (67 FR 48054) (the ``notice of
proposed rulemaking'') which generally proposed that a bank chartered
as an LLC would be considered to be ``incorporated'' if it had the four
traditional, corporate attributes. The notice of proposed rulemaking
also requested comments on three specific questions regarding the
proposed rule. The FDIC received 23 comment letters from 22
organizations. All of the comment letters were generally in favor of
granting deposit insurance to State banks organized as LLCs. The
organizations filing comments included nine State trade associations,
six State banks, three national trade associations, two law firms, an
organization of State bank supervisors, and a State banking
commissioner.
The three questions posed and a discussion of the responses
received with respect to those questions, as well as the FDIC's
analysis of those responses follow.
[[Page 7304]]
1. Should the FDIC Permit a State Bank That Is Organized as an LLC To
Obtain Federal Deposit Insurance?
All of the commenters favored, at least, in general, a
determination that a State bank that is organized as an LLC is eligible
to apply for Federal deposit insurance.
2. If So, Should the FDIC Interpret the Term ``Incorporated'' Utilizing
Some, All, or None of the Traditional Four Corporate Attributes?
Ten commenters thought the FDIC should not use any of the four
corporate attributes in determining eligibility for Federal deposit
insurance; four commenters thought we should use three of the four
corporate attributes; three commenters thought we should use all four
attributes; and five commenters did not respond specifically on this
question.
Arguments Against Using Any of the Four Corporate Attributes
Of the 10 commenters who opposed using any of the four corporate
attributes in determining a Bank-LLC's eligibility to apply for deposit
insurance, eight specifically thought that if the particular State
permits a bank to be organized as an LLC, and if the FDIC determines
that the institution could be operated in a safe and sound manner, that
should be sufficient for the entity to be eligible for Federal deposit
insurance.
In support of their position the 10 commenters offered their views
on the appropriateness of using specific corporate attributes to
determine eligibility for Federal deposit insurance.
With regard to the corporate attribute of perpetual succession,
several commenters construed the perpetual succession attribute to mean
perpetual existence. Several commenters pointed out that in the past
many FDIC-insured banks had limited lives (e.g., the legal existence of
some banks would terminate after 50 years). Since limited-life banks
had never been a problem for the FDIC in the past, the commenters
argued, they should not be a problem for the FDIC now. However,
perpetual succession does not mean immortality. Rather, perpetual
succession means that the existence of an entity is not dependent on
the existence, condition, or status of any of its owners, and the
death, disability, withdrawal, or bankruptcy of one or more of the
owners of the entity does not terminate, dissolve, or suspend the
entity. As noted above, some State LLC laws require, or permit an LLC
to provide in its organizational documents, that the LLC will
automatically terminate, dissolve, or be suspended upon the death,
disability, bankruptcy, withdrawal or expulsion of an owner of an LLC
or upon the happening of some other specified event. If a Bank-LLC were
subject to such automatic termination, dissolution, or suspension
provisions, without any advance warning, depositors in that institution
might be denied access to their deposits due to an automatic
termination of the institution's existence. Generally, the triggers for
such automatic provisions may be wholly unrelated to the financial
condition of the entity. Consequently, an institution that is well-
capitalized, that is otherwise highly-rated for safety and soundness,
and that is not subject to any enforcement actions could suddenly be
closed for the sole reason that one of the owners died. Depositors
would never know with certainty if their bank will be in existence on
the day and time when they may need to withdraw their money.
Furthermore, without such advance notice, the FDIC would not be
prepared to handle the institution's closure and meet its deposit
insurance obligation in a timely manner. In addition, not only would a
customer be denied access to his or her deposits, but also any checks
in transit that had not yet been paid by the bank would be rejected.
The uncertainty, confusion, and disruption caused by such a closing
would not only cause serious damage to public confidence in the
nation's banking system, but also serious disruption to the community.
Finally, without an opportunity to locate a healthy institution to
purchase the assets and assume the deposits of the institution on a
going-concern basis, the cost of the resolution could be substantially
higher than necessary. For these reasons, the FDIC continues to believe
that it is not only reasonable, but essential, that the term
``incorporated'' be interpreted to include the corporate attribute of
perpetual succession.
With regard to the corporate attribute of centralized management,
one commenter recognized that in a theoretical sense there may be
concerns when a Bank-LLC with a large number of members is proposed to
be managed directly by its members. However, rather than requiring a
board of directors for every Bank-LLC, the commenter suggested that the
FDIC could require a board of directors only if the number of members
exceeded 25. The FDIC believes that centralized management is an
important attribute for a bank for a couple of reasons. First, if the
authority to manage the bank is limited to the owners of the
institution, management expertise would necessarily also be limited.
The quality of the management of a bank is a key factor in a bank's
success or failure. In order to provide the best chance for a bank to
compete successfully and to operate profitably, a bank should be free
to enlist the best qualified managers available to it. Too small of a
group of owners may not provide sufficient management expertise. Too
large of a group may dilute the influence of those owners who do have
adequate management expertise. For example, even if some of the owners
possess adequate expertise, their ability to manage the institution may
be negated by a larger segment of the owners that lacks such expertise.
Second, management by a group that is too small could severely impair
the bank's ability to respond to supervisory and regulatory direction.
The volume and complexity of the demands of operating a bank might put
too small of a group under excessive pressure and could result in
management that is not responsive or at least so slow as to imperil the
bank's effectiveness. Too large of a group may make it unwieldy or
excessively difficult to disseminate information and get decisions in a
timely manner because so many voices are entitled to be heard and
considered. For these reasons, the FDIC believes that centralized
management is also an important attribute that a bank should have in
order to be eligible for deposit insurance.
With regard to the corporate attribute of limited liability, one of
the 10 commenters while generally disagreeing with the use of the four
corporate attributes, nevertheless thought that requiring limited
liability was reasonable, since unlimited liability would certainly
reduce the number of prospective shareholders. Another of the 10
commenters thought that in some cases the FDIC might conclude that
unlimited liability of one or more members actually reduces the risk to
the deposit insurance fund. Furthermore, the commenter argued that bank
organizers should be permitted to explain the reasons for unlimited
liability and show how unlimited liability impacts the bank's risk to
the fund.
The FDIC believes that limited liability tends to attract more
potential investors than unlimited liability and, furthermore, that the
more attractive an investment generally the greater the chances that
the entity will be able to maintain adequate capital. Consequently, the
FDIC believes that limited liability is also a very important attribute
for a bank to possess.
[[Page 7305]]
With regard to the corporate attribute of free transferability of
interests several of the 10 commenters also thought it inappropriate to
require that attribute. The commenters argued that since many existing,
FDIC-insured banks are closely-held corporations that have restrictive
share-transfer agreements, it would be inconsistent for the FDIC to
require free transferability of interests with respect to a bank that
is chartered as an LLC. Furthermore, two of those commenters suggested
that rather than requiring free transferability for every Bank-LLC, a
better solution would be to require that the Bank-LLC's organizational
documents provide that if the primary regulator determines that the
institution's capital is inadequate, then the current owners would be
required to restore capital or permit free transferability of the
interests. The FDIC believes that the free transferability of ownership
interests is an important attribute because it tends to ensure that the
bank will have the best opportunity to attract and maintain adequate
capital. Even well-run business entities can experience economic stress
when there is a downturn in their markets or the industry as a whole.
Adequate capital provides a cushion that helps a business weather the
periods of economic stress. If an owner of an interest in an LLC must
obtain the consent of the other owners in order to transfer his or her
interest, the transfer may be delayed until that consent can be
obtained, or it may be rejected altogether if the consent is not
granted. Either circumstance tends to reduce a bank's ability to
attract and maintain adequate capital. Indeed, the mere presence of
such a consent requirement may discourage investors who can choose from
other, more liquid and, perhaps, more familiar investments. As noted
above, since an LLC is neither a corporation nor a partnership, State
corporation laws and State partnership laws generally would not apply.
That fact, coupled with the relative novelty of the LLC form of
business entity, may discourage potential investors. Many investors are
familiar with, or can readily determine, the general structure of
corporations and the rights, powers, privileges, duties and liabilities
of a corporation's shareholders, officers, and directors. With an LLC,
its structure and the rights, powers, privileges, duties and
liabilities of the LLC's owners, officers and managers are all
generally subject to modification according to the wishes of the
members. Unlike investing in a corporation, a potential investor in an
LLC may not be able to rely, to any extent, on his or her general
familiarity with corporate law in making an investment decision. A
potential investor would have to examine carefully the operating
agreement of the particular LLC to determine the LLC's operating
structure and the rights, powers, privileges, duties, and liabilities
of the LLC's owners, officers, and managers. Such additional burden may
also tend to discourage new investors and further reduce the bank's
ability to attract and maintain capital. Furthermore, the alternative
suggested by one commenter would not cure these problems. The commenter
suggested that the FDIC might require a provision in the LLC's
organizational documents that if capital fell below a certain level
then the existing owners would have to replenish capital or waive the
consent requirement. However, if a bank's capital were to fall below
the minimum capital requirements, it might then be too late to try to
attract new investors. It is not clear that many investors would want
to get involved with a bank that has an unfamiliar legal structure at a
time when its capital is depleted. Consequently, the FDIC believes that
a Bank-LLC should have the corporate attribute of free transferability
of interests.
Several of the 10 commenters also offered general comments on how
to determine eligibility and suggested some alternative uses for the
four corporate attributes. Several thought that the key to eligibility
for Federal deposit insurance should simply be whether the bank is
chartered in accordance with State banking law. If so, they argue, that
should be enough to qualify for eligibility for deposit insurance. The
FDIC disagrees with this notion entirely. Congress conferred upon the
FDIC the authority to grant Federal deposit insurance to certain
institutions described in the FDI Act. Allowing the individual States
to determine which institutions are eligible would (i) require the FDIC
to ignore the express language of the FDI Act, (ii) require the FDIC to
abdicate its statutory responsibility to make such determinations, and
(iii) potentially result in a wide variety of notions as to what types
of institutions are eligible for deposit insurance. As a result, the
FDIC's ability to manage the risks posed to the insurance fund would be
seriously jeopardized. The FDIC does not believe such an approach is
either reasonable or consistent with the purposes of the FDI Act.
Two commenters pointed out that the four corporate attributes are
not mentioned in the factors listed in section 6 of the FDI Act, 12
U.S.C. 1816, (the ``section 6 factors'') that are required to be
considered in approving applications for deposit insurance. Therefore,
they believe that the FDIC should determine who is eligible for deposit
insurance solely by reference to the section 6 factors. One commenter
argued that while the ultimate question is whether the bank is a legal
entity under State law, it thought that the FDIC could consider the
four corporate attributes in assessing whether the institution could be
operated in a safe and sound manner. In that regard the commenter
thought that perpetual succession and centralized management were
important for safety and soundness and should be accorded greater
weight, while free transferability of interests was less important. The
FDIC believes that while the section 6 factors are required to be
considered in determining whether to grant deposit insurance, they do
not determine an institution's eligibility to apply for deposit
insurance. Eligibility is a threshold issue that must be determined
before the section 6 factors are considered. To focus only on the
section 6 factors would again require that we ignore the express
language of the FDI Act. Congress carefully set out what it meant by a
``State bank,'' and the FDIC declines to ignore that language.
One commenter noted that national banks only need to be chartered
pursuant to the National Bank Act (the ``NBA'') to be eligible for
Federal deposit insurance and that, therefore, the FDIC should only
require that state banks be chartered under State law. The FDIC agrees
that in accordance with the language of the FDI Act a national bank is
eligible to apply for deposit insurance if it is chartered as a
national bank under the NBA. However, the NBA describes a national bank
as a ``body corporate'' \25\, and national banks are structured and
operate essentially the same as corporations. Consequently, requiring a
State-chartered, Bank-LLC to have the four corporate attributes does
not represent treatment inconsistent with that applicable to national
banks.
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\25\ 12 U.S.C. 24.
---------------------------------------------------------------------------
Arguments in Favor of Using Three of the Four Corporate Attributes
As noted above, four commenters thought we should use three of the
four corporate attributes. Three of those four commenters disagreed
specifically with requiring free transferability of interests for a
Bank-LLC, but concurred with requiring the other three attributes. The
other commenter while generally disagreeing with the free
transferability requirement thought that the FDIC should require any
three out of the four
[[Page 7306]]
corporate attributes. Two of the commenters who specifically disagreed
with the free transferability requirement repeated the argument
mentioned above that the free transferability requirement has not been
viewed by the FDIC in the past as a significant impairment of an
institution's ability to raise capital and, therefore, should not be
required for Bank-LLCs. As discussed above, the FDIC believes that a
Bank-LLC should have the corporate attribute of free transferability of
interests. The FDIC's analysis of the need for this attribute is
detailed above and will not be repeated here. However, in summary, the
FDIC believes that free transferability of interests is necessary to
ensure that a Bank-LLC will be able to attract and maintain adequate
capital. With regard to the suggestion that the FDIC require any three
of the four corporate attributes as its test for eligibility for
deposit insurance, the FDIC does not believe that such an approach
would be consistent with the purposes of the FDI Act and could lead
again to a wide variety of notions about what types of institutions are
eligible for deposit insurance. Each of the attributes has its own
significance for purposes of the FDI Act, and each is independently
justifiable as an essential requirement for the FDIC to determine that
a Bank-LLC is ``incorporated.'' Among other things, a three-out-of-four
approach would permit a Bank-LLC that does not have perpetual
succession to be considered ``incorporated'' for purposes of
eligibility for deposit insurance. As fully discussed above, an
institution that could terminate without warning could cause
substantial harm to depositor confidence in the nation's banking
industry, seriously disrupt the communities where the bank operated,
and increase the costs of resolutions. Furthermore, the wide variety of
institutions that such an approach could permit would jeopardize the
FDIC's ability to manage the risks to the insurance fund. Consequently,
the FDIC does not believe that a three-out-of-four approach would be
consistent with the FDI Act and declines to adopt it.
Comments in Favor of Using All Four Corporate Attributes
Three commenters endorsed the FDIC's use of all four of the
corporate attributes. One commenter also expressed the strong belief
that the full range of safety and soundness and enforcement mechanisms
that currently apply to state banks should also apply to Bank-LLCs. For
the reasons discussed above, the FDIC believes that the corporate
attributes are not only appropriate, but essential to determining
whether a Bank-LLC could be considered to be ``incorporated.'' The FDIC
specifically concurs with the comment that the full range of safety and
soundness and enforcement mechanisms needs to apply to Bank-LLCs. In
that regard, the final rule includes some revisions to further clarify
this point. The final rule clarifies that for purposes of the FDI Act
(including section 8 of the FDI Act) and the FDIC's regulations, the
members, managers, and officers of a Bank-LLC would be equivalent to
shareholders, directors, and officers, respectively, of a bank
chartered as a corporation. Also, the certificates or other evidences
of ownership interests in a Bank-LLC would be equivalent to voting
stock, voting shares and voting securities.
3. If the FDIC Should Not Utilize Any of the Four Corporate Attributes,
How Should It Interpret the Term ``Incorporated?''
Six commenters thought that the FDIC should interpret
``incorporated'' to mean chartered under State law. Two other
commenters thought that an institution should be deemed to be
``incorporated'' if it is chartered under State law and can operate in
a safe and sound manner. Another commenter thought that
``incorporated'' should mean ``organized'' or ``operating'' as a bank
under State law. Yet another thought that ``incorporated'' should
simply mean ``chartered and regulated'' under State law and thought the
FDIC should focus on whether the particular structure is consistent
with the section 6 factors. All of these suggestions have been fully
analyzed and considered above, and will not be repeated here. Central
to all of these suggestions is the notion that if the State's laws
would charter an entity as a bank, that should be enough for the FDIC.
Following that argument, the FDIC should consider to be
``incorporated'' whatever type of institution a State may charter as a
bank under its laws. As fully discussed above, such an approach would
mean that (i) the FDIC would have to ignore the express language of the
FDI Act, (ii) the FDIC would have to abdicate its responsibility under
the FDI Act, and (iii) the potential variety of notions about what
could be chartered as a bank would seriously impair the FDIC's ability
to manage the risks to the insurance fund. For those reasons the FDIC
declines to adopt such an approach.
V. Interpretation of ``Incorporated''
In order to determine whether an LLC could qualify as a State bank
for purposes of Federal deposit insurance, it is necessary to determine
if an LLC could be considered to be ``incorporated.'' In resolving any
ambiguity in a statute it is always helpful to try to determine what
Congress intended by its choice of the particular words of the statute.
In this case, as noted above, there is no legislative or judicial
guidance on the meaning of the term ``incorporated'' as used in the FDI
Act. Consequently, the FDIC believes that the best approach is to
interpret the term in a manner consistent with, and in aid of, the
purposes of the FDI Act.
Congress created the Federal Deposit Insurance Corporation in 1933
to restore and maintain public confidence in the nation's banking
system by, among other things, promoting the safety and soundness of
the institutions whose deposits the FDIC insures.\26\ Consequently, the
FDIC is charged with maintaining public confidence in the nation's
banking system, and promoting the safety and soundness of the
institutions that it insures is a critical component of its duty.
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\26\ See FDIC v. Philadelphia Gear Corp., 106 S.Ct. 1931, 1935
(1986), FDIC v. Eckert, 754 F.Supp. 22, 24 (E.D. N.Y. 1990); FDIC v.
Rockelman, 460 F.Supp. 999, 1001 (E.D. WI 1978).
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A common understanding of the term ``incorporated'' is ``formed or
constituted as a legal corporation.''\27\ In addition, Black's Law
Dictionary defines ``incorporate'' as ``to form a legal
corporation.''\28\ An institution that is labeled as a corporation
under State law would then be ``incorporated'' under the common
understanding of the term. One approach that the FDIC could take,
therefore, is to treat as incorporated only those entities that are
labeled as ``corporations'' under State law. Such an interpretation
would be consistent with the language of the statute. However, such an
approach might be too narrow in that it may not include all of the
State banks that are currently operating as insured institutions even
though they are structured and operate with the same characteristics as
a corporation. Furthermore, limiting the interpretation to only those
entities that are labeled as ``corporations'' would seem unduly
restrictive in that it would tend to unnecessarily limit the
flexibility, and stifle the innovativeness, of State banking. Thus,
such an approach could arguably impair or harm the viability of the
nation's banking system.
---------------------------------------------------------------------------
\27\ The Random House Dictionary of the English Language 968 (2d
ed. 1987).
\28\ Black's Law Dictionary 769 (7th ed. 1999).
---------------------------------------------------------------------------
Another approach to interpreting the term ``incorporated'' is to
focus on the attributes of the entity. In other words, if the entity
has the four corporate
[[Page 7307]]
attributes, it should be considered to be ``incorporated'' regardless
of how it is labeled under State law.\29\ Clearly, the actual nature of
an entity is much more important than its label.
---------------------------------------------------------------------------
\29\ This approach is not unprecedented. In Morrissey v.
Commissioner of Internal Revenue, 296 U.S. 344, 359, 56 S.Ct. 289,
296 (1935) the Supreme Court held that a trust created for the
purpose of carrying on a business that had continuity of life,
centralized management, limited liability, and free transferability
of interests is sufficiently analogous to a corporation to justify
taxation as a corporation.
---------------------------------------------------------------------------
Within the confines of Federal law, and subject to safety and
soundness, banks need to be able to take advantage of new forms of
business organization in order to maintain maximum viability. Some of
these new forms of business entities were never envisioned at the time
that Congress passed the FDI Act almost 70 years ago. Part of the
FDIC's duty in administering the FDI Act is to interpret it to carry
out the purposes of the FDI Act in the modern world. Consistent with
that duty, the FDIC believes that it is more reasonable to focus on the
essential characteristics of a corporation that distinguish it from
other forms of business entities rather than to focus on the presence
or absence of a label.
Therefore, mindful of the need to maintain the viability of the
nation's banking system, and consistent with the purposes of the FDI
Act, the FDIC believes that the better approach, is to interpret the
term ``incorporated'' to include those LLCs that have the four
traditional corporate attributes.
As noted above, the attributes that are commonly identified as
distinguishing a corporation from other forms of business organizations
are: perpetual succession, centralized management, limited liability,
and free transferability of interests.
Perpetual Succession
The first attribute, perpetual succession, is essential to the
FDIC's efforts to promote public confidence in the nation's banking
industry. An institution that automatically terminated, dissolved, or
suspended operations upon the happening of some event would most likely
have a substantial, adverse effect on public confidence. A depositor in
such an institution would have no way of knowing from one day to the
next whether the institution will continue in existence, and whether he
or she will be able to retrieve his or her money when the need arises.
Furthermore, such an automatic termination, dissolution, or suspension
feature would have a significantly adverse effect on the FDIC's efforts
to resolve failed institutions. The FDIC is not only charged with
promoting the safety and soundness of banking institutions, but is also
charged with the duty of resolving failed institutions in an orderly,
least costly manner. The FDIC would have no practical opportunity to
plan and execute an orderly, least-costly resolution of an institution
that, without any warning or advance notice, was terminated or
dissolved or whose operations were suspended. Most likely it would not
be possible to arrange for a healthy institution to purchase the assets
and assume the deposit liabilities of the failed institution in order
to continue to serve the affected community with the least disruption.
Checks that were in transit at the time of the bank's failure, but that
had not yet been paid, would be rejected. The disruption to the
community could be substantial. The cost to the insurance fund of
resolving such an institution could be significantly higher than
necessary as a result, and the higher costs would tend to deplete the
insurance fund more rapidly. Consequently, the FDIC believes that
perpetual succession is an essential prerequisite for an insured
depository institution, and that automatic termination/dissolution/
suspension features are inconsistent with the FDIC's duties and the
purposes of the FDI Act.
Centralized Management
Centralized management in the form of a board of directors provides
the FDIC and other banking regulators with a discrete group of
individuals who are authorized to act for, and represent, the
institution in virtually all matters. The typical rights, liabilities,
powers, and responsibilities of a board of directors are well-
established. On the other hand, management of an institution directly
and solely by all of its owners presents a variety of problems both
from an operational standpoint and from an enforcement standpoint.
First, if the authority to manage the bank is limited to the owners of
the institution, management expertise would necessarily also be
limited. The quality of the management of a bank is a key factor in a
bank's success or failure. In order to provide the best chance for a
bank to compete successfully and to operate profitably, a bank should
be free to enlist the best qualified managers available to it. If there
are too few owners, the group may not provide sufficient management
experience and expertise. Too large of a group may also mean that even
if adequate banking expertise is represented among the owners, it may
be negated by a larger segment of the owners that lacks adequate
expertise. Second, management by a group that is too small could
severely impair the bank's ability to respond to supervisory and
regulatory direction. The volume and complexity of the demands of
operating a bank might put too small of a group under excessive
pressure and could result in management that is not responsive or, at
least so slow as to imperil the bank's effectiveness. Too large of a
group may make it unwieldy or excessively difficult to disseminate
information, arrange meetings, ensure that all members have the
opportunity to be heard, and get decisions in a timely manner. Finally,
with a member-managed Bank-LLC, merely determining who represents the
institution and the extent of his or her authority could represent a
significant task for regulators. Consequently, centralized management
is also an important attribute for purposes of the FDIC Act.
Limited Liability
Limited liability, of course, encourages investment in the
enterprise. Potential owners are more likely to invest in an enterprise
when their liability is limited to the amount of their investment.
Attracting and maintaining sufficient capital helps to ensure an
adequate cushion to protect an institution during periods of economic
stress. Since banks are subject to periods of economic stress just as
other businesses are, the FDIC believes that the owners of banks should
have limited liability to encourage the maintenance of adequate
capital.
Free Transferability of Ownership Interests
The free transferability of ownership interests also tends to aid
in attracting and maintaining adequate capital. Conversely, requiring
the prior consent of the other owners in order to transfer an ownership
interest may decrease the bank's ability to attract and maintain
adequate capital. At worst, prior consent to a transfer limits the pool
of available investors; at best, it delays interested, potential
investors. While the FDIC currently insures approximately 700 mutual
institutions (that issue no stock) and more than 1,700 closely-held
institutions (some of which may have stock-transfer restrictions in the
form of shareholder agreements), the FDIC has substantial experience
with their structure, operations, and capital maintenance capabilities.
The FDIC has no similar experience with institutions organized as LLCs,
and that lack of similar experience argues for facilitating, rather
than impairing, the maintenance of a capital cushion.
[[Page 7308]]
Indeed, the mere presence of such a prior consent requirement may
discourage investors who can choose from other, more liquid and,
perhaps, more familiar investments. As noted above, since an LLC is
neither a corporation nor a partnership, State corporation laws and
State partnership laws generally would not apply. That fact, coupled
with the relative novelty of the LLC form of business entity, may also
discourage potential investors. Many investors are familiar with, or
can readily determine, the general structure of corporations and the
rights, powers, privileges, duties and liabilities of a corporation's
shareholders, officers, and directors. With an LLC, its structure and
the rights, powers, privileges, duties and liabilities of the LLC's
owners, officers and managers are all generally subject to modification
according to the wishes of the members. Unlike investing in a
corporation, a potential investor in an LLC may not be able to rely, to
any extent, on his or her general familiarity with corporate law in
making an investment decision. A potential investor in an LLC would
have to examine carefully the operating agreement of the particular LLC
to determine its operating structure and the rights, powers,
privileges, duties, and liabilities of the LLC's owners, officers, and
managers. Such additional burden may tend to discourage new investors
and further reduce the bank's ability to attract and maintain capital.
Consequently, the FDIC believes that the free transferability of
ownership interests is an important attribute for a bank.
In summary, the FDIC believes that an LLC should have all of the
four corporate attributes in order to be ``incorporated.'' Therefore, a
banking institution that is chartered as an LLC under the law of any
State and that has all of the above four corporate attributes would be
considered to be ``incorporated'' under the law of the State for
purposes of the definition of ``State bank.'' Furthermore, such a
banking institution would be eligible to apply for Federal deposit
insurance as a State bank under section 5 of the FDI Act, 12 U.S.C.
1815.
The final rule reflects these conclusions. In general, the rule
provides that a banking institution that is chartered by a State as an
LLC will be deemed to be ``incorporated'' if (i) it is not subject to
any automatic termination/dissolution/suspension provisions, (ii) the
exclusive authority to manage the institution is vested in a board of
directors or managers, (iii) neither State law nor the LLC's
organizational documents provide that any owner is liable for the debts
of the institution beyond his or her investment, and (iv) neither State
law nor the LLC's organizational documents require the consent of any
other owner in order to transfer all or a part of an ownership
interest. The final rule also specifies that for purposes of the FDI
Act and the FDIC's regulations, an owner of an interest in an LLC is a
``stockholder'' and a ``shareholder;'' a manager of an LLC is a
``director;'' an officer of an LLC is an ``officer;'' and a certificate
or other evidence of an ownership interest in an LLC is a ``voting
share,'' ``voting security,'' and ``voting stock.'' These provisions
are intended to remove any ambiguity as to how the rest of the FDI Act
and the FDIC's regulations apply to banking institutions chartered as
LLCs, including the enforcement provisions of the FDI Act and the
FDIC's regulations.
VI. Paperwork Reduction Act
The final rule does not involve any collections of information
under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
Consequently, no information has been submitted to the Office of
Management and Budget for review.
VII. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.) the FDIC hereby certifies that the final rule will
not have a significant economic impact on a substantial number of small
entities. The final rule will apply to all depository institutions that
are currently insured under the FDI Act as well as those applying for
Federal deposit insurance. The final rule clarifies the circumstances
when a banking institution that is chartered under State law as a
limited liability company would be considered to be ``incorporated''
for purposes of the definition of ``State bank'' in 12 U.S.C.
1813(a)(2). It does not require any banking institution to organize as,
or convert to, a limited liability company, and it imposes no new
reporting, recordkeeping or other compliance requirements. Accordingly,
the requirements relating to an initial and final regulatory
flexibility analysis are not applicable.
VIII. Impact on Families
The FDIC has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L. 105-277, 112 Stat. 2681).
IX. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) (Pub. L. 104-121) provides generally for agencies to report
rules to Congress for review. The reporting requirement is triggered
when the FDIC issues a final rule as defined by the Administrative
Procedure Act (APA) at 5 U.S.C. 551. Because the FDIC is issuing a
final rule as defined by the APA, the FDIC will file the reports
required by SBREFA. The Office of Management and Budget has determined
that this final rule does not constitute a ``major rule'' as defined by
SBREFA.
List of Subjects in 12 CFR Part 303
Administrative practice and procedure, Authority delegations
(government agencies), Bank deposit insurance, Banks, Banking, Bank
merger, Branching, Foreign branches, Foreign investments, Golden
parachute payments, Insured branches, Interstate branching, Reporting
and recordkeeping requirements, Savings associations.
The Board of Directors of the Federal Deposit Insurance Corporation
hereby amends part 303 of title 12 of the Code of Federal Regulations
as follows:
PART 303--FILING PROCEDURES AND DELEGATIONS OF AUTHORITY
1. The authority citation for part 303 continues to read as
follows:
Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817, 1818, 1819
(Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1,
1831w, 1835a, 1843(l), 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.
2. New Sec. 303.15 is added to read as follows:
Sec. 303.15 Certain limited liability companies deemed incorporated
under State law.
(a) For purposes of the definition of ``State bank'' in 12 U.S.C.
1813(a)(2) and this Chapter, a banking institution that is chartered as
a limited liability company (LLC) under the law of any State is deemed
to be ``incorporated'' under the law of the State, if
(1) The institution is not subject to automatic termination,
dissolution, or suspension upon the happening of some event (including,
e.g., the death, disability, bankruptcy, expulsion, or withdrawal of an
owner of the institution), other than the passage of time;
(2) The exclusive authority to manage the institution is vested in
a board of
[[Page 7309]]
managers or directors that is elected or appointed by the owners, and
that operates in substantially the same manner as, and has
substantially the same rights, powers, privileges, duties,
responsibilities, as a board of directors of a bank chartered as a
corporation in the State;
(3) Neither State law, nor the institution's operating agreement,
bylaws, or other organizational documents provide that an owner of the
institution is liable for the debts, liabilities, and obligations of
the institution in excess of the amount of the owner's investment; and
(4) Neither State law, nor the institution's operating agreement,
bylaws, or other organizational documents require the consent of any
other owner of the institution in order for an owner to transfer an
ownership interest in the institution, including voting rights.
(b) For purposes of the Federal Deposit Insurance Act and this
Chapter,
(1) Each of the terms ``stockholder'' and ``shareholder'' includes
an owner of any interest in a bank chartered as an LLC, including a
member or participant;
(2) The term ``director'' includes a manager or director of a bank
chartered as an LLC, or other person who has, with respect to such a
bank, authority substantially similar to that of a director of a
corporation;
(3) The term ``officer'' includes an officer of a bank chartered as
an LLC, or other person who has, with respect to such a bank, authority
substantially similar to that of an officer of a corporation; and
(4) Each of the terms ``voting stock,'' ``voting shares,'' and
``voting securities'' includes ownership interests in a bank chartered
as an LLC, as well as any certificates or other evidence of such
ownership interests.
By order of the Board of Directors.
Dated in Washington, DC, this 31st day of January, 2003.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Resolution
Whereas, the Board of Directors (``Board'') of the Federal Deposit
Insurance Corporation (``FDIC'') is responsible for administering the
Federal Deposit Insurance Act (``FDI Act''); and
Whereas, the FDIC is authorized under section 5 of the FDI Act (12
U.S.C. 1815) to approve or disapprove applications for deposit
insurance for State banks as well as other depository institutions; and
Whereas, in order for a banking institution to qualify as a ``State
bank'' eligible to apply for deposit insurance, section 3(a) of the FDI
Act (12 U.S.C. 1813(a)) generally requires that it be engaged in the
business of receiving deposits other than trust funds and that it be
``incorporated under the laws of any State''; and
Whereas, the FDI Act does not define the term ``incorporated,'' and
there is some uncertainty as to the meaning of the term
``incorporated''; and
Whereas, on July 23, 2002, the Board authorized the publication in
the Federal Register of a proposed rule entitled Insurance of State
Banks Chartered as Limited Liability Companies, describing the
circumstances under which a bank chartered as a limited liability
company would be considered to be ``incorporated'' and, therefore,
eligible to apply for deposit insurance; and
Whereas, the Board requested public comment on the proposed rule
and received 23 comment letters, and
Whereas, the staff has reviewed and the Board has considered the
comments submitted by the public in response to the proposed rule; and
Whereas, the staff has recommended that the Board adopt a final
rule entitled Insurance of State Banks Chartered as Limited Liability
Companies as set forth in the attached Federal Register document; and
Whereas, the Board has decided to adopt the proposed rule entitled
Insurance of State Banks Chartered as Limited Liability Companies as a
final rule with certain modifications.
Now, therefore, be it resolved, that the Board does hereby adopt a
final rule entitled Insurance of State Banks Chartered as Limited
Liability Companies amending 12 CFR part 303 in the manner set forth in
the attached Federal Register document.
Be it further resolved, that the Board hereby authorizes
publication in the Federal Register of the attached final amendment to
part 303.
Be it further resolved, that the Board hereby directs the Executive
Secretary, or his designee, to cause the attached final rule to be
published in the Federal Register in a form and manner satisfactory to
the General Counsel, or his designee, and the Executive Secretary, or
his designee.
Be it further resolved, that the Board hereby delegates authority
to the General Counsel, or the General Counsel's delegate(s), and to
the Executive Secretary, or the Executive Secretary's delegate(s) to
make technical, non-substantive changes to the text of the attached
Federal Register document.
[FR Doc. 03-3387 Filed 2-12-03; 8:45 am]
BILLING CODE 6714-01-P