4000 - Advisory Opinions
Effect of Section 24 of the FDI Act on State-Chartered BIF Member Insured Savings Bank's Investment in Limited Partnership Organized to Make Portfolio Investments in Equity of Various Enterprises
May 11, 1992
Pamela E.F. LeCren, Counsel
The following is in response to your March 31, 1992 letter to me seeking confirmation of your understanding, based upon our recent telephone conversation, of the effect of section 24 of the Federal Deposit Insurance Act ("FDI Act", 12 U.S.C. 1831(a)) on [savings bank] investment as a limited partner in a limited partnership organized for the purposes of making portfolio investments in the equity of various enterprises. You also asked for guidance on the divestiture requirement imposed by section 24.
According to your letter, [savings bank], a state chartered BIF member insured bank, entered into an agreement of limited partnership in 1989. The general partner is an affiliate of a major investment banking firm. Pursuant to the agreement the bank committed to invest a maximum of $10,000,000 in the form of capital contributions to the partnership. To date the bank has invested approximately one half of that amount. The portfolio investments of the partnership presently consist of equity investments in, among other things, companies involved in the aerospace, broadcasting and automobile industries. When the general partner determines in its sole discretion that it is appropriate for the partnership to make a portfolio investment, the general partner can call for an additional capital contribution the proceeds of which are used to fund new investments by the partnership. The agreement provides that a limited partner may be excused from its obligation to make a capital contribution with respect to a portfolio investment if the limited partner delivers a legal opinion to the effect that the payment of the capital contribution, or any specified portion thereof, to acquire the proposed portfolio investment is prohibited by any statute, regulation, law, judicial or administrative order or decree.
Section 24(c), which was added to the FDI Act effective December 19, 1991, provides that an 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. There are a number of exceptions to the general prohibition1 none of which are applicable here. Therefore, the issue presented by the facts of your letter is whether section 24(c) prohibits [savings bank] from making any additional capital contributions to the partnership.
It is our opinion that any additional capital contribution by the bank pursuant to a capital call by the general partner would be an "acquisition" of an equity investment for purposes of section 24(c). As we know of no statute or regulation that would authorize a national bank to make a similar investment, no further capital investments are permissible. Additionally, the bank's current investment must be divested.
You will note that section 24(c)(4) provides that an insured state bank must divest any equity investment as quickly as prudently possible (but in no event later than December 19, 1996) if the equity investment is not a permissible equity investment for a national bank. The FDIC is the arbiter as to the timing and conditions under which a prohibited equity investment may be retained during the divestiture period. Insured state banks are expected to use their best efforts to divest prohibited equity investments. A bank will not be held to be in violation of the prohibition on the retention of a prohibited equity investment so long as the bank complies with any conditions or restrictions that the FDIC places on the retention of the equity investment during the divestiture period.
Until such time as the FDIC imposes any conditions or restrictions (either by order or regulation) on [savings bank] retaining its limited partnership interest, the bank is not under any obligation to take action with respect to that investment other than to use its best efforts to divest its interest as quickly as possible. A bank is expected to immediately evaluate and plan for divestiture. It will not be considered acceptable for a bank to continue to merely hold a prohibited equity investment until the outside divestiture date. Additionally, the FDIC expects any action that the bank may take with respect to its interest in the limited partnership to be consistent with its obligation to divest that interest as quickly as possible. If the bank is determined by the FDIC to have failed to divest as soon as it could have prudently divested, the FDIC can order the bank to do so and if the bank fails to comply with any conditions or restrictions that are placed on retention of the limited partnership interest during the divestiture period, the bank will be cited for a violation of section 24(c).
I hope that this letter has been responsive to your request. Should you have any further questions, or need for clarification, please do not hesitate to contact me at (202) 898-3730.
1Paragraph (2) creates an exception for majority owned subsidiaries and paragraph (3) allows insured state banks to invest as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation, or new construction of qualified housing projects. Section 24(e) excepts investments in the stock of a savings bank life insurance company by banks in Massachusetts, New York, and Connecticut. Section 24(f)(2) allows, subject to certain restraints, insured state banks located in certain states to acquire and retain common or preferred stock listed on a national securities exchange and/or shares of investment companies registered under the Investment Company Act of 1940. Finally, section 24(f)(3) allows insured state banks to acquire not more than 10 percent of a directors and officers insurer and to acquire or retain shares of certain depository institutions. Go back to Text