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4000 - Advisory Opinions

Violation of Depository Institution Management Interlocks Act1


June 18, 1981

Barbara I. Gersten, Attorney

By memorandum dated June 10, 1981, you have requested that the Legal Division render an opinion on whether acquisition of the *** (" *** ") by Mr. *** would result in a prohibited management interlock with other banks located in the same SMSA in which *** has an interest. The *** Regional Office has recommended denial of the proposed transaction under the Change in Bank Control Act because it appears that the acquisition of *** by *** would result in a violation of the Interlocks Act.

*** proposes to acquire 9.79% of *** and six other persons plan to acquire 44.05% for a total of 53.84%. The stock is to be placed in a voting trust of which *** would act as sole trustee. In addition, *** would serve as chairman of the board. *** other banking interests in the *** standard metropolitan statistical area (SMSA) comprise two one-bank holding companies and another bank2 , *** owns 30% of *** (the 100% owner of ***) and votes an additional 22% of the stock under a voting trust agreement. He owns 100% of *** (the 85.6% owner of *** and 66% of ***.3 *** and *** have assets in excess of $20 million, while *** has assets of less than $20 million. *** is chairman of the foregoing holding companies and banks, and also serves as president of *** and its parent.

Part 348 of the FDIC's regulations provides, in pertinent part, that a management official of a depository organization (a bank or bank holding company, for purposes of the instant case) may not serve at the same time as a management official of another depository organization not affiliated with it, if offices of both are located in the same SMSA and either has assets of $20 million or more. 12 C.F.R. § 348.3(b). A "management official'' means an employee or officer with management functions. 12 C.F.R. § 346.2(b). Part 348 defines the term "affiliate'' with reference to Section 202 of the Interlocks Act, which provides, in pertinent part, that depository organizations are affiliates if more than 50% of the voting stock of one corporatrion is beneficially owned in the aggregate by one or more persons who also beneficially own in the aggregate more than 50% of the other corporation. 12 U.S.C. § 3202(3)(B).

In the instant case, all the subject depository organizations are located in the *** SMSA. While the asset size of *** is not known, two of the other banks involved have assets in excess of $20 million. *** qualifies as a management official, as he serves as chairman and president of the various depository organizations. The key issue to be resolved is whether the depository organizations are affiliated through common beneficial ownership of more than 50%, which would permit interlocks involving ***. *** owns more than the requisite amount of stock in ***. (***), *** and *** (*** ***)4 *** will actually purchase less than 10% of the stock of ***, however, he will have voting control of more than 50% of the stock.

The concept of beneficial ownership is not defined in the Interlocks Act or Part 348, therefore guidance in defining the concept must be sought from other statutes and regulations, such as those in the area of Federal securities law. Rule 13d-3 (17 C.F.R. § 240.13d-3) promulgated under the Securities Exchange Act of 1934, as amended (15 U.S.C. § 78), in pertinent part provides:

(a) For purposes of Section 13(d) and (g) of the Act a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:

(1) Voting power which includes the power to vote, or to direct the voting of, such security . . . 5

Regulations promulgated by the FDIC pursuant to the Securities Exchange Act of 1934 have similar provisions which include voting power within the meaning of beneficial ownership.6

Section 13(d) of the 1934 Act requires certain public disclosures by persons acquiring substantial blocks of a security registered under the 1934 Act. Within 10 days of acquiring a security that results in the beneficial ownership or more than 5% of a class of security, certain information as required by schedule 13D must be provided to the issuer, the exchanges in which the security is traded, and to the Securities and Exchange Commission. The purpose of § 13 is to alert the market as to large and rapid accumulation of securities which might represent a shift in corporate control.7

The issue of whether voting control of more than 50% of the stock of a bank would constitute beneficial ownership for purposes of the Interlocks Act was considered by staff of the Federal Reserve Board ("FRB") in reviewing *** January 1980 application for *** to become a holding company by acquiring ***, of which he owned more than 85% of the stock.8 At that time, *** owned 20% of *** and as sole trustee of a voting trust, had the power to vote an additional 33% of the bank's stock. Relying on the definition of beneficial ownership found in the Federal securities laws, the FRB determined that *** beneficially owned more than 50% of the stock of ***. therefore the interlock would be allowed because affiliation of the two depository organizations through common beneficial ownership was found to exist.9

The Legal Division is of the opinion that the concept of beneficial ownership should be deemed to include voting rights for purposes of the Interlocks Act. A narrow construction of the term to mean equitable ownership only (as contrasted with holding legal title), would not promote the purpose of the Interlocks Act. The purpose of the Interlocks Act and Part 348 is to foster competition by prohibiting a management official of a depository organization from also serving as a management official of another depository organization if the two organizations (1) are not affiliated and (2) are large or are located in the same local area. 12 C.F.R. § 348.1(b). A broad definition of beneficial ownership that includes voting rights appears consistent with the notion of the power to create an affiliation in terms of control. Acquisition of the power to vote more than 50% of the stock of a depository organization could impact on competition, therefore voting rights should be taken into consideration when defining beneficial ownership for purposes of the Interlocks Act.10 To prevent an interlock in the *** case by narrowly construing beneficial ownership as an equitable interest only would not promote competition in the *** SMSA. If the *** transaction were consummated, *** would control five banks (including the ***, should that acquisition be approved) in the *** SMSA having a total of 1.3% of the SMSA deposits as of December 30, 1980. The *** Regional Office has determined that acquisition of *** by *** would not substantially lessen competition or tend to create any form of monopoly.11 If there is no anticompetitive issue that would constitute a basis to deny the proposed acquisition under the Change in Bank Control Act, similarly, there would exist no reason to deny the acquisition under the Interlocks Act, which would prohibit an interlock in order to foster competition.

It is the opinion of the Legal Division that ***, as sole trustee of more than 50% of the voting stock of ***, should be deemed to have beneficial ownership of the stock that is subject to the trust. On this basis, *** may be found to be the affiliate of the other depository organizations in the *** SMSA in which *** beneficially owns more than 50% of the stock. The proposed acquisition of *** by *** would not, therefore result in a prohibited interlock. The reverse, however, is not necessarily true. That is, even if acquisition of control would not result in an illegal interlock due to the affiliate exemption, we would expect that the FDIC could still deny an acquisition under the Change in Bank Control Act on competition grounds. It is clear that the Interlocks Act cannot effectively be used as a tool to foster competition in change of ownership situations because of the affiliate exemption; however, the Change in Bank Control Act may be so used.

1 The Depository Institution Management Interlocks Act ("Interlocks Act", 12 U.S.C. § 3201 et seq.) is implemented by Part 348, "Management Official Interlocks" of the FDIC's regulations (12 C.F.R. Part 348). Go back to Text

2 *** is also currently seeking to acquire 70.51% of ***, the 100% owner of ***, and intends to serve as chairman of both the holding company and the bank. Go back to Text

3 The information on the ownership of *** (100%) and *** (66%) by *** is derived from correspondence dated June 10, 1981 from ***, Regional Director, *** to ***, Director, Division of Bank Supervision, on the notice of acquisition of control of *** (the " *** "). An undated draft memorandum from *** to *** on the same subject indicates, however, that *** owns 87% of *** and 63% of ***. Go back to Text

4 See footnote 9 and accompanying text, infra. Go back to Text

5 See Financial General Bancshares, Inc. v. Lance, CCH Fed.Securities Law Rptr., 1978 Transfer Binder, 96,403 (D.D.C. 1978) (pooling of voting power in order to effect management of corporation indicative of beneficial ownership for purposes of § 13 of the Securities Exchange Act of 1934); Transcon Lines v. A.G. Becker, Inc., 470 Fed. Supp. 356, 372 (S.D.N.Y.)1979). Go back to Text

6 The relevant provisions of the FDIC's regulation are found at 12 C.F.R. § 335.4(h)(A). Go back to Text

7 GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d Cir. 1971), cert. denied 406 U.S. 910 (1972). Go back to Text

8 Federal Reserve Board Legal Opinion *** to BMC Files dated January 18, 1980, on the subject of the § 3(a)(1) application of *** to become a bank holding company. Go back to Text

9 The opposite position was taken by staff of the Federal Reserve Bank of Chicago, which did not support a construction of beneficial ownership that would include voting rights, and further, indicated that the legal staff of the Board of Governors was in accord with this position. Correspondence from Attorney *** FRB *** to ***, dated September 17, 1980. In this regard, I contacted legal staff of the Board of Governors on June 12, 1981. Attorney *** (a primary member of the interagency task force on the Interlocks Act) indicated that FRB staff in Washington did not subscribe to this opinion, and that the opinion issued in the *** application of January 18, 1980, was controlling on the subject of beneficial ownership. Go back to Text

10 While the Interlocks Act has the stated purpose of fostering competition, it does not reach the situation where the same person (who is not a management official) acquires two banks in a SMSA. Go back to Text

11 *** correspondence of June 10, 1981, at page 3. Go back to Text

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