[Federal Register Volume 68, Number 30 (Thursday, February 13, 2003)]
[Rules and Regulations]
[Pages 7301-7309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-3387]



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  Federal Register / Vol. 68, No. 30 / Thursday, February 13, 2003 / 
Rules and Regulations  

[[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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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