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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations In order to limit the extent of each Covered Companys influence over a subsidiary industrial bank, the proposed rule required each Covered Company to commit to limit its representation on the industrial banks board of directors to 25
percent of the members of the board, or if the bank is organized as a limited liability company and is managed by a board of managers, to 25 percent of the members of the board of managers, or if the bank is organized as a limited liability company and is managed by its members, to 25 percent of managing member interests commitment 6. For example, if company A, which has 15
percent representation on the subsidiary industrial banks board, controls company B, then the companies representation would be aggregated and limited to no more than 25 percent.
Thus, company Bs representation would be limited to no more than 10
percent.
The FDIC sought comment on whether this threshold is appropriate.
Three commenters argued against any limitation of a Covered Companys representation on the board of a subsidiary industrial bank. These commenters noted the burden in identifying independent director candidates and obtaining the prior approval for candidates associated with a Covered Company. In addition, these commenters argued that the restriction would limit the coordination necessary and appropriate among entities within an organization. One commenter expressed the concern that there could be a negative effect on the remaining directors if an independent director leaves a board. That is, the potential need to eliminate a director associated with a Covered Company in order to comply with the rule on a continuing basis.
One commenter asserted that there may be conflicts between the rule limitation and unspecified State law, while another noted the lack of comparable limitations on other legal structures, creating a distinct difference between Covered Companies and other operating entities. A number of commenters also suggested that relying on the simple majority of independent directors, as has been applied in other instances, has not led to issues or concerns regarding the subsidiary industrial bank.
To address the concerns regarding the limitation, commenters suggested either raising the threshold from 25 percent to one-third, or requiring that a simple majority be independent. While acknowledging the need for some degree of director independence to limit the potential influence from Covered
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Companies, these commenters noted that the higher threshold may enhance coordination between the industrial bank and Covered Companies. By extension, the increased coordination would enable the Covered Companies to have a better understanding of the industrial banks obligations. One comment also noted that the FDIC
would retain its full enforcement authority should circumstances require action.
The FDIC understands the challenges involved in the selection of directors of insured institutions. However, the prior approval requirement should not substantially interfere in a wellqualified candidates ability to assume the responsibilities of the position in a timely manner, and thereby to achieve the noted benefits of appropriate coordination between the industrial bank and the Covered Company. As to the possibility that an independent directors departure from a board may result in temporary non-compliance with the established threshold, the FDICs construction and use of written agreements provides sufficient mechanisms by which compliance can be timely achieved without the extreme consequence of removing other directors or requiring FDIC actions to enforce the commitment.
As to the specific threshold, the FDIC
is revising the commitment in the final rule to establish a less than 50 percent threshold, which will maintain a sufficient number of independent directors while addressing a number of the commenters concerns. In making this change, the FDIC considered the potential numeric challenges that could confront industrial banks whose boards are comprised of a comparatively small number of directors. In addition, the change enables Covered Companies and industrial banks to select director candidates believed to be most qualified to direct and oversee the institution. As such, the change enables Covered Companies and industrial banks to exercise some additional flexibility when selecting directors. Nevertheless, the FDIC retains the authority, as appropriate, to require a higher threshold of director independence.
Finally, one comment requested clarification as to whether officers of the industrial bank would be included within the limitation. In short, if an officer in question is associated with a Covered Company, the individual would be counted against the limitation.
In order to ensure that a subsidiary industrial bank has available to it the resources necessary to maintain sufficient capital and liquidity, the proposed rule required each party to a
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written agreement to commit to maintain each subsidiary industrial banks capital and liquidity at such levels as the FDIC deems necessary for the safe and sound operation of the industrial bank, and to take such other actions as the FDIC finds appropriate to provide each subsidiary industrial bank with the resources for additional capital or liquidity commitment 7. As discussed above, the FDIC is finalizing 354.3b as proposed, which provides that the FDIC may require the controlling or dominant shareholder of a Covered Company to join as a party to the written agreements required under the rule, including commitment 7. The final rule includes commitment 7 as proposed.
Lastly, the proposed rule required that each Covered Company and its subsidiary industrial banks enter into a tax allocation agreement that expressly recognizes an agency relationship between the Covered Company and the subsidiary industrial bank with respect to tax assets generated by such industrial bank, and that further states that all such tax assets are held in trust by the Covered Company for the benefit of the subsidiary industrial bank and promptly remitted to such industrial bank commitment 8. As proposed, a tax allocation agreement would have also provided that the amount and timing of any payments or refunds to the subsidiary industrial bank by the Covered Company should be no less favorable than if the subsidiary industrial bank were a separate taxpayer.
One commenter questioned the FDICs statutory authority to impose such a requirement. The FDIC has the power to issue rules to carry out the provisions of the FDI Act,120 including rules to ensure the safety and soundness of industrial banks and to protect the DIF. As the FDIC discussed in the proposed rule, companies and their subsidiaries, including insured depository institutions and their parent companies, will often file a consolidated income tax return. A 1998 interagency policy statement issued by the Federal banking agencies and the U.S.
Department of the Treasury, and an addendum thereto 121 collectively, 120 The Corporation . . . shall have power . . .
to prescribe by its Board of Directors such rules and regulations as it may deem necessary to carry out the provisions of this chapter or of any other law which it has the responsibility of administering or enforcing except to the extent that authority to issue such rules and regulations has been expressly and exclusively granted to any other regulatory agency. 12 U.S.C. 1819aTenth.
121 See Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure, 63

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