What Happened

On December 15, 2020, the Federal Deposit Insurance Corporation (FDIC) adopted a final rule, effective April 1, 2021, setting forth conditions, commitments, and requirements for the approval of deposit insurance applications, changes in control, and merger transactions in which an insured industrial bank or industrial loan company (ILC) would become a subsidiary of a company not subject to consolidated supervision from the Federal Reserve Board that would directly or indirectly control the ILC as a result of such transaction (Covered Company). The final rule largely adopted most of the provisions from the FDIC’s March 17, 2020 notice of proposed rulemaking,¹ with a few substantive changes. Overall, the final rule expanded the regulatory framework for the FDIC’s approval process by requiring the following obligations of ILCs and Covered Companies.

Overview of the FDIC Final Rule

Here are the key provisions you need to know now:

1. Required Written Agreements With FDIC. The final rule provides no ILC may become a subsidiary of a Covered Company unless such Covered Company enters into one or more written agreements with the FDIC and its subsidiary ILC. In addition to requiring Covered Companies to sign on to such written agreements, the FDIC may require a controlling shareholder of a Covered Company to enter into such written agreements as well, as determined in the FDIC’s sole discretion on a case-by-case basis. The final rule provides that the FDIC may condition its approval of deposit insurance applications, changes in control, and merger transactions on the controlling shareholder’s joinder or signing on to the written agreements with the FDIC and the subsidiary ILC required by this rule. In making the decision on a case-by-case basis, the FDIC “will consider the business plan, capital structure, risk profile, and business activities of the Covered Company.” However, there is no requirement that an officer such as the CEO must sign on to such written agreements.

2. Required Provisions of Written Agreements With FDIC. Such written agreements with the FDIC must include the following commitments from the Covered Company:

• Furnish to the FDIC an initial listing with annual updates of such Covered Company’s subsidiaries.
• Submit to the FDIC an annual report of such Covered Company and its subsidiaries, as well as any other reports that the FDIC may request.
• Consent to the FDIC’s examination of such Covered Company and its subsidiaries to monitor compliance with such written agreements.
• Maintain each subsidiary’s capital and liquidity at a level the FDIC deems necessary for its safe and sound operation.
• Maintain records.
• Undergo an annual independent audit of each subsidiary ILC.
• Enter into a tax allocation agreement with its subsidiaries that (i) recognizes an agency relationship between the Covered Company and the subsidiary ILC regarding the tax assets generated by such ILC and (ii) states that all such tax assets are held in trust by the Covered Company for the benefit of the subsidiary ILC and will be promptly remitted to such ILC.
• Inform the FDIC about such Covered Company’s systems for protecting the security, confidentiality and integrity of consumer and nonpublic personal information. This is a new requirement.

However, the final rule removed the proposed rule that the FDIC may require additional commitments from a Covered Company or a controlling shareholder of a Covered Company in order to ensure the safety and soundness of the ILC.

3. Required FDIC Approval for Certain Actions. A subsidiary ILC is required to obtain the FDIC’s prior approval to make a material change in its business plan after becoming a subsidiary of a Covered Company. A “material change” to a business plan includes increases of 25% or more in financial statement categories or subcategories; distinctly new business strategies or objectives, products, services, target markets, delivery channels, or business development strategies; changes to financial strategies; assumption of deposits or other liabilities; and changes in organizational relationships affecting business strategies or objectives. Additionally, FDIC approval is required to add or replace a member of the board of directors, board of managers or senior executive officers for the first three years after an ILC becomes a subsidiary of a Covered Company, or to employ a senior executive officer who is or was associated with an affiliate of the ILC for the past three years. No FDIC approval is required after the three-year period. Lastly, a subsidiary ILC must seek FDIC approval to enter into contracts for material services with a Covered Company or a subsidiary thereof.

Why It Matters

We expect robust activity in the fintech market in 2021, and the final rule adds new considerations into the mix. The final rule brings clarity to the FDIC approval process for deposit insurance applications, changes in control, and merger transactions involving ILCs, Covered Companies, fintechs and their parent companies. Companies should carefully consider the obligations required by the final rule when evaluating the advantages and disadvantages of obtaining an ILC charter.

1 See FDIC, Parent Companies of Industrial Banks and Industrial Loan Companies, 85 Fed. Reg. 17,771 (Mar. 31, 2020), located at https://www.fdic.gov/news/press-releases/2020/pr20031a.pdf.