Legal Bulletins

Once a bank holding company is formed, bank management should familiarize itself with the new laws and procedures that will affect the operations of the bank and its holding company. To begin, bank management should familiarize itself with the Bank Holding Company Act, at 12 U.S.C. §§ 1841-1850, Regulation Y, at 12 C.F.R. Part 225, and the Maryland General Corporation Code. Many immediate concerns and more specific laws are described below.

Corporate Governance

* Independence. In general, a bank and bank holding company ("BHC") should be managed as separate corporate entities as if they were not affiliated. When the BHC needs staff, employee sharing arrangements may be necessary.

* BHC Committees. To direct bank holding company operations, a BHC should form a nominating, executive and audit committee, consisting of the same members as at the Bank level. For SEC registered and listed BHCs, an audit committee charter is required. Other ad hoc or special committees may be established to address particular or unusual issues. Because most bank holding companies do not employ separate employees, a separate compensation committee is not required. This recommendation is made despite the Securities and Exchange Commission (SEC) suggestion that the boards of all public companies appoint a compensation committee to consider compensation issues and to consider shareholder concerns in making executive pay recommendations. See, e.g., 12 C.F.R. § 229.402 (Regulation S-K). While many bank holding companies have additional committees, including CRA or public policy committees, loan and investment committees, and finance committees, there is no legal requirement to form these additional committees at the bank holding company level.

* Quarterly Board of Directors Meetings. At a minimum, the BHC should hold regular quarterly meetings. For convenience, the BHC's board of directors may meet immediately after the Bank's board meeting. Separate compensation to directors for BHC meetings is unusual. Meetings of the BHC's board should be held more than quarterly if the BHC begins to engage in other business activities.

Other Corporate Issues

* Director Stock Ownership Requirement. Directors of a BHC of a Maryland bank or national bank must own at least $500 and $1000, respectively, fair market value, in BHC stock, based on the stock's fair market value at the time of purchase or the date the director took office, or based on aggregate shareholder's equity. See Md. Code Ann., Fin. Inst. § 3-403.

* Holding Company Expenses. All of the BHC's expenses must be paid by the bank holding company. Each quarter, or as needed, the bank board of directors may approve a dividend out of available net profits to the BHC for payment of the BHC's expenses.

* Dividends. All dividend payments must meet certain minimum requirements under state law. See § 2-309 of the Maryland General Corporation Code. Dividends that are earmarked for the BHC's stockholders must be declared first by the bank board, and then by the BHC board. The FRB has issued two policy statements regarding the declaration of dividends. See attached F.R.R.S. §§ 4-877, 4-878. A bank still must meet its own statutory requirements regarding dividends. See Md. Code Ann., Fin. Inst. § 3-306 to §3-308.

* Insurance. The BHC and/or its officers and directors should be added to the bank's director's and officer's insurance policy and blanket bond and to all other appropriate insurance policies. There should be no more than a nominal increase in premium for the change.

* CUSIP and Federal EIN Numbers. To enable securities brokers to trade the BHC stock, the BHC should obtain a CUSIP number from the CUSIP Service Bureau. The BHC should also obtain a federal Employer Identification Number.

* Bank Holding Company Filings. A recently formed BHC must file an F.R. Y-6A within 30 days of forming a bank holding company. The FRB requires a brief annual filing on Form F.R. Y-6. The BHC should receive instructions from the FRB regarding this filing.

* BHC as Shareholder. Under certain circumstances, a bank will need to obtain the authority of its shareholder to engage in certain activities, such as bank charter amendments. Because the sole shareholder is the BHC, the BHC board of directors should direct the BHC President to vote all of bank's shares in favor of the proposal. Pursuant to § 2-505 of the Maryland General Corporation Code, the President may vote the shares of the bank by unanimous consent. Of course, if the BHC desires to amend its charter, the vote of the BHC's stockholders is required at a special or annual meeting.

* Federal Reserve Act Restrictions. A BHC and its bank subsidiary face several legal requirements concerning loans to, and transactions with, affiliates. These requirements are found in Sections 23A and 23B of the Federal Reserve Act, at 12 U.S.C. §§ 371c, 371c-1. Because of the complexity of these laws, a separate outline of these requirements is attached.

* Sharing Examinations with Bank Holding Companies. The Bank generally may not furnish to the BHC a copy of any examination report of the bank subsidiary unless the bank board of directors at least annually by resolution authorizes the reproduction and furnishing of examination reports, a copy of the resolution authorizing disclosure is provided to the BHC, and the bank minutes reflect that the disclosure was made and the date of disclosure, among other things. For a description of this requirement, see 12 C.F.R. §309.6(b)(9)(iii).

* Sharing Information with Affiliates. The Fair Credit Reporting Act permits a company, such as the Bank, to share customer information with an affiliate, such as the BHC, under certain conditions. The Act permits affiliates to share "experience information" without any disclosure to the consumer, and to share "other information" if the consumer is notified and has the opportunity to opt out of the sharing of "other information." The notification and opt-out procedures may be by a separate letter, or, for new customers, by providing a disclosure and "opt-out" box in customer applications, and other customer agreements. "Experience information" includes any information pertaining to the entity's own transactions or experiences with the consumer, such as history of delinquency and the status of loans and deposits. "Other information" includes application information, information from demographic firms, and credit reports. At some time, the bank may wish to share information with the BHC or other BHC subsidiaries. All banks with a holding company structure should implement the notification and opt-out procedure as soon as possible.

* Tax Sharing Agreements. By an interagency policy statement, the FRB expects BHCs to enter into a tax sharing agreement with their subsidiaries. A tax sharing agreement is an agreement between or among affiliates that addresses the percentage of taxes to be paid by each entity and the manner of payment. The FRB has stated by telephone that with or without an agreement, a bank must pay taxes on a "stand alone basis." If the bank holding company makes the tax payment rather than its subsidiary bank, the bank should not dividend up the funds for the tax payment until just before the tax payment is due.