LIMITED LIABILITY COMPANIES

48054

Federal Register / Vol. 67, No. 141 / Tuesday, July 23, 2002 / Proposed Rules

(b)(4) are redesignated as paragraphs

(b)(2) and (b)(3), respectively.

PART 980—VEGETABLES; IMPORT

REGULATIONS

4. Section 980.1 is amended as

follows:

a. Revise paragraphs (a)(1)(i), (a)(2)(ii),

(b)(2), (e), (f), and (g)(1)(ii).

b. Redesignate paragraph (i) as

paragraph (j).

c. Redesignate paragraphs (h)(1) and

(h)(2) as paragraphs (i)(1) and (i)(2) and

revise newly designated paragraphs

(i)(1) and (i)(2). The revisions read as

follows:

§ 980.1

Import regulations; Irish potatoes.

*

*

*

*

*

(a) * * *

(1) * * *

(i) Grade, size, quality, and maturity

regulations have been issued from time

to time pursuant to the following

marketing orders: No. 945 (part 945 of

this chapter), No. 948 (part 948 of this

chapter), No. 947 (part 947 of this

chapter), No. 946 (part 946 of this

chapter), and No. 953 (part 953 of this

chapter).

*

*

*

*

*

(2) * * *

(ii) Imports of all other round type

potatoes during the period June 5

through July 31 are in most direct

competition with the marketing of the

same type of potatoes produced in the

Southeastern States covered by Order

No. 953 (part 953 of this chapter); and

during the period of August 1 through

June 4 of the following year they are in

most direct competition with all other

round type potatoes produced in Area

No. 3, Colorado (Northern Colorado)

covered by Marketing Order No. 948, as

amended (part 948 of this chapter).

*

*

*

*

*

e type of potatoes produced in the

Southeastern States covered by Order

No. 953 (part 953 of this chapter); and

during the period of August 1 through

June 4 of the following year they are in

most direct competition with all other

round type potatoes produced in Area

No. 3, Colorado (Northern Colorado)

covered by Marketing Order No. 948, as

amended (part 948 of this chapter).

*

*

*

*

*

(b) * * *

(2) During the period June 5 through

July 31 of each marketing year, the

grade, size, quality, and maturity

requirements of Marketing Order No.

953 (part 953 of this chapter) applicable

to potatoes of the round type shall be

the respective grade, size, quality, and

maturity requirements for imports of

other round type potatoes; and during

the period August 1 through the

following June 4 of each year the grade,

size, quality, and maturity requirements

of Area No. 3, Colorado (Northern

Colorado) covered by Marketing Order

No. 948, as amended (part 948 of this

chapter) shall be the respective grade,

size, quality, and maturity requirements

for imports of all other round type

potatoes.

*

*

*

*

*

(e) Certified seed. Certified seed

potatoes shall include only those

potatoes which are officially certified

and tagged as seed potatoes by the Plant

Health and Production Division, Plant

Products Directorate, Canadian Food

Inspection Agency, and which are

subsequently used as seed.

(f) Designation of governmental

inspection services. The Federal or

Federal-State Inspection Service, Fruit

and Vegetable Programs, Agricultural

Marketing Service, U.S. Department of

Agriculture and the Food of Plant Origin

Division, Plant Products Directorate,

Canadian Food Inspection Agency, are

hereby designated as governmental

inspection services for the purpose of

certifying the grade, size, quality, and

maturity of Irish potatoes that are

imported, or to be imported, into the

United States under the provisions of

§ 608e of the Act.

Service, U.S. Department of

Agriculture and the Food of Plant Origin

Division, Plant Products Directorate,

Canadian Food Inspection Agency, are

hereby designated as governmental

inspection services for the purpose of

certifying the grade, size, quality, and

maturity of Irish potatoes that are

imported, or to be imported, into the

United States under the provisions of

§ 608e of the Act.

(g) * * *

(1) * * *

(ii) Since inspectors may not be

stationed in the immediate vicinity of a

port, or point of entry, an importer of

uninspected and uncertified Irish

potatoes should make advance

arrangements for inspection. Each

importer should give at least the

specified advance notice to one of the

following applicable inspection offices

prior to the time the Irish potatoes

would be imported.

Ports and points

Inspection offices

Advance

notice

(days)

All Maine ports and points of entry ............

In-Charge, Post Office Box 1058, Presque Isle, ME 04767 (PH 207–764–2100) .........

1

Port of Boston, MA .....................................

In-Charge, Boston Market Terminal Building, Room 1, 34 Market Street, Everett, MA

02149 (PH 617–389–2480).

1

Port of New York, NY ................................

In-Charge, 465B New York City Terminal Market, Bronx, NY 10474 (PH 718–991–

7665).

1

Port of Philadelphia, PA .............................

In-Charge, 210 Produce Building, 3301 South Galloway Street, Philadelphia, PA

19148 (PH 215–336–0845.

1

All other ports and points of entry. ............

Head, Field Operations Section, Fresh Products Branch, Fruit and Vegetable Pro-

grams, AMS, USDA, Washington, DC 20250 (PH 1–800–811–2373).

3

*

*

*

*

*

NY 10474 (PH 718–991–

7665).

1

Port of Philadelphia, PA .............................

In-Charge, 210 Produce Building, 3301 South Galloway Street, Philadelphia, PA

19148 (PH 215–336–0845.

1

All other ports and points of entry. ............

Head, Field Operations Section, Fresh Products Branch, Fruit and Vegetable Pro-

grams, AMS, USDA, Washington, DC 20250 (PH 1–800–811–2373).

3

*

*

*

*

*

(i) Definitions. (1) For the purpose of

this part potatoes meeting the

requirements of Canada No. 1 grade and

Canada No. 2 grade shall be deemed to

comply with the requirements of the

U.S. No. 1 grade and U.S. No. 2 grade,

respectively, and the tolerances for size,

as set forth in the U.S. Standards for

Grades of Potatoes (§§ 51.1540 to

51.1556, inclusive of this title) may be

used.

(2) Importation means release from

the custody of the U.S. Customs Service.

*

*

*

*

*

Dated: July 17, 2002.

A.J. Yates,

Administrator, Agricultural Marketing

Service.

[FR Doc. 02–18572 Filed 7–22–02; 8:45 am]

BILLING CODE 3410–02–P

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 303

Insurance of State Banks Chartered as

Limited Liability Companies

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

SUMMARY: One of the statutory

requirements for a State-chartered bank

to be eligible for Federal deposit

insurance is that it be ‘‘incorporated

under the laws of any State.’’ In the

recent past the FDIC has received two

inquiries regarding whether a State bank

that is chartered as a limited liability

company (LLC) could be considered to

be ‘‘incorporated’’ for purposes of that

requirement. The FDIC proposes to

issue a regulation that would clarify that

a bank that is chartered as an LLC under

State law would be considered to be

‘‘incorporated’’ under State law if it

meets certain criteria.

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ered to

be ‘‘incorporated’’ for purposes of that

requirement. The FDIC proposes to

issue a regulation that would clarify that

a bank that is chartered as an LLC under

State law would be considered to be

‘‘incorporated’’ under State law if it

meets certain criteria.

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48055

Federal Register / Vol. 67, No. 141 / Tuesday, July 23, 2002 / Proposed Rules

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).

4 12 U.S.C. 1813(a)(2).

5 The Random House Dictionary of the English

Language 968 (2d ed. 1987).

6 Black’s Law Dictionary 769 (7th ed. 1999).

7 1 William Meade Fletcher et al., Fletcher’s

Cyclopedia of the Law of Private Corporations § 4

(perm. ed., rev. vol. 2001).

8 Trustees of Dartmouth College v. Woodward, 17

U.S. (4 Wheat.) 518 (1819).

9 Dartmouth College, 17 U.S. at 636.

10 See Douglas Arner, Development of the

American Law of Corporations to 1832, 55 SMU

Law Review 23, 43–54, 2002.

DATES: Written comments must be

received on or before October 21, 2002.

ADDRESSES: Written comments should

be addressed to Robert E. Feldman,

Executive Secretary, Attention:

Comments/OES, Federal Deposit

Insurance Corporation, 550 17th Street,

NW., Washington, DC 20429. Comments

may be hand-delivered to the guard

station at the rear of the 550 17th Street

Building (located on F Street), on

business days between 7:00 a.m. and

5:00 p.m. Send facsimile transmissions

to (202) 898–3838. Comments may be

submitted electronically to

comments@FDIC.gov. Comments may be

inspected and photocopied in the FDIC

Public Information Center, Room 100,

801 17th Street, NW., Washington, DC,

between 9 a.m. and 4:30 p.m. on

business days.

FOR FURTHER INFORMATION CONTACT:

Curtis Vaughn, Examination Specialist,

Division of Supervision and Consumer

Protection, (202) 898–6759, or Robert C

8. Comments may be

submitted electronically to

comments@FDIC.gov. Comments may be

inspected and photocopied in the FDIC

Public Information Center, Room 100,

801 17th Street, NW., Washington, DC,

between 9 a.m. and 4:30 p.m. on

business days.

FOR FURTHER INFORMATION CONTACT:

Curtis Vaughn, Examination Specialist,

Division of Supervision and Consumer

Protection, (202) 898–6759, 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 Finally,

‘‘State bank’’ means

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

Traditionally, the term

‘‘incorporated’’ has been applied such

that only those legal entities that have

been identified as corporations under

State law have been considered eligible

to become insured. However, recently,

two banks have expressed interest in

obtaining Federal deposit insurance for

a State bank that would be chartered as

an LLC. Proponents have argued

specifically that the term

‘‘incorporated’’ should not be

interpreted to preclude an LLC from

becoming an insured depository

institution

fied as corporations under

State law have been considered eligible

to become insured. However, recently,

two banks have expressed interest in

obtaining Federal deposit insurance for

a State bank that would be chartered as

an LLC. Proponents have argued

specifically that the term

‘‘incorporated’’ should not be

interpreted to preclude an LLC from

becoming an insured depository

institution. A common understanding of

the term ‘‘incorporated’’ is ‘‘formed or

constituted as a legal corporation.’’ 5 In

addition, Black’s Law Dictionary defines

‘‘incorporate’’ as ‘‘to form a legal

corporation.’’ 6 The FDI Act provides no

definition of the term ‘‘incorporated,’’

and there is no judicial guidance on the

meaning of ‘‘incorporated’’ as used in

the FDI Act. Consequently, in view of

the arguments offered regarding LLCs

and the lack of direct legislative or

judicial guidance, there is some

ambiguity as to the meaning of the word

‘‘incorporated.’’

II. Corporations and Other Business

Entities

At common law there were three

types of business entities:

proprietorships, partnerships and

corporations. 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.’’ 7 One of the earliest

judicial definitions reflecting that

notion is that enunciated in the 1819

case of Trustees of Dartmouth College v.

Woodward.8 In Dartmouth College,

Chief Justice Marshall stated that

[a] corporation is an artificial being, * * *

existing only in contemplation of law

d

on that of the component persons, and

the being or existence of which is owed

to an act of state.’’ 7 One of the earliest

judicial definitions reflecting that

notion is that enunciated in the 1819

case of Trustees of Dartmouth College v.

Woodward.8 In Dartmouth College,

Chief Justice Marshall stated that

[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.9

Description of Four Corporate Attributes

There is also no universal agreement

as to the characteristics generally

attributed to a modern corporation. This

may have resulted from the fact that the

characteristics of a modern corporation

have evolved over time 10 and also

possibly from the fact that the nature of

a corporation was subject to the varying

notions of the individual State

legislatures. However, it is generally

accepted that there are four attributes of

a corporation that distinguish it from

other forms of business entities; they

are: perpetual succession, centralized

management, limited liability, and free

transferability of interests.

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. In the case

of a corporation, the death or

withdrawal of a shareholder 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 partners. The death or withdrawal of

a partner generally terminates the

partnership

xist

independent of its owners. In the case

of a corporation, the death or

withdrawal of a shareholder 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 partners. The death or withdrawal of

a partner generally terminates the

partnership.

Centralized management generally

means that management of the entity is

vested in a group of individuals

appointed or elected by the owners;

each owner, therefore, does not have the

authority to directly participate in the

management of the entity. In a

partnership the general partner(s)

manage the affairs of the partnership.

Limited liability means that an owner

of the entity is generally not personally

liable for the debts of the entity; rather,

the maximum potential liability of an

owner is generally limited to the

owner’s investment in the entity. In a

corporation the shareholders of a

corporation are generally not liable for

the corporation’s debts. This attribute

also distinguishes a corporation from a

partnership because in a partnership a

general partner is 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.

In a corporation a shareholder can

generally transfer all or a part of his/her

shares to another person without the

consent or approval of the other

shareholders. However, in closely-held

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interest in the entity without the

consent or approval of the other owners.

In a corporation a shareholder can

generally transfer all or a part of his/her

shares to another person without the

consent or approval of the other

shareholders. However, in closely-held

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48056

Federal Register / Vol. 67, No. 141 / Tuesday, July 23, 2002 / Proposed Rules

11 See Flectcher, supra note 7, § 20.

12 See Unif. Partnership Act, sec. 101(6) (1997), 6

U.L.A. 61 (Supp. 2002).

13 See Treas. Reg. §§ 301.7701–2, 7701–3 (1997).

14 Treas. Reg. § 301.7701–2(b)(5) (1997).

15 See Small Business Job Protection Act, Pub. L.

104–188 § 1315, 26 U.S.C. 1361(b)(1996).

16 See Id.

17 See Mark A. Sargent & Walter D. Schwidetzky,

Limited Liability Company Handbook § 1:3 (rev.

2002).

18 See Id.

19 See ‘‘Unif. Limited Liability Company Act,’’

Prefatory Note, (amended 1996) 6A U.L.A. 426

(Supp. 2002).

20 See Sargent & Schwidetzky, supra note 17,

§ 1:3.

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/her interest

without the consent of the other

partners. However, even when the other

partners consent, the original

partnership technically is terminated,

and a new partnership is created.11

Partnership Distinguished

In addition to the differences noted

above, there are other characteristics

that distinguish a corporation from a

partnership. A generally accepted

definition of a partnership is an

association of two or more persons to

carry on as co-owners a business for

profit.12 A principal distinction between

a corporation and a partnership is that

generally a partnership can be created

by agreement among the co-owners,

whereas a corporation requires a grant

of authority from the State

uish a corporation from a

partnership. A generally accepted

definition of a partnership is an

association of two or more persons to

carry on as co-owners a business for

profit.12 A principal distinction between

a corporation and a partnership is that

generally a partnership can be created

by agreement among the co-owners,

whereas a corporation requires a grant

of authority from the State. In addition,

a partnership, unlike a corporation, is

not a legal entity separate from its

owners. Because of this fact, for federal

income tax purposes, the partnership’s

income is not taxed at the partnership

level, but is attributed 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. A corporation’s income is said

to be taxed twice, once at the

corporation level, and again at the

shareholders’ level when the

shareholders receive the corporation’s

income as dividends.

Internal Revenue Service Rules

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. § 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

arrying 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 old IRS

regulations, if an association possessed

at least three of the four corporate

characteristics, then 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

for partnership tax treatment for Federal

income tax purposes.

Subchapter S Corporations

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

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. Also, there can

only be one class of stock in a

Subchapter S corporation, and no

nonresident aliens may be

shareholders.16

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.17 Wyoming

was the first State to authorize LLCs in

1977; since that time the remaining

forty-nine States and the District of

Columbia have all enacted LLC

statutes.18 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

form of business organization.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

An LLC is established by filing

articles of organization with the State.

These articles are roughly equivalent to

a corporation’s articles of incorporation

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

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 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 a

member’s interest in an LLC 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 exhibit all of 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. These

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ll

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. These

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48057

Federal Register / Vol. 67, No. 141 / Tuesday, July 23, 2002 / Proposed Rules

21 See Banking Act of 1935, Pub. L. 74–305, sec.

101, 49 Stat. 684.

22 See FDIC v. Philadelphia Gear Corp., 106 S. Ct.

1931, 1935 (1986).

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 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. Such member-

management also tends to be

inconsistent with the corporate attribute

of centralized management (usually a

board of directors) because there is no

central management group (i) that has

full authority to act for the entity, and

(ii) that is not so large or so small as to

present operational problems for the

entity. Third, members of an LLC are

generally not liable for the debts of the

LLC in excess of the amount of their

investment in the LLC and, therefore,

generally have limited liability. 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

membership without the consent of the

remaining members

,

generally have limited liability. 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

membership without the consent of the

remaining members. Such a provision

tends to be inconsistent with the

concept of free transferability of

interests because the requirement for

prior consent restrains or prevents the

transfer of an ownership interest.

III. Interpretation of ‘‘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 there is no legislative history

that sheds any light on their intent. The

phrase ‘‘incorporated under the laws of

any State’’ first appeared in the

definition of ‘‘State bank’’ with the

Banking Act of 1935.21 As noted above,

there is also no judicial guidance on the

meaning of ‘‘incorporated’’ as used in

the FDI Act. In the absence of such

guidance, the FDIC believes that it is

reasonable to interpret the term

‘‘incorporated’’ in such a way as to aid

the FDIC in carrying out the purposes of

the FDI Act. Specifically, the FDIC

believes that reviewing the corporate

attributes, in light of the purposes of the

FDI Act, may indicate a rational basis

for applying the ‘‘incorporated’’

requirement and may further indicate

which of the corporate attributes are

necessary or desirable for purposes of

determining which institutions qualify

as ‘‘State banks.’’

Congress created the Federal Deposit

Insurance Corporation in 1933 to restore

and maintain public confidence in the

nation’s banking system

the

FDI Act, may indicate a rational basis

for applying the ‘‘incorporated’’

requirement and may further indicate

which of the corporate attributes are

necessary or desirable for purposes of

determining which institutions qualify

as ‘‘State banks.’’

Congress created the Federal Deposit

Insurance Corporation in 1933 to restore

and maintain public confidence in the

nation’s banking system. One of the

principal purposes of the FDI Act is to

promote the safety and soundness of the

institutions whose deposits the FDIC

insures.22 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.

As noted above, the attributes that are

commonly identified as distinguishing a

corporation from other forms of

business organizations are: perpetual

succession, centralized management,

free transferability of interests, and

limited liability.

Perpetual Succession

The first attribute, perpetual

succession, is very important 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/she will be

able to retrieve his/her money when

desired. 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

money when

desired. 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 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.

The cost of resolving such an institution

would likely be significantly higher

than necessary as a result. Depositors of

the failed institution would be paid to

the extent of their insured deposits, and

then would have to open new accounts

with another institution. 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 would be substantial.

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 is also an

important attribute. Centralized

management in the form of a board of

directors provides the FDIC with a

discrete group of individuals who are

capable of acting for, and representing,

the institution in virtually all matters.

The typical rights, liabilities, powers,

and responsibilities of this group are

well established

e FDI Act.

Centralized Management

Centralized management is also an

important attribute. Centralized

management in the form of a board of

directors provides the FDIC with a

discrete group of individuals who are

capable of acting for, and representing,

the institution in virtually all matters.

The typical rights, liabilities, powers,

and responsibilities of this group are

well established. 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. If there is a large group of

owners, it may be excessively difficult

to conduct business in a timely fashion.

With a large group, activities such as

coordinating meetings, providing every

owner with information and notices,

determining who represents the

institution and the extent of his/her

authority become substantial

undertakings. If there are too few

owners, the group may not provide

sufficient management depth and

expertise. Ensuring that the institution

is run by experienced, competent

management may be especially difficult

if the owners do not happen to possess

adequate banking experience and

competence. Finally, removing an

individual from a management position

may be complicated when the manager

is also an owner of the institution.

Consequently, centralized management

is also an important attribute for

purposes of the FDI 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

e for

purposes of the FDI 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 and savings

associations are subject to periods of

economic stress just as other businesses

are, the FDIC believes that the owners

of banks and savings associations

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Federal Register / Vol. 67, No. 141 / Tuesday, July 23, 2002 / Proposed Rules

should also have limited liability to

encourage the maintenance of adequate

capital.

Free Transferability of Ownership

Interests

Finally, the free transferability of

ownership interests also tends to aid in

attracting and maintaining capital.

Requiring the prior consent of the

remaining owners in order to transfer an

ownership interest impairs an

institution’s ability to attract additional

investors. At worst, prior consent to a

transfer limits the pool of available

investors; at best, it delays the

additional investment. While the FDIC

currently insures approximately 700

mutual institutions (that issue no stock)

and more than 1700 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

ome 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.

In summary, the FDIC believes that all

of the above four attributes that are

peculiar to corporations are attributes

that a State bank should have in order

to be ‘‘incorporated’’ as used in the

definition of ‘‘State bank’’ in the FDI

Act. 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 proposed regulation reflects these

conclusions. It provides generally that a

banking institution that is chartered by

a State as an LLC will be deemed to be

‘‘incorporated’’ if it has each of the four

corporate attributes. The proposed

regulation also specifies that for

purposes of the FDI Act and the FDIC’s

regulations, an owner of an interest in

an LLC is 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 both ‘‘voting stock’’ and a

‘‘voting security.’’ 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.

IV

is 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 both ‘‘voting stock’’ and a

‘‘voting security.’’ 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.

IV. Request for Comments

The FDIC’s Board of Directors (Board)

is seeking comment on whether the

agency should permit a State bank that

is organized as an LLC to obtain Federal

deposit insurance; whether use of some

or all of the four corporate attributes is

the most appropriate method of

determining whether an institution is

‘‘incorporated;’’ and if not, how the term

‘‘incorporated’’ should be interpreted.

The Board invites comments on all of

the following questions:

1. Should the FDIC permit a State

bank that is organized as an LLC to

obtain Federal deposit insurance?

2. If so, should the FDIC interpret the

term ‘‘incorporated’’ utilizing some, all,

or none of the traditional four corporate

attributes?

3. If the FDIC should not utilize any

of the four corporate attributes, how

should it interpret the term

‘‘incorporated?’’

V. Paperwork Reduction Act

The proposed rule would 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.

VI. Regulatory Flexibilty Act

Pursuant to 5 U.S.C. 605(b) the FDIC

certifies that the proposed rule would

not have a significant economic impact

on a substantial number of small

businesses within the meaning of the

Regulatory Flexibility Act (5 U.S.C. 601

et seq.). The proposed rule describes the

circumstances under which 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

cant economic impact

on a substantial number of small

businesses within the meaning of the

Regulatory Flexibility Act (5 U.S.C. 601

et seq.). The proposed rule describes the

circumstances under which 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 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.

VII. Impact on Families

The proposed 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).

List of Subjects in 12 CFR Part 303

Administrative practice and

procedure, Authority delegations

(Government agencies), Bank deposit

insurance, Banks, banking, Foreign

banking, Golden parachute payments,

Reporting and recordkeeping

requirements, Savings associations.

The Board of Directors of the Federal

Deposit Insurance Corporation hereby

proposes to amend 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 § 303.15 is added to subpart A

to read as follows:

§ 303.15

Certain limited liability companies

deemed incorporated under State law.

ty 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 § 303.15 is added to subpart A

to read as follows:

§ 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), 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 LLC’s existence is

independent of the life or lives of its

owner(s) and specifically is not subject

to automatic termination, dissolution, or

suspension upon the happening of some

event including the death, disability,

bankruptcy, expulsion, or withdrawal of

an owner of the LLC;

(2) The LLC is managed by a board of

managers or directors that operates in

substantially the same manner as, and

has substantially the same rights,

powers, privileges, duties,

responsibilities, and composition as, a

board of directors of a State bank

chartered as a stock corporation;

(3) Each ownership interest in the

LLC, including all management rights

and voting rights, is transferable without

the consent of any other owner of the

LLC; and

(4) Each owner of the LLC is not liable

for the debts, liabilities, and obligations

of the LLC in excess of the amount of

the owner’s investment.

ition as, a

board of directors of a State bank

chartered as a stock corporation;

(3) Each ownership interest in the

LLC, including all management rights

and voting rights, is transferable without

the consent of any other owner of the

LLC; and

(4) Each owner of the LLC is not liable

for the debts, liabilities, and obligations

of the LLC in excess of the amount of

the owner’s investment.

(b) For purposes of the Federal

Deposit Insurance Act and chapter III,

title 12 of the Code of Federal

Regulations:

(1) The term ‘‘shareholder’’ includes

an owner of any interest in an LLC,

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Federal Register / Vol. 67, No. 141 / Tuesday, July 23, 2002 / Proposed Rules

including a member or participant of an

LLC;

(2) The term ‘‘director’’ includes a

manager, director, or other person with

substantially similar authority, of an

LLC;

(3) The terms ‘‘voting stock’’ and

‘‘voting securities’’ each includes

certificates or other evidence of

ownership interests in an LLC; and

(4) The term ‘‘officer’’ includes an

officer, or other person with

substantially similar authority, of an

LLC.

By order of the Board of Directors.

Dated at Washington, DC, this 12th day of

July, 2002.

Federal Deposit Insurance Corporation.

Valerie J. Best,

Assistant Executive Secretary/Supervisory

Counsel.

[FR Doc. 02–18467 Filed 7–22–02; 8:45 am]

BILLING CODE 6714–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 2000–NE–47–AD]

RIN 2120–AA64

Airworthiness Directives; Pratt and

Whitney PW4000 Series Turbofan

Engines

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: The Federal Aviation

Administration (FAA) proposes to

supersede an existing airworthiness

directive (AD), that is applicable to Pratt

and Whitney (PW) model PW4000 series

turbofan engines

–NE–47–AD]

RIN 2120–AA64

Airworthiness Directives; Pratt and

Whitney PW4000 Series Turbofan

Engines

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: The Federal Aviation

Administration (FAA) proposes to

supersede an existing airworthiness

directive (AD), that is applicable to Pratt

and Whitney (PW) model PW4000 series

turbofan engines. That AD currently

requires the number of PW4000 engines

with potentially reduced stability

margin to be limited to no more than

one engine on each airplane, and

removing engines that exceed high

pressure compressor (HPC) cycles-since-

overhaul (CSO) or cycles-since-new

(CSN) from service based on the

engine’s configuration and category.

That AD also requires establishing a

minimum build standard for engines

that are returned to service, and

performing cool-engine fuel spike

testing (Testing-21) on engines to be

returned to service after having

exceeded HPC cyclic limits or after shop

maintenance.

This proposal would establish

requirements similar to those in the

existing AD, and would introduce a

rules-based criterion to determine the

engine category classification for

engines installed on Airbus A300

airplanes. This proposal would also add

new requirements to manage the engine

configurations installed on Boeing 747

airplanes, and would require repetitive

Testing-21 to be performed on certain

configuration engines. This proposal

would also establish criteria which

would require Testing-21 on certain

engines with Phase 0 or Phase 1, FB2T

or FB2B fan blade configurations. In

addition, this proposal would re-

establish high pressure compressor

(HPC)-to-high pressure turbine (HPT)

cycles-since-overhaul (CSO) cyclic

mismatch criteria, and add criteria to

address engine installation changes,

engine transfers, and thrust rating

changes. Also, this proposal would

establish criteria to allow engine stagger

without performing Testing-21 for

engines over their respective limits

this proposal would re-

establish high pressure compressor

(HPC)-to-high pressure turbine (HPT)

cycles-since-overhaul (CSO) cyclic

mismatch criteria, and add criteria to

address engine installation changes,

engine transfers, and thrust rating

changes. Also, this proposal would

establish criteria to allow engine stagger

without performing Testing-21 for

engines over their respective limits.

This proposal is prompted by

investigation and evaluation of PW4000

series turbofan engines surge data, and

continuing reports of surges in the

PW4000 fleet. The actions specified by

this AD are intended to prevent engine

takeoff power losses due to HPC surge.

DATES: Comments must be received by

August 22, 2002.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), New England

Region, Office of the Regional Counsel,

Attention: Rules Docket No. 2000–NE–

47–AD, 12 New England Executive Park,

Burlington, MA 01803–5299. Comments

may be inspected at this location, by

appointment, between 8:00 a.m. and

4:30 p.m., Monday through Friday,

except Federal holidays. Comments may

also be sent via the Internet using the

following address: ‘‘9-ane-

adcomment@faa.gov’’. Comments sent

via the Internet must contain the docket

number in the subject line.

The service information referenced in

the proposed rule may be obtained from

Pratt & Whitney, 400 Main St., East

Hartford, CT 06108, telephone (860)

565–6600; fax (860) 565–4503. This

information may be examined, by

appointment, at the FAA, New England

Region, Office of the Regional Counsel,

12 New England Executive Park,

Burlington, MA.

FOR FURTHER INFORMATION CONTACT:

Diane Cook, Aerospace Engineer, Engine

Certification Office, FAA, Engine and

Propeller Directorate, 12 New England

Executive Park; telephone (781) 238–

7133; fax (781) 238–7199

fax (860) 565–4503. This

information may be examined, by

appointment, at the FAA, New England

Region, Office of the Regional Counsel,

12 New England Executive Park,

Burlington, MA.

FOR FURTHER INFORMATION CONTACT:

Diane Cook, Aerospace Engineer, Engine

Certification Office, FAA, Engine and

Propeller Directorate, 12 New England

Executive Park; telephone (781) 238–

7133; fax (781) 238–7199.

SUPPLEMENTARY INFORMATION:

Comments Invited

Interested persons are invited to

participate in the making of the

proposed rule by submitting such

written data, views, or arguments as

they may desire. Communications

should identify the Rules Docket

number and be submitted in triplicate to

the address specified above. All

communications received on or before

the closing date for comments, specified

above, will be considered before taking

action on the proposed rule. The

proposals contained in this action may

be changed in light of the comments

received.

Comments are specifically invited on

the overall regulatory, economic,

environmental, and energy aspects of

the proposed rule. All comments

submitted will be available, both before

and after the closing date for comments,

in the Rules Docket for examination by

interested persons. A report

summarizing each FAA-public contact

concerned with the substance of this

proposal will be filed in the Rules

Docket.

Commenters wishing the FAA to

acknowledge receipt of their comments

submitted in response to this action

must submit a self-addressed, stamped

postcard on which the following

statement is made: ‘‘Comments to

Docket Number 2000–NE–47–AD.’’ The

postcard will be date stamped and

returned to the commenter.

Availability of NPRM’s

Any person may obtain a copy of this

NPRM by submitting a request to the

FAA, New England Region, Office of the

Regional Counsel, Attention: Rules

Docket No. 2000–NE–47–AD, 12 New

England Executive Park, Burlington, MA

01803–5299

llowing

statement is made: ‘‘Comments to

Docket Number 2000–NE–47–AD.’’ The

postcard will be date stamped and

returned to the commenter.

Availability of NPRM’s

Any person may obtain a copy of this

NPRM by submitting a request to the

FAA, New England Region, Office of the

Regional Counsel, Attention: Rules

Docket No. 2000–NE–47–AD, 12 New

England Executive Park, Burlington, MA

01803–5299.

Discussion

On December 12, 2001, the Federal

Aviation Administration (FAA) issued

AD 2001–25–11, Amendment 39–12564

(67 FR 1, January 2, 2002) which applies

to PW model PW4000 series turbofan

engines. That AD was issued as an

interim action to address the engine

takeoff power loss events while

investigation continued. AD 2001–25–

11 requires:

• Limiting the number of engines

with the HPC cut-back stator (CBS)

configuration to one on each airplane

before further flight after the effective

date of that AD.

• Limiting the number of PW4000

engines with potentially reduced

stability margin, to no more than one

engine on each airplane.

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