As a general rule, there is no prohibition against a bank officer pledging shares of their bank stock to a third party, including a family member (although both state and federal law prohibit a bank from making a loan secured by shares of its own stock). Under the Illinois Banking Act, bank stock may be transferred in the same manner as other corporate stock.

However, there are a number of exceptions to this general rule.

If your bank retains a right of first refusal to repurchase the shares that the officer wants to transfer to a third party, the officer should not pledge the shares as collateral for the loan unless the bank waives its right to repurchase.

Also, pledging bank stock to a third party can raise change-in-control issues in some circumstances when the stock is seized after a default. Under both state and federal law, the power to vote 25% or more of the bank’s outstanding stock is considered a controlling interest in the bank. The Federal Deposit Insurance Act requires an institution to provide sixty days’ prior written notice to the appropriate federal banking agency of a proposed change in control, which may be denied. Similarly, the Illinois Banking Act requires any person who obtains ownership of stock that would constitute control of a bank to apply for a change in control to the IDFPR. When this approval is necessary for a change in control of a bank, the officer’s shares should not be pledged as collateral for a loan if this would result in the third-party lender obtaining a controlling interest in the bank upon the loan’s default.

In addition, the officer’s stock should not be pledged as collateral for the loan if the third-party lender has been convicted of any criminal offense involving dishonesty or a breach of trust or money laundering and is not allowed to participate in banking, and change-in-control or SEC filing issues are involved.

This list is not exhaustive, and while most cases will be subject to the general rule, we advise you to review the specific details of the loan and the stock being pledged with your bank counsel to determine if the officer may pledge the shares.

For resources related to our guidance, please see:

• Illinois Banking Act, 205 ILCS 5/15(7) (“Shares of stock shall be transferable in accordance with the general laws of this State governing the transfer of corporate shares.”)

• Illinois Banking Act, 205 ILCS 5/18(a) (“Before any person . . . may cause may cause (i) a change to occur in the ownership of outstanding stock of any State bank, whether by sale and purchase, gift, bequest or inheritance, or any other means, including the acquisition of stock of the State bank by any bank holding company, which will result in control or a change in the control of the bank . . . the Secretary shall be of the opinion and find: . . . “)

• Illinois Banking Act, 205 ILCS 5/1 (“’Secretary’ means the Secretary of Financial and Professional Regulation, or a person authorized by the Secretary or by this Act to act in the Secretary's stead.”)

• Illinois Banking Act, 205 ILCS 5/18(h) (“As used in this Section: ‘control’ means the power, directly or indirectly, to direct the management or policies of the bank or to vote 25% or more of the outstanding stock of the bank. . . . “)

• Illinois Banking Act, 205 ILCS 5/18(b-1) (“Any person . . . who obtains ownership of stock of an existing State bank . . . by gift, bequest, or inheritance such that ownership of the stock would constitute control of the State bank . . . may obtain title and ownership of the stock, but may not exercise management or control of the business and affairs of the bank or vote his or her shares so as to exercise management or control unless and until the Secretary approves an application for the change of control as provided in subsection (b) of this Section.”)

• Federal Deposit Insurance Act, 12 USC 1817(j)(1) (“No person . . . shall acquire control of any insured depository institution through a purchase, assignment, transfer, pledge, or other disposition of voting stock of such insured depository institution unless the appropriate Federal banking agency has been given sixty days’ prior written notice of such proposed acquisition and within that time period the agency has not issued a notice disapproving the proposed acquisition or, in the discretion of the agency, extending for an additional 30 days the period during which such a disapproval may issue. . . . ”)

• Federal Deposit Insurance Act, 12 USC 1817(j)(8) (“For the purposes of this subsection, the term— (A) ‘person’ means an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity not specifically listed herein; and (B) ‘control’ means the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25 per centum or more of any class of voting securities of an insured depository institution.”)

• Federal Deposit Insurance Act, 12 USC 1829(a)(1) (“Except with the prior written consent of the Corporation (A) any person who has been convicted of any criminal offense involving dishonesty or a breach of trust or money laundering, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense, may not— (i) become, or continue as, an institution-affiliated party with respect to any insured depository institution; (ii) own or control, directly or indirectly, any insured depository institution