[Federal Register Volume 62, Number 40 (Friday, February 28, 1997)]
[Rules and Regulations]
[Pages 9290-9344]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4906]
[[Page 9289]]
_______________________________________________________________________
Part III
Federal Reserve System
_______________________________________________________________________
12 CFR Part 225
Bank Holding Companies and Change in Bank Control (Regulation Y); Final
Rule
Federal Register / Vol. 62, No. 40 / Friday, February 28, 1997 /
Rules and Regulations
[[Page 9290]]
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Reg. Y; Docket Nos. R-0935; R-0936]
Bank Holding Companies and Change in Bank Control (Regulation Y)
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board has adopted comprehensive amendments to Regulation Y
that improve the competitiveness of bank holding companies by
eliminating unnecessary regulatory burden and operating restrictions,
and by streamlining the application/notice process. Among other
revisions, the final rule incorporates a streamlined and expedited
review process for bank acquisition proposals by well-run bank holding
companies with a number of modifications intended to broaden and
improve public notice of bank acquisition proposals, to assure that the
regulatory filing is made well within the public comment period, and to
better assure that proposals reviewed under the streamlined procedures
do not raise issues under the statutory factors in the Bank Holding
Company Act.
The final rule also implements the changes enacted in the Economic
Growth and Regulatory Paperwork Reduction Act of 1996 that eliminate
certain notice and approval requirements and streamline others that
involve nonbanking proposals by well-run bank holding companies. The
final rule also includes a reorganized and expanded regulatory list of
permissible nonbanking activities and removes a number of restrictions
on those activities that are outmoded, have been superseded by Board
order or do not apply to insured banks that conduct the same activity.
In addition, the final rule incorporates several amendments to the
tying restrictions, including removal of the regulatory extension of
those restrictions to bank holding companies and their nonbank
subsidiaries. A number of other changes have also been included to
eliminate unnecessary regulatory burden and to streamline and modernize
Regulation Y, including changes to the provisions implementing the
Change in Bank Control Act and section 914 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989.
EFFECTIVE DATE: April 21, 1997.
FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General
Counsel (202/452-3583), Diane A. Koonjy, Senior Attorney (202/452-
3274), Thomas R. Corsi, Senior Attorney (202/452-3275), Lisa R.
Chavarria, Attorney (202/452-3904), Satish M. Kini, Attorney (202/452-
3818), Gregory A. Baer, Managing Senior Counsel (202/452-3236), Legal
Division; Molly Wassom, Assistant Director (202/452-2305), Sid Sussan,
Assistant Director (202/452-2638), Nicholas A. Kalambokidis, Project
Manager (202/452-3830), David Reilly, Supervisory Financial Analyst
(202/452-5214), Division of Banking Supervision and Regulation, Board
of Governors of the Federal Reserve System. For the hearing impaired
only, Telecommunication Device for the Deaf (TDD), Dorothea Thompson
(202/452-3544), Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue, NW., Washington, DC.
SUPPLEMENTARY INFORMATION:
Background and Summary of Final Action
On August 28, 1996, the Board proposed comprehensive revisions to
Regulation Y designed to eliminate unnecessary regulatory burden and
paperwork, improve efficiency and eliminate unwarranted constraints on
credit availability while faithfully implementing the statutory
requirements that form the bases for Regulation Y. (61 FR 47242
(September 6, 1996)). The Board proposed these revisions after
conducting the review of its regulations required by section 303 of the
Riegle Community Development and Regulatory Improvement Act of 1994
(``Riegle Act''). Regulation Y governs the corporate practices and
nonbanking activities of bank holding companies, sets forth the
procedures for a company to become a bank holding company and for a
bank holding company to seek Federal Reserve System (``System'')
approval for a bank acquisition or a nonbanking proposal under the Bank
Holding Company Act (``BHC Act''), implements the prohibitions on
tying, implements the prior notice requirements of the Change in Bank
Control Act (governing the acquisition of control of a bank or bank
holding company by an individual) and section 914 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (governing
appointment of senior officers and directors of certain banks and bank
holding companies), and implements other provisions of law applicable
to bank holding companies.
The changes proposed by the Board to Regulation Y included removal
of a number of restrictions on the permissible nonbanking activities of
bank holding companies, expansion and reorganization of the regulatory
list of permissible nonbanking activities, streamlining of the
application/notice process, revisions to the tying rules, and
streamlining of the procedures governing change in bank control notices
and senior executive officer and director appointments. On September
30, 1996, Congress, in the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (``Regulatory Relief Act''), enacted several
complementary changes to the BHC Act, primarily reducing the burden
associated with seeking approval of nonbanking proposals. On October
23, 1996, the Board proposed, on an interim basis, a definition of a
well-capitalized bank holding company for purposes of the procedures
enacted in the Regulatory Relief Act. (61 FR 56404 (November 1, 1996)).
The Board received over 300 comments regarding its proposal. The
comments reflected the views and suggestions of a wide cross-section of
interested persons, including bank holding companies, community groups
and representatives, trade associations, individuals, law firms,
Congressional representatives, state and local government and
supervisory officials, and others. The commenters enthusiastically
supported the Board's proposal to establish a streamlined procedure for
well-run bank holding companies to engage in nonbanking activities and
make nonbanking acquisitions, to remove unnecessary or outmoded
restrictions on nonbanking activities, and to expand the regulatory
list of permissible nonbanking activities. Commenters also applauded
the proposed amendments to the tying provisions that would enhance the
ability of banking organizations to provide customer discounts on
services. In addition, commenters supported the proposed streamlining
of the provisions governing a change in control of state member banks
and bank holding companies and the appointment of new directors and
senior executive officers.
A significant number of commenters, representing primarily bank
holding companies and banking industry trade associations and
representatives, also strongly supported the Board's proposal to
establish a streamlined procedure for well-run bank holding companies
to seek System approval to acquire additional banks within certain
limits. On the other hand, a large number of commenters, consisting
primarily of community representatives and groups, and individuals,
strongly opposed any change to the Board's current procedure
[[Page 9291]]
governing bank acquisitions, in general, and adoption of the Board's
proposed streamlined review process, in particular.
After carefully reviewing the comments, the Board has adopted a
final rule that largely incorporates the initiatives contained in its
proposal. The Board has made a number of revisions in response to
concerns, suggestions and information provided by commenters. In
particular, the Board has changed in several respects the streamlined
procedure governing bank acquisitions and has adopted a number of
measures designed to broaden and improve public notice of acquisition
proposals. These changes focus on assuring that interested persons will
have a meaningful opportunity to provide the Board with information
regarding acquisition proposals. These and other changes adopted by the
Board in response to concerns and suggestions raised by commenters are
discussed in more detail below.
A number of comments addressed matters that are better addressed in
supervisory policy statements or guidelines governing specific
activities or in the context of an individual proposal. Many other
matters raised by commenters, including suggestions regarding venture
capital and portfolio investment activities and the scope of a bank
holding company's authority to acquire shares of investment companies
under section 4(c)(7) of the BHC Act, were not addressed in the
original proposal and remain under active review.
Explanation of Final Rule
A. Process for Seeking Approval of Bank and Nonbank Acquisitions
The Board's review of its current procedures for evaluating
applications and notices identified two important principles that could
be applied by the Board to reduce the burden associated with those
procedures. One principle is that well-run bank holding companies that
meet objective and verifiable measures for each of the criteria set
forth in the BHC Act should be able to expect little burden or delay
from the approval process unless special circumstances demonstrate that
a closer review is warranted. The other principle is that the
application/notice process should focus on an analysis of the effects
of the specific proposal and should not become a vehicle for
comprehensively evaluating and addressing supervisory and compliance
issues that can more effectively be addressed in the supervisory
process.
These principles guided the Board's decision to propose both
procedural and substantive changes to the application/notice process in
August 1996. In particular, the Board proposed to use the application/
notice process as a gateway for identifying (and rejecting)
organizations that do not have the resources or expertise to make an
acquisition or conduct a particular activity, and to rely on the on-
site inspection and supervisory process as the most effective way to
determine if a particular organization is in fact managing its
subsidiaries or conducting an approved activity in a safe and sound
manner and within its authority.
In addition, the Board proposed to establish a streamlined process
for reviewing proposals by well-run bank holding companies and reducing
the information required to be filed for proposals that qualify for the
streamlined procedure. The Board also proposed a number of other
revisions that would eliminate unnecessary burden from the application/
notice process, including eliminating the pre-acceptance procedure for
all bank acquisition proposals, permitting public notice of an
acquisition proposal to be published up to 30 days before the final
regulatory filing was submitted to the System, and permitting the
waiver of applications involving solely internal corporate
reorganizations.
The final rule adopted by the Board incorporates these proposed
changes with a number of important modifications discussed below.
1. Streamlined Procedure
The Board proposed a streamlined 15-day notice procedure for
proposals by well-capitalized and well-managed bank holding companies
with satisfactory or better performance ratings under the Community
Reinvestment Act of 1977 (``CRA'') to acquire banks and nonbanking
companies within certain size limits. The Board's original proposal
retained the Board's current requirements that public notice of all
bank acquisitions be provided (both by newspaper and by Federal
Register) and that the public be provided at least a 30-day opportunity
to submit comments to the System regarding a proposed bank acquisition.
These notice and comment provisions applied equally to proposals that
qualified for the streamlined procedure and to proposals reviewed under
the normal 30/60-day procedures.
Many commenters strongly supported the establishment of a
streamlined procedure for proposals by well-run bank holding companies
that do not raise significant issues. These commenters indicated that
the current approval procedure is burdensome and costly, particularly
in the case of smaller acquisitions that do not raise any significant
issue under the BHC Act. Commenters stated that the current process
increases the risks and costs associated with an acquisition by
imposing unnecessary delay in consummating both bank and nonbank
acquisition proposals. This delay also increases the potential for loss
of key employees, customer relationships and franchise value. In
addition, commenters argued that delay in approving clearly permissible
transactions postpones the realization by the holding company and the
community of the benefits of the transaction and, in the case of a
nonbanking proposal, puts bank holding companies at a disadvantage in
competing with unregulated entities vying for the same target company.
Moreover, commenters indicated that the management, legal and other
resources required to prepare an application/notice under the current
procedures are significant.
These commenters agreed that a streamlined procedure would reduce
regulatory burden substantially by reducing the costs to bank holding
companies of preparing applications as well as the costs associated
with the delay inherent in the regulatory review process. Many
commenters also stated that these changes would improve the ability of
bank holding companies to be competitive with unregulated entities in
making nonbanking acquisitions and engaging de novo in permissible
nonbanking activities.
Several of these commenters urged the Board to take the additional
step of reducing or eliminating the public comment period for proposals
by banking organizations, or permitting a safe-harbor from comments if
the banking organization maintains satisfactory or better CRA
performance ratings or the comment relates to a matter that was
reviewed in the CRA examination. These commenters argued that neither
the BHC Act nor the CRA requires that public notice be provided for
bank acquisition proposals, and that comments on the CRA performance of
insured institutions would be more effective if provided in the CRA
examination process. These commenters also contended that the delay
associated with the requirement that the Board consider all public
comments under a more protracted procedure is costly and delays the
ability of well-run organizations to pass on benefits of an acquisition
to the affected communities. In addition, they argued that providing a
safe harbor from public comments for
[[Page 9292]]
organizations with satisfactory or better CRA performance ratings would
provide an incentive for institutions to achieve better CRA performance
ratings.
On the other hand, a significant number of commenters, including
various community groups, believe that the current procedures for
reviewing bank acquisition proposals work well and that no change to
the current process is necessary. These commenters argued that the
current 30/60-day procedure strikes an important balance between the
banking industry's need for regulatory action within a limited period
of time and the community's need to have a meaningful opportunity to
discuss with the acquiring company the potential effects of a proposed
bank acquisition and participate in the System review process. These
commenters also expressed concern that the revisions proposed by the
Board would weaken the review process for bank acquisition proposals by
reducing the attention the System would pay to certain proposals, and
would erode the ability of interested members of the public to provide
information to the System for consideration in an analysis of the
convenience and needs factor, the CRA performance record, and other
aspects of a bank acquisition proposal. In addition, a number of these
commenters argued that the Board should not adopt its proposed
streamlined procedure for bank acquisition proposals by well-run bank
holding companies because the Regulatory Relief Act adopts streamlined
procedures only for nonbanking proposals and indicates that Congress
rejected applying a similar streamlined approach to reviewing bank
acquisitions.
The Board believes that it is important to address the concerns of
both sets of commenters. The Board believes that it is sound public
policy, in addition to being consistent with the Riegle Act, that the
Board revise its application/notice process to reduce any unnecessary
regulatory costs and burdens associated with that process. At the same
time, the Board believes that revisions to its application/notice
process should not diminish the quality of its review of transactions.
In addition, the Board strongly believes that public participation in
the application/notice process is important because it provides the
Board with useful information, in particular, information regarding the
effect of transactions on the relevant communities.
As the Board noted in its original proposal, the Board reviews
approximately 1,300 applications and notices each year under the BHC
Act. While these proposals include some complex and large proposals,
the overwhelming preponderance are relatively simple proposals that
raise no issues under the statutory factors that the Board is required
to consider. In more than 90 percent of the cases submitted to the
System, no public comment is submitted. Currently, these cases are
largely considered and approved by the Reserve Banks under delegated
authority in a process that involves a pre-acceptance period of on
average 25 days and final action about 30 days following the date of
acceptance of a filing.
In these cases, the Board believes that there is room to revise the
current review process to reduce paperwork and regulatory burden. The
Board believes that this reduction in burden can be accomplished
without diminishing the System's review of the statutory factors in any
case or the opportunity for the public to provide information to the
System that is relevant to the statutory factors. Importantly, the
Board is maintaining the public notice and period for public comment
that currently apply to bank acquisitions, including bank acquisitions
reviewed under the streamlined procedures.
Accordingly, the final rule adopts the streamlined review process
originally proposed by the Board, with several important modifications.
These changes are in response to specific concerns raised by commenters
and are designed to provide earlier and broader public notice of
acquisition proposals, better access to regulatory filings, and to
assure that the public continues to have a meaningful opportunity to
provide the System with relevant information regarding proposals
subject to System review. The Board believes that adoption of a
streamlined process for bank acquisitions as well as all of the other
revisions proposed by the Board to Regulation Y are within the
authority of the Board under the current BHC Act and do not require
statutory changes.
The changes to the original proposal adopted in the final rule are
discussed more fully below and include the following:
* Timing of Publication. The regulatory filing for a bank or
nonbank acquisition proposal must be made within 15 calendar days of
publication of the request for comment on the proposal (as opposed to 7
days under the current procedure and 30 days under the original
proposed revisions);
* New Methods of Public Notice. In order to make public notice
available earlier, a new list of all bank and nonbank acquisition
proposals subject to System review will be prepared weekly and updated
every 3 days, and made available to all interested parties using three
methods: by mail (on a weekly basis), through a dedicated fax-on-demand
facility (available 24 hours every day), and on the Board's Internet
Home Page;
* Information Regarding Convenience and Needs. The regulatory
filing under the streamlined procedure will retain the current
requirement that the filer briefly describe the proposed transaction
and the parties to the transaction, and, in the case of a bank or
thrift acquisition, will require (as under the current procedure) a
brief discussion of the effects of the proposal on the convenience and
needs of the community and of steps that are being taken by the
acquiring company to address weaknesses at insured institutions that
have not received at least a satisfactory CRA performance rating;
* Convenience and Needs Standard. In the case of a bank or thrift
acquisition, the standards for qualifying for the streamlined procedure
have been modified to require the acquiring bank holding company to
show that the transaction is consistent with the convenience and needs
standard in the BHC Act as well as requiring that the CRA performance
rating of the lead insured institution and insured institutions with at
least 80 percent of the assets of the acquiring bank holding company be
satisfactory or better;
* Timely Comments Require Full Consideration. A provision has been
added specifying that a proposal filed under the streamlined procedure
will be reviewed under the normal 30/60 day review process if a
substantive written comment is received by the System during the public
comment period;
* Guidance in Defining Substantive Comments. A provision has been
added describing generally the types of comments that would be
considered substantive (this provision contemplates that the vast
majority of comments that are now considered by the Board would
continue to be reviewed by the Board);
* Extensions to Obtain Filing. A provision has been added
incorporating the Board's current policy of exercising discretion,
based on the facts and circumstances, to grant an extension of the
public comment period of 1 to 15 days to an interested member of the
public that has made a timely request for a copy of the regulatory
filing on a proposal (this extension will not itself disqualify a
proposal from consideration under the streamlined procedure);
* Joint Extension Requests. A provision has been added reflecting
the Board's current policy of permitting a
[[Page 9293]]
reasonable extension of the public comment period where the extension
is jointly requested by an interested person and the applicant (for
example, in order to permit completion of discussions between the
applicant and the interested person); and,
* Size Limitation. A size limitation of $7.5 billion on any
individual acquisition that may qualify for the streamlined procedures
has been added as well as a limitation of 15 percent of the
consolidated total capital of the acquiring company on the total
consideration that may be paid in the case of the acquisition of a
nonbanking company.
Under the new rule, bank and thrift acquisition proposals that meet
the qualifying criteria in the regulation would be considered under a
streamlined procedure that allows System action 3 business days
following the close of the public comment period. This streamlined
review process will allow System action on a qualifying proposal
typically between 18 and 21 calendar days after the regulatory filing
is made with the System. In addition, the regulatory filing required in
these cases includes less paperwork than under the current procedures.
Cases that are complex, or that raise an issue of first impression,
issues of safety and soundness or other concerns, or that raise
concerns regarding the effect of the proposal in the relevant
communities will, as under the Board's current rules and policies,
receive more in-depth analysis. Moreover, the Board retains the ability
to notify a bank holding company for any reason that the streamlined
notice procedure is not available and that the normal 30/60-day
procedure must be followed.
The final rule eliminates unnecessary delay in all bank acquisition
proposals by eliminating the current pre-acceptance period. Elimination
of this period reduces the System review process by an average of 25
days. The function of this pre-acceptance period was to collect
information regarding the specific proposal that may not be described
in the original filing. The Board's experience in reviewing nonbanking
proposals (which are not subject to a pre-acceptance review period)
indicates that this period is not necessary and that the System is able
to request and obtain additional information in a timely fashion during
the normal review period that begins after acceptance of the regulatory
filing. The final rule allows the System to continue to request
additional information at any time and to return as incomplete any
filing that does not contain the information prescribed in the
regulation.
The final rule also adopts the procedures established in the
Regulatory Relief Act regarding nonbanking proposals. These provisions
eliminate the prior notice and approval requirements of the BHC Act for
any bank holding company that meets the qualifying criteria to engage
de novo in any nonbanking activity approved by the Board by regulation.
In addition, the Regulatory Relief Act established a streamlined 12-
business day review process for proposals by well-run bank holding
companies to acquire a company (other than an insured depository
institution) engaged in permissible nonbanking activities or to engage
de novo in nonbanking activities approved only by order.
A company or proposal that does not qualify for the streamlined
procedure would follow the current application process, which provides
for Reserve Bank action within 30 days of filing and for Board action
within 60 days of filing. In the event that the System determines that
a proposal filed under the streamlined procedure must be reviewed under
the normal 30/60-day procedure, the final rule provides that the notice
filed under the streamlined procedure would be accepted under the
normal procedure and the normal procedure would be deemed to have begun
at the time the notice was filed under the streamlined procedure. In
cases that have been shifted from the streamlined to the normal
processing schedule, the Reserve Bank and the Board would determine
whether information supplementing the streamlined filing is needed to
address the relevant issues. As in any case, the System may request any
additional information during the processing period necessary to
resolve issues related to the proposal.
2. Public Participation in Review Process
a. Public Notice
The original proposal retained the current requirement for public
notice of all acquisition proposals, including a full 30-day public
comment period for bank acquisition proposals. As noted above, the
final rule retains the current public notice requirement and 30-day
public comment period for bank acquisition proposals, including
proposals that qualify for the streamlined procedure. Public notice of
these proposals would continue to be given through newspaper
publications in the affected communities and through publication in the
Federal Register, as required under the Board's current procedures.
The Regulatory Relief Act amended section 4 of the BHC Act to
eliminate the requirement for public notice of certain nonbanking
acquisition proposals by qualifying bank holding companies. The final
rule implements the statutory changes enacted by the Regulatory Relief
Act. Public notice of all acquisitions of insured depository
institutions, including savings associations, is still required,
however, and would mirror the notice requirements applicable to bank
acquisition proposals. In addition, public notice would continue to be
required for nonbank proposals that do not qualify for the streamlined
procedures under the Regulatory Relief Act, and for any proposal that
involves a new activity that has not previously been determined by the
Board to be closely related to banking.
b. Steps To Improve Public Notice
In connection with its revision of the current procedures, the
Board will implement three steps that are designed to improve the
effectiveness and timeliness of the public notice of acquisition
proposals. First, the Board will publish a new listing of all
acquisition proposals submitted for System approval under the BHC Act.
This new document will include all bank acquisition proposals that have
been published for comment, whether submitted under the streamlined or
normal procedures, as well as proposals to acquire a nonbanking company
that require public notice. This new document will be updated at least
weekly and will indicate the applicant and target organization, the
date that the public comment period closes, and the Reserve Bank to
which public comments may be sent. The new document will be a more
comprehensive list of cases open to public comment than the current H-2
(which includes only application/notices that have been filed with the
System and does not generally indicate proposals that have been
published for comment but not yet filed), and will be more quickly
available than the current H-2 (which includes a list of Board and
Reserve Bank final actions and other information that often requires a
longer time to assemble). This document will be available by mail.
Second, to expedite distribution of this information, the Board
will make the new document available through a fax-on-demand call-in
facility. This facility will be available 24 hours a day, 7 days a
week, and will automatically fax a copy of the new document to any
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caller. The information available on the fax call-in facility will be
updated at least every three business days.
Third, the Board will make the new document available on its
Internet Home Page, along with other information, including a list of
actions taken by the System on applications and notices. Thus, the
Board's Internet Home Page will include a list of all acquisition
proposals requiring System approval under the BHC Act that have been
published for public comment. This list will identify the applicant,
target organization, closing date for the public comment period, and
the Reserve Bank to which comments may be submitted. This information,
like the fax call-in information, will be updated at least every 3
business days to reflect the addition of new proposals.
As a complement to providing broader and earlier public notice, the
Board will make regulatory filings more quickly available to the
public. The System expects to make the public portion of all pending
applications/notices available to the public within 3 business days of
filing.
c. Timing of Publication
Several commenters supported allowing an applying bank holding
company to publish notice of a proposal up to 30 days in advance of
filing the required application/notice for System approval. This would
permit publication at a time closer to the announcement date of a
proposed acquisition.
A large number of other commenters, however, suggested that
permitting an applicant to publish notice 30 days before submitting an
application/notice to the System would effectively deprive the public
of an opportunity to comment on the information contained in the
filing. These commenters were particularly concerned that this would
result in less informed comments and would force commenters to express
concerns relating to factors, such as the effect of the proposal on the
convenience and needs of the community or CRA performance, without
reviewing the plans of an applicant to address these matters or
discussing these plans with the applicant.
In light of the comments, the Board has determined to adopt a
revised approach that permits publication up to 15 days prior to the
submission of the required filing. Under the Board's current rules,
publication may occur up to 7 days prior to submission of the
application. Allowing a slightly earlier publication date will allow
for a shorter regulatory process in cases that meet the criteria for
expedited action while at the same time assuring that the required
filing will be available to the public for a significant part of the
public comment period.
To address the possibility that a filing may not be submitted
during the first 15 days of the public comment period, the final rule
incorporates the Board's current policy that the Board may, in its
discretion and based on the facts and circumstances, permit an
extension of the public comment period, of an appropriate length up to
15 days, for an interested person that makes a timely request for both
a copy of the required regulatory filing and additional time to file a
comment regarding a proposal. In considering whether to grant a request
for an extension, and the length of the extension to be granted, the
Board has in the past and will continue to take into account such
factors as when the proposal was announced and the regulatory filing
made available to the public, when the request for the regulatory
filing was made, and the specific reasons given by the requester for
being unable to file a timely comment. A decision to grant an extension
of the public comment period would not disqualify a proposal from
action under the streamlined procedure.
d. Joint Requests To Extend the Comment Period
A number of commenters argued that a shortened processing period
would frustrate the ability of community groups to conduct discussions
with applicants in connection with a bank acquisition proposal
regarding lending and other programs to help meet the convenience and
needs of the community. These commenters indicated that a shorter
regulatory review period would truncate the period for these
discussions and potentially force premature objections to acquisition
proposals, especially in situations that involve the initial entry of a
banking organization into the community.
The Board believes that discussions between an insured institution
and community representatives for purposes of identifying and helping
to serve the banking needs of the community are appropriately and most
effectively conducted throughout the year and should not be confined to
the period when an acquisition proposal is under review. In the
application/notice context, the Board has granted requests for an
extension of the public comment period that were made jointly by an
interested party and an applicant for the purpose of allowing
completion of discussions regarding a matter, such as CRA performance
or competitive divestitures, that is relevant to the statutory factors
the Board must consider in reviewing the proposal. The final rule
specifically incorporates this policy and states that a reasonable
extension of the public comment period will be granted upon a joint
request of an interested member of the public and the applicant. This
type of extension will not disqualify an otherwise qualifying proposal
from consideration under the streamlined procedure.
e. Protested Cases
The streamlined procedure proposed by the Board provided that the
Board could require an applicant to follow the current 30 or 60 day
procedure if the Board indicates to the applicant for any reason that
the proposal does not qualify for the streamlined process. The Board
also stated that it expected that proposals by well-run bank holding
companies would be disqualified only sparingly and in extraordinary
situations. Among the situations identified by the Board as meriting
review under the normal 30/60-day procedure is the situation where a
timely substantive public comment is received by the System that raises
an issue that cannot be resolved by the Reserve Bank under its
delegated authority.
A number of commenters argued that the Board should not disqualify
a proposal from consideration under the streamlined process on the
basis of a public comment regarding CRA or fair lending performance if
the applicant organization's insured depository institutions have
satisfactory or better CRA performance ratings or if the comment
relates to a matter that was reviewed in the CRA examination process.
Other commenters argued that a proposal should not be disqualified from
streamlined processing if a comment is submitted that relates to
information that is available to the Board outside the application
process (such as HMDA data) or a matter uniquely within the Board's
expertise (such as financial, managerial or competitive matters), or if
the commenter has not first attempted to discuss the concerns with the
acquiring organization outside the approval process.
On the other hand, a large number of community groups and
representatives argued that the application/notice process provides an
important opportunity for members of the public and representatives of
affected communities to provide information to the System relating to
the impact of a proposal on the community. These
[[Page 9295]]
commenters argued that it is critical to preserve the ability of the
public to have input into the government review process and for the
Board to take a close look at proposals that raise concern in the
affected community. These commenters argued that the Board should
indicate in the regulation that submission of a comment would trigger
the normal 30/60-day processing period.
The Board had indicated in its original proposal that the filing of
a timely comment could trigger the normal review process, and has
adopted the suggestion of commenters that this be specifically included
in the rule. Thus, the final rule provides that the normal 30/60-day
process applies in any case in which a timely substantive comment
regarding a proposal is received by the System. A proposal that is
considered under the normal process will be acted on as soon as the
System completes its review of the proposal, which may be before
expiration of the 30 or 60 day period.
The final rule provides that a comment will be considered timely if
it is submitted in writing and is received by the appropriate Reserve
Bank or by the Board before the expiration of the public comment
period. A comment will be considered to be substantive unless the
comment involves individual complaints, or raises frivolous,
previously-considered or unsubstantiated claims, or irrelevant
issues.1 The Board notes that under this standard the vast
majority of comments that have in the past been considered by the Board
will continue to be viewed as substantive and will continue to be
reviewed by the Board. A comment that is delegable will be carefully
weighed in the review process by the Reserve Bank and any action taken
by the Reserve Bank is subject to review by the Board. The Reserve Bank
may seek additional information necessary to evaluate any delegable
comment and may refer a comment for investigation to the appropriate
federal banking agency or other relevant agency, if appropriate.
---------------------------------------------------------------------------
\1\ The Board will develop supervisory guidance identifying the
limited types of comments that may be considered under delegated
authority.
---------------------------------------------------------------------------
f. Late Comments
In its original proposal, the Board proposed to adhere to its
current rules governing consideration of public comments, and to
discontinue its practice of routinely considering comments, including
supplemental comments filed by a timely commenter, that are filed after
the close of the public comment period. The Board's Rules of Procedure
currently provide that the Board is required to consider a comment
involving an application or notice only if the comment is in writing
and is received by the System prior to the expiration of the public
comment period.
A number of commenters argued that the Board should continue
routinely to consider late comments. Many of these comments focused on
the potential under the original proposal that the public comment
period could expire prior to the time that the regulatory filing was
made and that any comment based on the regulatory filing was,
therefore, likely to be late. Other commenters contended that public
notice of proposals and of the closing date of the comment period is
not adequate under the current rule, and, consequently, that late
comments should be accepted and considered. In addition, commenters
argued that the approval process is an important opportunity for the
community to participate in the review of transactions that will
directly affect the community, and that leeway should be given to the
community to submit late comments. A number of community groups
indicated that discussions with applicants, particularly applicants
entering a community for the first time, often require substantial time
and cannot always be completed during the public comment period.
The Board believes that the public often provides the System with
important information in connection with acquisitions subject to System
review. Consequently, the Board has determined to provide public notice
and a significant period for public comment for all bank acquisition
proposals subject to System review under the BHC Act, including
proposals that qualify for the streamlined procedures.
As noted above, the Board has also taken a number of significant
steps to improve the effectiveness of the public notice regarding bank
acquisition proposals, including establishing a public listing focused
on acquisitions that are subject to public comment and System review
and making this list available by mail, Internet and fax. In addition,
the Board has amended its original proposal to assure that the
regulatory filing will be submitted at least 15 days prior to the
expiration of the public comment period, and has reiterated its
policies regarding extensions of the public comment period to
accommodate joint discussions between members of the public and
applicants as well as timely requests for a regulatory submission that
has been filed after the start of the public comment period.
Moreover, the Board notes that the public may at any time submit
comments regarding the effectiveness of an insured depository
institution in meeting the convenience and needs of the community for
consideration in connection with the on-site examination of the CRA
performance of the institution. The CRA examination process involves a
review of the actual lending performance of an institution and includes
discussions by examiners with members of the public regarding the
institution's performance. Comments submitted for consideration in the
CRA examination process provide the most effective opportunity for the
public to affect the CRA performance and CRA rating of any institution
and provide a regularly re-occurring opportunity for public input.
For these reasons, the Board has determined to adhere to its
established rules regarding the filing of comments on proposals subject
to System review. Accordingly, the Board will not consider comments,
including supplemental comments filed by a timely commenter, that are
submitted after the close of the public comment period and the filing
of a late comment will not disqualify a proposal from review under the
streamlined procedure. The Board continues to reserve the right to
consider late comments at its discretion, but expects to exercise that
discretion only in extraordinary circumstances.
3. Information Requirements
For transactions that qualify for the streamlined procedure, the
Board proposed to reduce substantially the information required to be
filed with the System. For example, the Board proposed to eliminate the
requirement that the applicant submit financial information otherwise
available to the System and the requirement that the applicant provide
competitive data in cases that meet the Board's and the Department of
Justice's policies.
Many commenters applauded the reduction in information requirements
for proposals that meet the criteria for streamlined processing.
Commenters noted that the costs of preparing an application/notice are
often substantial and argued that these costs are unnecessary in cases
that meet objective criteria and do not raise any regulatory issue.
Commenters believed that the savings would be substantial from reducing
the paperwork associated with applications and notices.
A number of other commenters expressed concern that elimination of
certain information requirements from the regulatory filing would
reduce the
[[Page 9296]]
ability of the System adequately to review a proposal and of commenters
to assess the consequences of the proposal for the communities
involved. In particular, a large number of commenters objected to
eliminating the portion of the current application that requires an
applicant to explain the effect of a bank acquisition on the
convenience and needs of the affected communities. Commenters found
this information especially helpful in understanding the effect of a
proposal by an organization located outside the community to make its
initial entry into the community.
The original proposal retained the requirement that applicants
briefly describe the proposed transaction and the institutions
involved, as well as the type of funding proposed. The final rule
continues to require this information.
As an initial matter, the Board believes that very little
additional information is needed to evaluate the financial, managerial
and competitive factors regarding the types of non-complex proposals
that qualify for streamlined processing. The System already receives,
through reports and examinations, substantial information regarding the
financial and managerial resources of bank holding companies and their
subsidiaries. In addition, in order to qualify for the streamlined
procedure, the proposal must meet objective competitive criteria
designed to assure that the proposal does not raise an issue under
those factors.
The Board agrees with commenters that the information regarding the
effect of a proposal on the convenience and needs of affected
communities currently provided by an acquiring bank holding company in
its regulatory submission is new information relevant to the System's
decision on the proposal that may not otherwise be available. Bank
holding companies currently provide a brief description of the effects
of an acquisition proposal on the convenience and needs of affected
communities in the regulatory filing. The Board's experience has been
that the description provided in the initial application is useful and
is not burdensome. Accordingly, the Board has determined to retain the
requirement that, as part of its initial filing for approval, an
applicant briefly explain the effect of a proposal on the convenience
and needs of the affected communities. As under the current
application/notice procedure, this explanation may contain a discussion
of the CRA performance record of the acquiring organization and any
actions that the organization proposes to take in order to help address
the credit and other banking needs of the affected communities.
In addition, the final rule requires the applicant to outline the
steps the organization is taking to address weaknesses in the CRA
performance of insured depository institution subsidiaries of the
acquiring holding company that have received a less than satisfactory
CRA performance rating. The Board currently requests this information
in the application process and believes this information is important
for evaluating the ability of an acquiring organization to meet the
convenience and needs of communities in which a bank or savings
association acquisition is proposed. A holding company may satisfy this
information requirement by filing copies of information prepared for
the primary federal banking supervisor of the relevant institution,
other documents already prepared by the organization, or a summary of
the steps taken and being implemented.
The final rule also modifies, in certain respects, the information
related to the financial, managerial and competitive factors that must
be provided. These changes require limited information regarding the
funding of an acquisition, certain pro forma financial information
regarding the acquiring bank holding company and financial information
regarding any nonbanking company that is proposed to be acquired. In
addition, limited information regarding proposed new management is
requested in certain cases. The final rule also clarifies the
information needed for a new principal shareholder of a bank holding
company to fulfill the notice requirement of the Change in Bank Control
Act in connection with a transaction that is reviewed under the
streamlined procedures of section 3 of the BHC Act.
In connection with nonbanking proposals, the final rule modifies
the requirement that market index information be submitted in every
case in light of the fact that competition in many nonbanking
activities is broad and is measured on a national or regional basis
that often makes calculation of market indexes burdensome and
unnecessary. The rule requires instead a brief description of the
competitive effects of the proposal in the relevant market and, in
markets that are local in nature, a list of major competitors. It is
expected that the Board or the appropriate Reserve Bank would indicate
to an applicant when market index information is necessary. Finally,
the rule requires a bank holding company that seeks approval under the
streamlined procedure for a nonbanking proposal to describe briefly the
public benefits of the proposal.
4. Criteria To Qualify for Streamlined Procedures
Many commenters lauded the use of objective criteria for
identifying proposals that would qualify for streamlined review. These
commenters found reliance on criteria that identify well-run bank
holding companies to be a constructive method of rewarding
organizations that are well run and encouraging other organizations to
take steps to meet these criteria. A significant number of commenters
also generally agreed that the standards proposed by the Board would
establish appropriate levels for identifying proposals that clearly
meet the statutory factors that the Board must consider under the BHC
Act.
As discussed below, many other commenters expressed concern that
establishing a streamlined procedure based on objective criteria would
result in too little analysis of proposals under the streamlined
procedure. A large number of commenters also argued that it is
inappropriate to rely on CRA performance ratings as qualifying criteria
for the convenience and needs standard.
The Board has adopted several modifications to the qualifying
criteria to address concerns raised by commenters.
a. Definition of Well-Capitalized and Well-Managed Bank Holding
Companies
In connection with its interim implementation of the Regulatory
Relief Act,2 the Board proposed to define a ``well-capitalized
bank holding company'' for purposes of determining qualification for
the streamlined procedure as any bank holding company that:
---------------------------------------------------------------------------
\2\ The Board specifically requested comment on the definition
of well-capitalized bank holding company in connection with
enactment of the Regulatory Relief Act. Because the definition is
contained in Regulation Y, the Board considered comments regarding
that proposed definition in connection with this overall revision of
Regulation Y.
---------------------------------------------------------------------------
* Maintains a total risk-based capital ratio of 10.0 percent or
greater and a Tier 1 risk-based capital ratio of 6.0 percent or
greater, on a consolidated basis both before and immediately following
consummation of the proposal;
* Maintains either a Tier 1 leverage ratio of 4.0 percent or
greater or, if the bank holding company has a composite examination
rating of 1 or has implemented the risk-based capital measure for
market risk, a Tier 1
[[Page 9297]]
leverage ratio of 3.0 percent or greater, on a consolidated basis both
before and immediately following consummation of the proposal; and
* Is not subject to any written agreement, order, capital
directive, asset maintenance requirement, or prompt corrective action
directive to meet or maintain a higher capital level for any capital
measure.
Commenters generally supported these levels for defining a well-
capitalized bank holding company. Commenters noted that the risk-based
levels parallel the level at which an insured bank is considered to be
well-capitalized for purposes of various provisions of federal law.
Most commenters that addressed these requirements agreed that the
leverage ratio can be an inexact measure of capital adequacy for many
bank holding companies, particularly for holding companies that engage
in significant nonbanking activities or for bank holding companies that
have significant trading portfolios and fee-generating off-balance
sheet activities. Accordingly, a number of commenters requested that
the Board eliminate or further reduce the leverage requirement. Large
domestic banking organizations contended that the arguments for
adopting a lower leverage ratio for defining a well-capitalized bank
holding company than is used in defining a well-capitalized bank--
namely that the leverage ratio is an inexact measure in certain
situations--also militate for elimination of the leverage ratio.
Foreign banks in particular assert that adoption of a leverage
requirement would violate the principle of national treatment and would
exclude strong and well-capitalized foreign banking organizations from
the streamlined procedure because a leverage ratio is not required
under the Capital Accord developed by the Basle Committee on Banking
Regulations and Supervisory Practices (``Basle Capital Accord'') and,
consequently, is not applicable to banks in many foreign countries.
Smaller bank holding companies, on the other hand, argued that the
leverage ratio should be applicable to all organizations equally. These
organizations argued that eliminating or adopting a lower leverage
standard would create an advantage for large organizations in making
acquisitions.
The Board believes that, in the limited context of determining the
qualifying criteria for the streamlined procedure, reliance on the
risk-based capital ratios is sufficient. As noted above, the risk-based
levels adopted are the same levels required in defining a well-
capitalized bank.
The final rule does not establish a minimum leverage ratio for a
bank holding company to qualify for the streamlined procedures because,
as noted above and in the Board's original proposal, the leverage ratio
is an inexact measure in certain situations. The Board has thus
determined to apply a definition that applies equally to all
organizations, regardless of size, origin or composition of balance
sheet. The Board retains the ability to disqualify any organization
from using the streamlined procedure if any financial or other factor,
including the organization's leverage ratio, indicates that a closer
review of the proposal is appropriate. The leverage ratio continues to
be a criterion in defining whether an insured depository institution
subsidiary of the holding company is well-capitalized.
To qualify for the streamlined procedure, a bank holding company
must meet the risk-based capital levels on a consolidated basis. The
Board generally will not apply these definitions to intermediate-tier
bank holding companies involved in the transaction. The procedure
allows the Board to notify a bank holding company that it should follow
the normal 30/60-day procedure if the System has concern about the
financial strength of an intermediate-tier bank holding company that,
for example, is itself an operating company or that contains
significant debt.
Several commenters argued that the Board should adopt a process for
granting exceptions to the capital requirements where the applicant can
demonstrate that capital ratios do not adequately indicate the
financial strength of the organization. In light of the other changes
that have been adopted, the Board does not believe that a special
exceptions process is necessary or appropriate. The capital criteria
are based on internationally accepted risk-based standards, and are for
the limited purpose of identifying companies that qualify for a
streamlined review process. Banking organizations that do not qualify
under these criteria are still permitted to make acquisitions and
engage in permissible nonbanking activities by following the normal 30/
60 review process. As noted above, the standard of 10 percent total
risk-based capital and 6 percent Tier 1 risk-based capital applies to
all organizations, including foreign banking organizations, seeking to
take advantage of the streamlined procedures. In its request for
comment, the Board specifically requested comment on ways in which the
qualifying criteria should be defined for foreign banking organizations
in order to assure national treatment of foreign banking organizations
under the streamlined procedures. Based on these comments, the final
rule includes a number of provisions specifically applicable to foreign
banking organizations.
Several commenters argued that, for purposes of determining whether
a foreign banking organization meets the capital levels necessary to
qualify for the streamlined procedure, a foreign banking organization
should be permitted to use the definition of capital adopted by the
home country of the foreign banking organization. For foreign banking
organizations from countries that have adopted capital standards in all
respects consistent with the Basle Capital Accord, the Board generally
agrees that this permits the least burdensome approach to applying
equivalent standards. Accordingly, the final rule provides that, for
purposes of determining whether a foreign banking organization meets
the capital ratios described above for a well-capitalized bank holding
company, a foreign banking organization may use the capital terms and
definitions of its home country provided that those standards are
consistent in all respects with the Basle Capital Accord. If the home
country has not adopted those standards, the foreign banking
organization may use the streamlined procedures if it obtains from the
Board a prior determination that its capital is equivalent to the
capital that would be required of a U.S. banking organization for these
purposes.
The Regulatory Relief Act provides that, for purposes of
determining qualification for the streamlined procedures for nonbanking
proposals, U.S. branches and agencies of foreign banking organizations
are considered banks and must meet the capital and managerial standards
applicable to U.S. banks. The Board recognizes that branches and
agencies are a part of the foreign banking organization and that
capital is not allocated separately to a branch or agency. Accordingly,
for purposes of determining the qualification for the streamlined
procedures, the final rule deems the capital ratios of U.S. branches
and agencies of foreign banking organizations to be the same as the
capital level of the foreign banking organization.
For purposes of determining whether a foreign banking organization
meets the managerial definition for the streamlined procedures, the
final rule requires that: (1) The largest U.S. branch, agency or
depository institution controlled by the foreign bank have
[[Page 9298]]
received at least a ``satisfactory'' composite examination rating from
its U.S. banking supervisor; (2) U.S. branches, agencies and depository
institutions representing at least 80 percent of the U.S. risk-weighted
assets controlled by the foreign banking organization at such offices
have received at least a ``satisfactory'' composite examination rating
from the U.S. banking supervisors; and (3) the overall rating of the
foreign banking organization's combined U.S. operations is at least
``satisfactory.'' Further, no branch, agency or depository institution
may have received one of the two lowest composite ratings at its most
recent examination. In addition, as with domestic bank holding
companies, no U.S. branch, agency or insured depository institution may
be subject to an asset maintenance agreement with its chartering or
licensing authority. Under the final rule, the System may disqualify
any banking organization, including a foreign banking organization,
from using the streamlined procedure for any appropriate reason,
including if information from the primary supervisor of a domestic bank
or home country supervisor for a foreign bank indicates that a more in-
depth review of proposals involving that organization is warranted.
The final rule also retains the requirement that, in order to
qualify for the streamlined procedure for bank acquisition proposals, a
foreign banking organization must meet the home country supervision and
information sufficiency requirements of the BHC Act.
Several commenters requested clarification of the types of
supervisory actions that would disqualify a bank holding company from
using the streamlined procedures. In this regard, the Regulatory Relief
Act provides that, for purposes of the streamlined nonbanking
procedures contained in that Act, a bank holding company may not be
subject to certain types of administrative enforcement proceedings. The
final rule clarifies that a bank holding company may not use the
streamlined procedures for any nonbanking proposal or any bank
acquisition proposal if any formal order, including a cease and desist
order, written agreement, capital directive, asset maintenance
agreement or other order or directive, is outstanding or any formal
administrative action is pending against the bank holding company or
any of its insured depository institutions. The System may, if
appropriate, require a bank holding company to follow the normal 30/60-
day procedure if an informal action, such as a memorandum of
understanding or supervisory letter, pending against the bank holding
company or any affiliate indicates that a more in-depth review is
appropriate.
The Regulatory Relief Act permits exclusion of recently acquired
insured depository institutions under certain circumstances in
determining whether a bank holding company is well-managed. This
exclusion has been adopted in the final rule for purposes of
determining a bank holding company's qualification for the streamlined
procedures for bank acquisition proposals as well as for nonbanking
proposals.
The Regulatory Relief Act also permits the Board to adjust the
level of insured depository institutions that must meet the well-
managed definition for purposes of the streamlined nonbanking
procedures, so long as the level adopted by the Board is consistent
with safety and soundness and the purposes of the BHC Act. For purposes
of the streamlined nonbanking procedures, the Board had proposed that
the parent bank holding company, the lead insured depository
institution and insured depository institutions controlling at least 80
percent of the insured depository institution assets of the holding
company be well-managed (rather than 90 percent as in the Regulatory
Relief Act). In addition, no insured depository institution controlled
by the bank holding company (other than a recently acquired
institution, subject to the limitations discussed above) may have
received one of the 2 lowest composite examination ratings.
As noted above, commenters addressing this issue were largely in
favor of this definition. The Board believes that, in the limited
context of determining the availability of the streamlined procedures,
the definition proposed and adopted in the final rule, and in
particular, the level of insured depository institutions that must be
well-managed, will adequately identify organizations that merit a more
in-depth review and is a definition that is consistent with safety and
soundness and the purposes of the BHC Act. The Board notes that the
Board retains the authority and discretion to require any organization
to follow the normal procedures if appropriate.
b. Competitive Criteria
A few commenters suggested that the Board amend the competitive
criteria by eliminating or raising the qualifying threshold levels of
the Herfindahl-Hirschman Index (``HHI''), by increasing or eliminating
the market share test, and by allowing a bank holding company to meet
the competitive criteria after making divestitures. The Board has
determined not to change its formulation of the competitive standard
for the streamlined procedures.
The competitive criteria proposed and adopted by the Board reflect
the HHI thresholds above which a bank acquisition proposal comes under
close scrutiny by the Department of Justice (``DOJ'') under the DOJ's
Horizontal Merger Guidelines as applied to bank acquisitions, and by
the Board under its existing delegation rules. In conducting a
competitive analysis, both the Board and the courts have found the
resulting market share to be an important indicator of the competitive
effects of a proposal. Finally, divestitures to address competitive
issues are not a normal event and typically indicate a transaction that
requires an evaluation of information and factors beyond what may be
accomplished in a streamlined procedure.
c. Convenience and Needs
Many commenters objected to the use of the CRA examination rating
as a measure of whether a proposal would meet the convenience and needs
of the communities affected by a bank acquisition proposal. These
commenters argued that CRA performance ratings are often outdated, are
as a rule too high and, at best, represent an average of an
institution's overall performance. These commenters also argued that
reliance on CRA ratings would amount to a safe-harbor for virtually all
institutions, and would represent a step that Congress considered and
rejected in adopting the Regulatory Relief Act. In addition, commenters
objected that use of these criteria would eliminate an in-depth review
of the convenience and needs standard in all but protested cases.
Commenters also objected to permitting an organization with up to 20
percent of its assets in institutions with unsatisfactory CRA
performance ratings to take advantage of streamlined procedures.
Other commenters argued that CRA ratings provide the most reliable
indicator of an institution's record of helping to meet the credit and
other banking needs of the institution's existing communities and
represent a strong indicator of the institution's willingness and
ability to meet the banking needs of new communities. Several of these
commenters also contended that reliance on CRA performance ratings as a
criterion for streamlined processing of acquisition proposals would
encourage organizations to meet and maintain satisfactory performance
levels.
[[Page 9299]]
After review of the comments, the Board has determined to amend the
criteria for qualifying for the streamlined procedure. The criteria
adopted require that the record show that the proposal is consistent
with the convenience and needs standard under the BHC Act and that the
acquiring organization have satisfactory or outstanding performance
ratings under the CRA at its lead insured depository institution and
insured institutions representing at least 80 percent of the
organization's banking assets.
As noted above, the Board has determined to retain the portion of
the current regulatory filing in which the applicant describes the
effect of the proposal on the convenience and needs of the affected
communities. The System would evaluate this information as well as
other information available to the System, including CRA performance
ratings, in determining whether a proposal meets the convenience and
needs factor in connection with the System's review of the proposal.
The Board continues to believe that the CRA performance rating is a
valuable and important measure of the record and ability of an
applicant to meet the convenience and needs of a community, and the
Board would, as currently, give significant weight to that performance
record in the streamlined process.
The Board believes that it may adopt the streamlined procedures as
amended without any statutory changes to the BHC Act. The provisions
under consideration by Congress in connection with the Regulatory
Relief Act would have taken additional steps, including eliminating any
public notice and opportunity for comment on bank acquisition proposals
and eliminating consultation with the primary supervisor for the banks
involved in the transaction.
d. Size
The Board proposed to limit to 35 percent of the acquiring holding
company's assets the aggregate amount of bank and nonbanking assets
that may be acquired during a 12-month period using the streamlined
procedures. This aggregate limit would be calculated by reference to
transactions approved under the streamlined procedure and would not
include transactions that are reviewed under the normal 30/60-day
process.
Several commenters argued that the 35 percent asset test would
allow very significant proposals by large bank holding companies to be
considered under the streamlined procedures, including mergers among
institutions that rank among the ten largest banking organizations in
the United States. These commenters contended that transactions that
are large in absolute terms always require in-depth agency review.
A few other commenters argued, on the other hand, that it was
important to assure that the streamlined procedures are available to
acquisition proposals by large bank holding companies because
acquisitions by these institutions allow the benefits of reduced
regulatory costs to be shared by a larger number of consumers. These
commenters suggested that the Board expand the size criteria in various
ways.
Still other commenters argued that the size restriction would
disproportionately limit transactions by small bank holding companies.
These commenters contended that a higher limit should be established
for small organizations because the objective criteria proposed by the
Board are particularly effective in identifying transactions that would
not raise statutory issues for small bank holding companies.
In addition to these comments, the Board considered that the
Regulatory Relief Act applies a limit on nonbanking acquisitions of 10
percent of the acquiring bank holding company's assets, unless the
Board finds that a higher limit is consistent with safety and soundness
and the purposes of the BHC Act. The Regulatory Relief Act also
includes a limit of 15 percent of the holding company's consolidated
Tier 1 capital on the gross consideration that may be paid by a bank
holding company in a nonbanking acquisition that is reviewed under the
streamlined procedures contained in that Act.
In view of these comments and enactment of the Regulatory Relief
Act, the Board has made two amendments to the size criterion originally
proposed. First, the Board has adopted an absolute limit of $7.5
billion to the size of an individual acquisition that may be reviewed
under the streamlined procedures. This limit would require an in-depth
review--on the basis of size alone--of any combination between
organizations within approximately the one-hundred largest bank holding
companies or involving nonbanking companies with a significant amount
of assets.
The second change to the size criterion involves adoption of a
limit on the gross consideration that may be paid in a nonbanking
acquisition by a bank holding company under the streamlined process. As
noted above, this limit was included in the Regulatory Relief Act. The
Board believes that, in the context of a nonbanking acquisition, a
measure based on consideration paid often represents a better test of
the potential impact of a proposal on the financial resources of the
acquiring organization than a test based on the amount of assets
acquired because nonbanking acquisitions often involve the purchase of
expertise and fee-based businesses that do not involve significant
assets.
As noted above, the Regulatory Relief Act adopted a limit of 10
percent of assets on the size of any individual nonbanking acquisition
that may occur under the streamlined procedures. The Regulatory Relief
Act allows the Board, by regulation, to adopt an asset size limit that
exceeds the 10 percent limit if the Board determines that a different
percentage is consistent with safety and soundness and the purposes of
the BHC Act.
The Board has determined to adopt its proposed 35 percent limit.
The size limit adopted by the Board takes account of the aggregate size
of all acquisitions--both bank and nonbank acquisitions--reviewed under
the streamlined procedures over a period of time that approximates the
supervisory examination schedule for most banking organizations. This
aggregate limit allows better monitoring of the overall growth of an
organization than does an individual transaction limit. As noted above,
the Board has also adopted an absolute limit of $7.5 billion on any
individual acquisition that may be reviewed under the streamlined
procedure, as well as a limit on the amount of consideration that may
be paid in a nonbanking acquisition. The Board has also retained the
ability to require review of any transaction using the normal 30/60-day
process if warranted for safety and soundness or other reasons. The
Board believes that, in view of these other limitations, the aggregate
35 percent size limit is consistent with safety and soundness and the
purposes of the BHC Act.
The Board has determined not to raise the size of its proposed
exception from the growth limit for smaller bank holding companies. The
Board proposed to permit a qualifying bank holding company to make
acquisitions without regard to the 35 percent of asset limitation so
long as the total assets of the bank holding company remained below
$300 million on a pro forma basis. The Board believes that it is
important to monitor rapid growth in the relative size of an
organization and that an examination rating may not accurately reflect
the financial and managerial strength of an organization that has grown
significantly since the last examination was conducted. The Board also
notes that a significant
[[Page 9300]]
number of acquisitions by smaller bank holding companies that exceed
the growth limit are likely to continue to qualify for the normal 30-
day delegated action procedure.
e. Notice to Primary Bank Supervisor
In the case of the acquisition of a bank, the BHC Act requires that
the primary supervisor for the bank to be acquired be given 30 calendar
days in which to submit comments on the transaction. A similar
provision was enacted in the Regulatory Relief Act that requires 30
days notice to be given to the Director of the Office of Thrift
Supervision of a proposal by a bank holding company to acquire a
savings association.
Financial, managerial, legal, safety and soundness, and other
concerns that are known to the primary bank supervisor generally are
shared with the System through ongoing arrangements for sharing
supervisory information. Similarly, the System and the Office of Thrift
Supervision regularly coordinate efforts and share information.
Consequently, in practice, the primary supervisor generally allows the
notice period regarding an application to expire without filing
comments.
To implement this statutory requirement, the final rule requires
the appropriate Reserve Bank to provide notice of each bank acquisition
proposal to the primary supervisor for the relevant banks and of each
savings association acquisition to the Director of OTS. The final rule
allows the System to act on any proposal that qualifies for the
streamlined procedure even though the period for obtaining comments
from the primary supervisor has not expired. The final rule provides,
however, that the System's action is subject to revocation if the
primary supervisor objects to a transaction within the relevant notice
period. Because bank acquisition proposals may not be consummated for
at least 15 days after System action--which is the minimum post-
approval period permitted by statute to allow DOJ review of a bank
acquisition--it is expected that the notice period for the primary
supervisor will expire prior to consummation of a bank acquisition
proposal. In the case of thrift acquisitions, the OTS is working with
the Board to streamline the comment process.
5. Preacceptance Review Period
The Board proposed to eliminate the current period prior to
acceptance of a regulatory filing regarding a bank acquisition proposal
during which the Reserve Bank reviews the informational sufficiency of
the filing. Instead, the Board proposed to accept immediately any
submission that contains the information specified in the rule for the
proposed type of transaction. This change eliminates a pre-acceptance
period that typically averages 25 days.
While commenters were generally in favor of this change, a number
of commenters objected that elimination of the pre-acceptance period
would reduce the ability of the System to obtain information needed to
evaluate properly the merits of a proposal. The Board disagrees. The
elimination of the pre-acceptance period does not in any way diminish
the ability of the System at any time to request, or the responsibility
of the applicant/notificant to provide, additional relevant information
needed to evaluate a proposal. In addition, the Board has retained the
right to return as incomplete any submission that does not contain the
information specified in the regulation or appropriate form.
The Board had previously eliminated a similar pre-acceptance period
that applied to nonbanking acquisitions. The Board's experience with
elimination of the pre-acceptance period for nonbanking acquisitions
has indicated that a similar period is not necessary for bank
acquisition proposals.
6. Hart-Scott-Rodino Act
One commenter expressed concern whether bank and nonbanking
acquisitions approved under the Board's streamlined procedures would be
exempt from the notification requirements of section 7A of the Clayton
Act. Section 7A of the Clayton Act, as added by the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (15 U.S.C. 18A) (``HSR Act''),
requires that persons contemplating certain mergers and acquisitions
provide notice of the transaction to the Federal Trade Commission
(``FTC'') and the DOJ. The HSR Act, however, specifically provides an
exemption from these filing requirements for transactions that require
agency approval under section 3 of the BHC Act (i.e., the acquisition
of shares or control of a bank or bank holding company). In addition,
the HSR Act provides an exemption for transactions that require agency
approval under section 4 of the BHC Act (i.e., the acquisition by a
bank holding company of a nonbanking company) if the acquiring company
provides to the FTC and DOJ copies of all information filed with the
Board.
The Board believes that the streamlined procedures under Regulation
Y continue to satisfy the requirement for an exemption from the HSR Act
for both bank and nonbanking acquisitions. The streamlined procedures
represent a more streamlined procedure for obtaining System approval
for the acquisition of a bank or bank holding company under section 3
or the acquisition of a nonbanking company under section 4 of the BHC
Act. As provided in the HSR Act, bank holding companies would continue
to be required to file with the DOJ and FTC the information submitted
to the Board in connection with a nonbanking acquisition. The staff of
the DOJ and FTC have informally agreed with this position.
7. Conditional Approval
The Board has authority to impose conditions in connection with its
action on any proposal, and has in fact imposed conditions that address
safety and soundness, CRA, conflicts of interest, and competitive
issues in a number of prior cases. The final rule incorporates this
policy in order to make clear that this authority is available in
connection with action on any case, including a case that qualifies for
the streamlined procedure.
8. Waiver Process
The Board's current regulation permits bank holding companies to
seek a waiver of the application filing requirement under the BHC Act
for transactions that involve the acquisition of stock of a bank for an
instant in time as part of a bank-to-bank merger reviewed by another
federal banking agency under the Bank Merger Act. The Board proposed
three changes to this portion of the regulation. First, the Board
proposed to reduce the period for its review of waiver requests to 10
days from 30 days. Second, the Board proposed to specify in the
regulation the information that must be provided with a waiver request.
Third, the Board proposed to make the waiver process available for
certain internal corporate reorganizations.
Commenters discussing this proposal generally supported these
changes. Several commenters suggested that the Board make waivers
automatic and eliminate the filing and review requirement altogether.
Another commenter argued, on the other hand, that the Board should not
allow the waiver of any application and should require application
filings in every case.
The Board continues to believe that the waiver process represents a
sensible reduction in duplication of regulatory review of proposals
that are subject to review under identical standards in two different
federal statutes. Accordingly, the Board has determined to retain the
waiver process with the changes proposed. The Board believes that a 10-
[[Page 9301]]
day review process is adequate and necessary to allow the System to
identify any aspect of the proposal that may have a material effect on
the bank holding company or otherwise fall outside the purview of the
federal banking agency that is reviewing the merits of the underlying
transaction.
The Board also believes that, as a general matter, corporate
reorganizations (such as the formation of a wholly owned intermediate-
tier holding company, the merger of wholly owned holding companies, and
the transfer of a bank from one part of an organization to another part
of the same organization) do not generally require agency review. In
each case, the bank holding company already has System approval to
control and operate the banks involved in the transaction. In these
cases, the Board agrees with commenters that a waiver should be
automatic. The supervisory process provides the Board with ample
authority and opportunity to address concerns that may arise from
internal corporate reorganizations. Accordingly, the Board has adopted
its proposal to extend the waiver process to internal corporate
reorganizations and has made these waivers available without any filing
requirement.3
---------------------------------------------------------------------------
\3\ Under the final rule, the waiver process is not available
for transactions by a holding company that is organized in mutual
form or for transactions that occur outside the United States. These
cases typically raise a variety of issues that require review in the
application/notice process.
---------------------------------------------------------------------------
9. Small Bank Holding Company Policy Statement
As published in the proposed revision to Regulation Y, the Board's
policy statement on one-bank holding companies was revised to
generalize its applicability beyond the formation of a bank holding
company to include acquisitions by qualifying small bank holding
companies, to reduce the burden in the applications process, to
incorporate previously informal policies that evolved since the
original publication of the statement, and to remove obsolete language.
Specifically, the Board proposed to permit small bank holding companies
whose subsidiary banks are well managed and well-capitalized and whose
proposals result in parent company debt to equity of less than 1.0:1,
to be eligible for streamlined processing. These companies would also
be permitted to pay dividends under certain conditions that are more
clearly defined than in the existing statement. Proposals involving
higher parent company leverage or a bank in less-than-satisfactory
condition would be subjected to a focused review of the parent-level
debt servicing ability, or other issue presented, under the Board's
normal procedures. These organizations would also be restricted from
paying dividends until their leverage was reduced to a 1.0:1 level and
the organization is otherwise in satisfactory condition.
The final statement incorporates several changes that further
reduce burden and make the policy statement more consistent with the
general revisions to Regulation Y. It also incorporates suggestions
from commenters and further clarifies the statement.
The major substantive change eliminates a disparity between larger
and smaller bank holding companies in qualifying for the Board's
streamlined procedures. The final statement incorporates the
requirement that, to qualify for the new streamlined procedure, banks
controlling 80 percent of the organization must be well-managed and
well-capitalized, as opposed to the requirement in the previous version
of the statement that all banks meet these criteria.
To address concern about the availability of the streamlined
procedures to small bank holding companies that have not yet received
an inspection rating, the final rule permits any unrated bank holding
company, including a small bank holding company, to be eligible for
streamlined processing as long as its subsidiary bank(s) are well-
capitalized and well-rated and the bank holding company obtains a
determination from the System that the company qualifies for the
streamlined procedures.
Several commenters urged the Board to raise the $150 million size
limit to qualify as a small bank holding company. The Board has
determined not to raise this level at this time. The Board is concerned
that an increase in the availability of higher levels of debt without
consolidated capital requirements would raise overall risks to the
banking system, including increased risk to the Bank Insurance Fund,
without sufficient offsetting public benefits.
The statement was also reformatted to make it more understandable
and several technical and conforming changes have been adopted.
10. One-Bank Holding Company Formations
The Board proposed a number of modifications to the streamlined
notice procedure governing proposals by existing shareholders of a bank
to establish a bank holding company. To qualify for this procedure
under current rules, the shareholders of the bank must acquire at least
80 percent of the shares of the new bank holding company in
substantially the same proportion as the shareholders' bank ownership,
all shareholders must certify that the shareholders are not subject to
any supervisory or administrative action, and the bank holding company
must identify the shareholders of the new bank holding company.
The Board proposed to reduce the percentage of the bank holding
company that must be owned by shareholders of the bank from 80 to 67
percent and to require only the principal shareholders (i.e.,
shareholders owning in excess of 10 percent of the bank holding
company) to certify that they are not subject to any supervisory or
administrative action. In addition, the Board proposed to eliminate the
publication requirement for this category of bank holding company
formation because no publication is required for these transactions
under the Riegle Act and because no regulatory purpose is served by
requiring publication of these transactions, which represent only a
corporate reorganization.
Only two commenters addressed these proposed revisions. Both
supported the revisions and stated that the changes would help reduce
unnecessary burden on individuals forming small bank holding companies.
Accordingly, the Board has adopted the proposed changes in the final
rule.
B. Explanation of Proposed Changes to the Nonbanking Provisions
1. General Review and Updating of Nonbanking Activities
Section 4(c)(8) of the BHC Act generally provides that a bank
holding company may engage in, or acquire shares of a company engaged
in, activities that the Board has determined, after notice and
opportunity for comment, ``to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.'' The
Board may make this determination by order or by regulation. The Board
has to date determined by regulation that 24 activities are ``closely
related to banking'' and has determined by individual order that a
number of additional activities are also ``closely related to
banking.''
Once the Board has determined--either by regulation or by order--
that an activity is ``closely related to banking,'' the Board need not
make that determination again in subsequent cases. Review of subsequent
cases is limited to determining whether the
[[Page 9302]]
conduct of the nonbanking activity by the applying bank holding company
would result in public benefits that outweigh the potential adverse
effects (the ``proper incident'' test).
The list of nonbanking activities contained in Regulation Y (the
``laundry list'') is intended to serve the purpose of providing a
convenient and detailed list of most of the activities that the Board
has found to be closely related to banking and therefore permissible
for bank holding companies. The Regulation Y laundry list also
designates the activities that may be approved by the Reserve Banks
under delegated authority, although the Board has delegated authority
for Reserve Banks to act on proposals involving a number of activities
approved by order during intervals between modifications of Regulation
Y.
The Board has adopted its proposed reorganization and revision of
the list of permissible nonbanking activities contained in Regulation
Y. Commenters generally agreed that reorganizing the list into
categories of functionally related activities would make the list
easier to understand and make it easier for bank holding companies to
obtain approval to engage in related activities. The Board intends that
this new organization of the laundry list permit a bank holding company
to obtain approval at one time to engage in all of the activities on
the laundry list, all activities listed in a functional category, or,
at the holding company's choosing, any specific activity within a
category.
As explained above, the Board has also amended Regulation Y to
incorporate the changes enacted in the Regulatory Relief Act that
eliminate the prior approval requirement for well-run bank holding
companies that propose to engage de novo in nonbanking activities that
have been permitted by regulation. This change will significantly
reduce regulatory burden and improve the ability of well-run bank
holding companies to respond quickly to changes in the marketplace by
eliminating the requirement that these companies obtain System approval
prior to commencing de novo an activity permitted by regulation. This
change will also permit a well-run bank holding company, without any
prior notice or Board approval, to commence immediately any activity
that is currently on the laundry list, any activity that has been added
to the regulatory list of permissible activities in this final rule,
and any new activity that is added to the regulatory laundry list in
the future, provided that the bank holding company meets the qualifying
criteria at the time the nonbanking activity is commenced. A bank
holding company that does not qualify under the final rule may file a
notice seeking approval to engage in any or all activities contained on
the laundry list, as reorganized in this final rule.
The Board has also adopted a streamlined procedure for well-run
bank holding companies to obtain System approval to make nonbanking
acquisitions that fall within the size limits noted above. This
streamlined procedure is also available for proposals to engage de novo
in nonbanking activities that have been permitted only by order.
As explained more fully below, the Board has amended the regulatory
list of permissible activities to include nonbanking activities that
previously have been determined by order to be closely related to
banking. Among the activities that have been included are: (1) Riskless
principal transactions; (2) private placement services; (3) foreign
exchange trading for a bank holding company's own account; (4) dealing
and related activities in gold, silver, platinum and palladium; (5)
employee benefits consulting; (6) career counseling services; (7) asset
management, servicing and collection activities; (8) acquiring and
resolving debt-in-default; (9) printing and selling checks; and (10)
providing real-estate settlement services.
In addition, the Board has broadened the scope of permissible
derivatives and foreign exchange activities to assure that bank holding
companies may conduct these activities to the same degree as banks. As
explained below, the final rule also removes several restrictions on
these activities that apply to bank holding companies but do not apply
to banks that conduct these activities.
2. Removal of Restrictions Governing Permissible Activities
The Board has determined to remove a significant number of
restrictions currently contained in the regulation that are outmoded,
have been superseded by Board order, or do not apply to insured
depository institutions that conduct the same activity. The removal of
these restrictions from the regulation does not affect the Board's
determination that each activity contained on the laundry list is so
closely related to banking as to be a proper incident thereto. A
detailed discussion of the restrictions that have been removed is
contained in subsections (3), (5) and (6), or the section below
explaining ``Restrictions Removed from Permissible Nonbanking
Activities.''.
The Board has determined to grant relief from these conditions to
all bank holding companies authorized to conduct each activity, without
the need for a specific filing by any individual bank holding company.
Henceforth, a bank holding company authorized to conduct an activity on
the revised laundry list may conduct that activity subject to the
limitations retained in this final rule and to other applicable laws.
This relief extends only to the restrictions described as being removed
in subsections (3), (5) or (6), or the section below explaining
``Restrictions Removed from Permissible Nonbanking Activities.'' In
particular, the relief does not extend to commitments or conditions
that relate to the financial resources of a particular bank holding
company or its subsidiaries, or to commitments or conditions that
relate to the risk management polices of the organization, periods for
divestiture of impermissible assets or shares, or other commitments or
conditions that are not discussed in subsections (3), (5), or (6) or
the section below explaining ``Restrictions Removed from Permissible
Nonbanking Activities.'' Bank holding companies that have committed to
comply with restrictions not described in those sections as being
removed may in writing request a determination that the condition or
commitment is no longer appropriate.
In granting this relief, the Board notes that some of the
conditions removed from activities on the Regulation Y laundry list
involve restrictions imposed under other laws and regulations, such as
the federal securities laws or the Commodity Exchange Act. The Board's
action does not relieve any bank holding company of its obligation to
conduct each activity in accordance with relevant state and federal law
governing the activity. Other restrictions that have been removed
describe good business practice but are not required to define the
lawful scope of permissible activity. The Board will continue through
the inspection process to monitor carefully the conduct of nonbanking
activities by individual bank holding companies and reserves the right
to impose any condition on the nonbanking activities or operations of
any bank holding company as appropriate to assure that the activity is
conducted in a safe and sound manner and within the authority granted
by the Board.
3. Revision of Policy Statement Governing Investment Advisory
Activities
The Board proposed to remove four restrictions contained in its
1972
[[Page 9303]]
interpretive rule regarding the investment advisory activities of bank
holding companies with respect to mutual funds and other investment
companies. These restrictions prohibit a bank holding company from:
* Owning any shares of a mutual fund advised by the bank holding
company;
* Lending to a mutual fund advised by the bank holding company;
* Accepting shares of a mutual fund that the holding company
advises as collateral for any loan to a customer for the purpose of
purchasing those mutual fund shares; and
* Serving as an investment adviser to an investment company or
mutual fund that has a name that is similar to, or a variation of, the
name of the bank holding company or any of its subsidiary banks.
These restrictions are intended to ensure that a bank holding
company does not control a mutual fund in violation of the Glass-
Steagall Act, as well as to mitigate potential conflicts of interests
and the potential for customer confusion about the uninsured nature of
investment company shares. The Board had previously removed a
prohibition on a bank holding company purchasing, as a fiduciary,
shares of a mutual fund advised by the holding company as well as
restrictions contained in a staff letter (the ``Sovran letter'') on the
sale of mutual funds by employees of a holding company and its
affiliates.
As the Board noted in its proposal, existing statutory provisions
appear adequate to address concerns about the ownership of shares of a
mutual fund by the bank holding company. In particular, the investment
limitations of section 4 of the BHC Act appear adequate to mitigate
potential conflicts of interests that could result from removal of the
investment restriction and limit the ability of a bank holding company
to acquire more than 5 percent of the voting shares of or to control a
mutual fund it advises.
Removal of the two lending restrictions would permit bank holding
companies and their affiliates to make certain loans to the extent
permissible under applicable federal or state law. For example, federal
law permits insured banks, within limits, to make loans to a mutual
fund advised by the bank, and the federal securities laws govern the
extension of credit by any broker/dealer to a customer to purchase
shares of a mutual fund. The System expects that extensions of credit
by the holding company to a mutual fund or to a customer who uses the
shares as collateral for the loan would be done on a safe and sound
basis.
The Board proposed to replace the fourth restriction with a
provision permitting similar names so long as: (1) The investment
company name is not identical to that of the holding company or an
affiliated insured depository institution; (2) the investment company
name does not include the term ``bank,''; and (3) the holding company
or investment company discloses to customers in writing the role of the
holding company as an adviser to the investment company and that shares
of the investment company are not federally insured and are not
obligations of or guaranteed by any insured depository institution. The
SEC permits an investment company to have a name similar to that of an
insured depository institution provided that the investment company
makes a number of disclosures that advise customers that the investment
company is not federally insured or guaranteed by the insured
depository institution.4
---------------------------------------------------------------------------
\4\ Letter of May 13, 1993, [1993 Transfer Binder] Fed. Sec. L.
Rep. (CCH) Paragraph 76,683.
---------------------------------------------------------------------------
Many commenters strongly supported these proposed revisions.
Commenters stated that these changes would remove restrictions
addressed more directly by other provisions of law and would allow bank
holding companies to compete on a more equal basis with other
investment advisors. Several commenters urged the Board to allow an
investment company advised by a bank holding company to have a name
identical to that of the bank holding company so long as the name is
not identical to that of any subsidiary bank of the holding company.
These commenters also contended that the Board's disclosure
requirements in this area are duplicative and therefore should be
eliminated. A small number of other commenters objected that the
Board's proposal would cause increased confusion among customers
regarding the nature of uninsured investment products.
After review of the comments, the Board believes that the proposed
revisions to the interpretive rule are appropriate, and has adopted the
revisions as proposed. The revised name restriction will allow
increased flexibility in the marketing of investment companies advised
by bank holding companies, and enhance the ability of bank holding
companies to compete with other bank and nonbank-affiliated investment
advisers. At the same time, the limitation on identical names and on
the use of the word ``bank,'' when coupled with the disclosure
requirements, should substantially mitigate the potential for customer
confusion about the un-insured nature of investment company shares.
The Board believes that the disclosure requirements also continue
to be appropriate to address the potential for customer confusion in
situations in which the holding company or its affiliates advise a
mutual fund and the sale of the mutual fund shares is not covered by
the disclosure provisions of the Interagency Statement on Retail Sales
of Nondeposit Investment Products. The disclosure requirements are
increasingly proving to be an effective method for addressing potential
customer confusion and do not appear to be onerous.
4. Procedures for Determining the Permissibility of Nonbanking
Activities
The Board has adopted two provisions to Regulation Y to ease the
burden associated with determining the authorization and scope of
permissible nonbanking activities. First, the regulation specifically
reflects the fact that the Board may, on its own initiative, begin a
proceeding to find that an activity is permissible for bank holding
companies, as the Board did in the case of many of the earlier
nonbanking activities. As required by the BHC Act, the Board would
provide public notice that it is considering the permissibility of a
given activity and would provide an opportunity for public comment.
The Board expects to consider amending the laundry list, for
example, as new activities are authorized for banks, as experience with
a narrowly defined activity indicates that the activity should be more
broadly defined, or as developments occur in technology or the
marketplace for financial products and services. The System will
actively track market developments as well as decisions that authorize
banks to conduct new activities and evaluate adding these activities to
the laundry list even if an individual request has not yet been made to
engage in these activities.
Several commenters urged the Board to add a provision limiting the
processing period for evaluating proposals regarding the permissibility
of a particular new activity, much as the Board has proposed for
determining the scope of a currently permissible activity. On the other
hand, other commenters argued that the Board should seek public comment
on all proposals involving the permissibility of new activities or the
scope of currently permissible nonbanking activities.
The BHC Act, as amended by the Regulatory Relief Act, requires that
the
[[Page 9304]]
Board provide notice and opportunity for public comment prior to
determining that an activity is closely related to banking. The
Regulatory Relief Act eliminated the requirement that the Board provide
an opportunity for a formal hearing regarding the permissibility of an
activity. The final rule reflects both of these statutory actions. In
particular, the final rule retains the provision currently in
Regulation Y for public notice and opportunity for comment in
connection with consideration of the permissibility of a new activity,
and eliminates the requirement for a hearing. The Board retains
discretion to order a formal or informal hearing regarding the
permissibility of an activity where a hearing may be useful in
resolving disputes of fact regarding an activity. Because of the
complexity of many of the issues raised in determining the
permissibility of a new activity, the Board has determined not to
establish a specific limit on the time for evaluating these proposals.
The Board has amended the regulation to establish a streamlined
procedure outside the application process through which any bank
holding company or other interested person may request an advisory
opinion from the Board that a particular variation on an activity is
permissible under an existing authorization and is not deemed to be a
new activity. The Board would issue an advisory opinion within 45 days,
and make this opinion available and applicable to all similarly
situated bank holding companies. At the time the Board reviews an
activity, the Board would determine whether it is appropriate to permit
bank holding companies to engage in this activity without additional
approval (as, for example, a variation of one or more previously
authorized activities) or to require bank holding companies to obtain
approval prior to conducting the activity (because, for example, the
activity does not fall within a previously approved activity or
category or involves special risks or concerns). As noted above, well-
run bank holding companies may, without prior Board approval, engage de
novo in any activity added to the regulatory laundry list.
Commenters agreed that these two procedures should make it easier
for bank holding companies to participate in marketplace developments
in permissible nonbanking activities. In addition, these procedures
will eliminate a number of applications that are currently filed by
bank holding companies that are uncertain about the scope of
permissible activities.
5. Nonbanking Activities That Are Incidental to a Permissible Activity
The Board has adopted its proposal to permit a subsidiary of a bank
holding company engaged in financial data processing or management
consulting activities, as an incidental activity, to derive up to 30
percent of its annual revenue from nonfinancial data processing or
management consulting services, respectively. Commenters discussing
this aspect of the proposal strongly supported this proposal and
contended that bank holding companies engaged in data processing and
management consulting activities have substantial expertise in these
areas that allow them safely and soundly to provide these services
involving nonfinancial data or nonfinancial customers. In addition,
several commenters argued that bank holding companies currently are at
a competitive disadvantage in providing data processing and management
consulting services and in hiring employees because of the strict
limitations tying these services to financial data and financial
consulting.
A number of commenters argued that the Board should permit a
greater amount of incidental activity, some arguing for no limit. Two
commenters argued, on the other hand, that bank holding companies
should not be permitted to engage in any nonfinancial data processing
because the commenters believed that the benefits of access to the
Federal discount window and the payments system and the unique products
that banks can provide combine to give bank holding companies and banks
an unfair advantage in competing with nonfinancial firms to provide
nonfinancial products and services, including firms owned by women and
minorities.
After considering the comments, the Board has adopted the revisions
to the data processing and management consulting provisions as
proposed. The Board believes that these revisions are necessary to
allow bank holding companies to compete effectively in providing
financial data processing and management consulting services.
The strict limitations on providing non-financial data processing
and management consulting activities that were previously applied to
bank holding companies inhibit the ability of bank holding companies
effectively to compete with other providers who often combine financial
and nonfinancial products. In a number of recent cases reviewed by the
Board, for example, the record has indicated that it is common practice
for a software provider to integrate financial data processing software
and nonfinancial data processing software in the same package.
Similarly, commenters indicated that it is common for management
consultants to provide advice on general matters in connection with
providing advice on financial, accounting and similar matters. The
strict limitations have also reduced the ability of bank holding
companies to attract the most qualified employees--who often have
expertise, clients, proprietary rights, and interests--that span
financial and nonfinancial matters.
The Board believes that its proposed limit--30 percent of the
revenue derived from permissible financial data processing activities,
and 30 percent of the revenue derived from permissible financial
management consulting services, respectively--represents a reasonable
level of incidental activity that assures that the bank holding company
is significantly involved in financial data processing or management
consulting.5 The Board does not believe that this limited
participation will permit bank holding companies an unfair competitive
advantage over other providers of data processing or management
consulting services. As the Board and the industry gain experience in
data processing and management consulting activities, the Board will
review and adjust the level of incidental activities as appropriate.
---------------------------------------------------------------------------
\5\ In the data processing area, this 30 percent basket would
not include revenue derived from the use of excess capacity or the
sale of general purpose hardware that is currently permitted in
accordance with the Board's regulation and policies governing those
activities.
---------------------------------------------------------------------------
6. Expanded Exception for Acquisitions of Lending Assets in the
Ordinary Course of Business
The Board proposed to revise the regulatory language permitting a
bank holding company, without additional approval, to acquire lending
assets from a third party in the ordinary course of business. The Board
currently permits a bank holding company, without additional approval,
to acquire assets of an office of another company related to making,
acquiring or servicing loans so long as the bank holding company and
the transaction meet certain qualifications. Among the qualifications
are that the assets relate to consumer or mortgage lending, and that
the acquired assets represent the lesser of $25 million or 25 percent
of the consumer lending, mortgage banking or industrial banking assets
of the acquiring bank holding company. The office must also be
[[Page 9305]]
located in the geographic area served by the bank holding company.
The Board has revised this provision in three ways. First, since
the Board no longer limits the geographic scope of its approval to
engage in nonbanking activities, this restriction has been removed.
Second, the scope of the exception has been broadened to permit the
acquisition of assets related to any lending activity. Third, the
threshold limits have been raised to permit the acquisition of assets
representing up to the lesser of $100 million or 50 percent of the
lending assets of the bank holding company.
Commenters generally favored the modifications proposed by the
Board for expanding the scope and size of transactions that could be
conducted in the ordinary course of business under this exception. The
proposed broadening of the exception would eliminate an unnecessary
approval requirement and paperwork for transactions that are relatively
small and represent the ordinary course of business.
7. Consummation Period for Certain Proposals
The Board had originally proposed to eliminate the requirement that
a bank holding company exercise its authority to engage de novo in a
nonbanking activity within one year of receiving System approval. While
several commenters expressed support for this approach, the final rule
does not include a specific provision adopting this change for two
reasons. First, since the date of the original proposal, the Regulatory
Relief Act eliminated altogether the prior approval requirement for
well-run bank holding companies that choose to engage de novo in
nonbanking activities permissible by regulation. This statutory change
eliminates a substantial portion of the cases that would have
benefitted by the proposal to eliminate the consummation period.
Second, the Board may, without any regulatory change, adjust the
consummation period on a case-by-case basis. The Board believes this is
a more appropriate approach in cases that do not qualify for the
statutory exception in the Regulatory Relief Act.
C. Explanation of the Restrictions Removed From Permissible Nonbanking
Activities
As noted above, the Board has removed restrictions contained in the
current regulation that are outmoded, have been superseded by Board
order or would not apply to an insured depository institution
conducting the same activity. The limitations that remain are necessary
to establish a definition of the permitted activity or to prevent
circumvention of another statute, such as the Glass-Steagall Act. The
following discussion explains, by functional group of activities, the
restrictions that the Board has eliminated as well as certain
limitations that the Board has retained. In several areas, the Board
expects to develop supervisory policy statements to address potential
adverse effects that may be associated with certain activities. The
Board may seek comment on those supervisory policy statements as
appropriate.
1. Extending Credit and Servicing Loans
Lending activities are already broadly defined and contain no
restrictions. Permissible lending activities include the types of
lending activities that were previously listed by way of example in
Regulation Y, such as lending activities conducted by consumer,
mortgage, commercial, factoring, and credit card companies. Removal of
those specific examples from the proposed rule was intended to make
clear that making, acquiring, brokering and servicing all types of
loans or extensions of credit are considered permissible lending
activities, and elimination of these examples from the final rule does
not diminish the scope of the activity or the permissibility of those
examples of lending activities. Nevertheless, at the request of a
number of commenters, factoring has been re-included as an example of a
permissible lending activity.
2. Activities Related to Extending Credit
A new category has been added authorizing activities that the Board
determines to be usual in connection with making, acquiring, brokering
or servicing loans or other extensions of credit. Without limiting the
scope of this activity, the category lists a number of activities that
the Board has previously determined are related to credit extending
activities, including, by way of example, credit bureau, collection
agency, appraisal, asset management, check guarantee, and real-estate
settlement activities.
Restrictions governing disclosures to customers, tying,
preferential treatment of customers of affiliates, disclosure of
confidential customer information without customer consent and similar
restrictions previously contained in Regulation Y have been removed
from these activities. These restrictions do not apply to banks that
conduct these activities and, to the extent these restrictions are
appropriate, supervisory guidance on the conduct of the activity will
be developed.
Several commenters requested that the Board eliminate all
restrictions governing the acquisition of debt in default, in
particular, the requirement that the period for disposing of shares or
assets securing debt in default be calculated as of the date the
defaulted debt is acquired. The Board believes the three restrictions
adopted in the regulation are necessary to define the scope of the
activity and to assure that the activity remains the acquisition of
debt rather than an impermissible acquisition of securities or other
assets. The requirement regarding the calculation of the period for
disposing of the underlying shares or assets subjects the activity to
the same limitations that apply under the terms of the BHC Act to the
acquisition of shares or assets in satisfaction of a debt-previously-
contracted. During this period, the holding company may divest the
property or, as in the case of any debt that has been previously
contracted, restructure the debt.
3. Leasing Personal or Real Property
The changes to the leasing provision have been adopted as proposed.
Specifically, the regulation removes a number of restrictions from the
two types of leasing activities permissible for bank holding companies,
full-payout leasing and high residual value leasing,6 including
the following restrictions:
---------------------------------------------------------------------------
\6\ A full-payout lease is the functional equivalent of an
extension of credit and relies primarily on rental payments and tax
benefits to recover the cost of the leased property and related
financing costs. High residual value leasing may involve significant
reliance on the expected residual value of the leased property--on
average, under 50 percent, but in some cases, up to the full
original cost of leased property--to recoup the cost of the leased
property and related financing costs. Under the current regulation,
bank holding companies may provide full-payout leases for any type
of personal property or real property, and may make high residual
value leases only for personal property.
---------------------------------------------------------------------------
* The lease must serve as the functional equivalent of an extension
of credit (permissible high residual value leasing may not be the
functional equivalent of an extension of credit);
* The property must be acquired only for a specific leasing
transaction;
* Leased property must be re-leased or sold within 2 years of the
end of each lease;
* The maximum lease term may not exceed 40 years; and
* No leased property may be held for more than 50 years.
Commenters favored removal of these restrictions and noted that
removal of these restrictions from the regulation would permit bank
holding companies
[[Page 9306]]
greater flexibility to acquire property in quantity in the expectation
of leasing activities and would allow more flexibility in selling or
re-leasing property at the expiration of a lease. It is expected that
supervisory guidance would be developed to address potential issues
arising from removal of the restrictions.
The provision limiting to 100 percent of the initial acquisition
cost the amount of reliance that may be placed on the residual value of
leased personal property has also been removed. This limit does not
apply to national bank leasing activities. While commenters favored
removal of the requirement that the estimated residual value of real
property be limited to 25 percent of the value of the property at the
time of the initial lease, this restriction was retained in order to
distinguish real property leasing from real estate development and
investment activities.
Two other requirements were retained: (1) That the lease be non-
operating, and (2) that the initial lease term be at least 90 days.
These requirements were developed in the course of litigation regarding
the leasing activities of national banks, and were relied on by the
courts in distinguishing bank leasing activities from general property
rental and real estate development businesses. The requirement that a
lease be non-operating is also a statutory requirement limiting the
high residual value leasing activities of national banks.
The regulation has been modified at the request of commenters to
clarify that, as a general matter, the requirement that a lease be non-
operating means that the bank holding company may not itself (or
through a subsidiary) repair, operate, maintain or service the
equipment or property being leased during the lease term. The Board has
applied this interpretation since 1974 in order to help distinguish
bank holding company leasing activities from general commercial
activities. A more detailed definition of a nonoperating lease in the
automobile rental context, which was developed in litigation and
adopted by the courts, has also been retained. The regulation provides
that, in either case, a bank holding company is permitted to arrange
for a third party to provide these repair and other services in
connection with a lease.
4. Operating Nonbank Depository Institutions
This category permits ownership of a savings association and an
industrial loan company. The proposed regulation retains the
restrictions in the BHC Act that the institution not be operated as a
``bank'' for purposes of the BHC Act 7 and that the activities of
the institution conform to the relevant statutory provisions of the BHC
Act. As noted above, by the terms of the Regulatory Relief Act, the
operation of a savings association requires prior System approval.
---------------------------------------------------------------------------
\7\ The BHC Act contains an exception from the definition of
``bank'' for industrial loan companies and savings associations that
meet requirements listed in the BHC Act.
---------------------------------------------------------------------------
5. Trust Company Functions
The current regulation limits the deposit-taking and lending
activities of trust companies. These limitations are already
encompassed in the requirement in the BHC Act that the trust company
not be a ``bank'' for purposes of the BHC Act and have, therefore, been
deleted from the regulation.
6. Financial and Investment Advisory Activities
Like the initial proposal, the final rule groups together all
investment and financial advisory activities and broadly permits acting
as investment or financial adviser to any person, without restriction.
Without limiting the breadth of the advisory authority, the rule also
lists specific examples of certain types of investment or financial
advice, counseling and related services that previously had been
separately authorized. These examples are:
* Advising an investment company and sponsoring, organizing and
managing a closed-end investment company;
* Furnishing general economic information and forecasts;
* Providing financial advice regarding mergers and similar
corporate transactions;
* Providing advice regarding commodities and derivatives
transactions; and
* Providing consumer educational courses and providing tax-planning
and tax-preparation.
The final rule removes the few restrictions that have in the past
been imposed by the Board on financial and investment advisory
activities. These restrictions do not apply to banks that provide
investment advisory services.
Specifically, the final rule removes the restriction that
discretionary investment advice be provided only to institutional
customers, thereby allowing bank holding companies to manage retail
customer accounts outside of the trust department of an affiliated bank
(to the extent otherwise permitted by law). This activity would
continue to be governed by the fiduciary principles in relevant state
law. Moreover, the final rule permits bank holding companies to provide
retail customers with investment advice concerning derivatives
transactions and to provide discretionary investment advice regarding
derivatives transactions to institutional or retail customers as an
investment adviser, commodity trading advisor, or otherwise. This
includes providing discretionary investment advice to any person
regarding contracts relating to financial or nonfinancial assets. The
conduct of these activities would, of course, be subject to the
requirements of applicable law, including applicable state and federal
laws governing fiduciary activities or advisory activities.
The final rule permits bank holding companies to engage in any
combination of permissible nonbanking activities listed in Regulation
Y. Accordingly, bank holding companies may provide financial and
investment advice (including discretionary investment advice) together
with permissible agency transactional services, investment or trading
transactions as principal, or any other listed activities. Supervisory
guidance may be developed, as needed, to address conflicts of interest
that may arise from providing certain services in combination.
The final rule also deletes restrictions in the areas of tax-
planning, tax-preparation and consumer counseling services that
prohibited bank holding companies from promoting specific products and
services and from obtaining or disclosing confidential customer
information without the customer's consent. These restrictions do not
apply to banks that engage in these activities.
The commenters addressing this activity strongly supported the
consolidation of the various advisory activities, the expansion of
permissible advisory activities, and the removal of existing
restrictions imposed by the Board on these activities. These commenters
argued that the provision of all types of financial and investment
advice is within the expertise of banking organizations and, therefore,
closely related to banking.
Several commenters requested further guidance on the scope of
permissible advisory activities and urged the inclusion of examples of
additional specific types of advisory activities, such as advisory
activities related to real estate, in order to clarify the
permissibility of these activities. Other commenters requested
clarification that the use of examples did not imply that advisory
activities that are omitted from the list of examples are not
permissible.
[[Page 9307]]
As noted above and in the original proposal, the final rule includes
any investment or financial advisory activity without restriction. The
examples included in the final rule are not intended in any way to
limit the scope of the financial and investment advisory activity. The
examples are illustrative rather than exclusive examples of permissible
advisory activities, and have been retained to recognize that certain
advisory activities have been specifically approved under other
provisions of Regulation Y and continue to be permissible.
Some commenters suggested revisions to the proposal's description
of certain examples. In response to these comments, the final rule
clarifies that the provision regarding advice on mergers, acquisitions
and other transactions includes ``other similar transactions.'' At the
suggestion of several commenters, the final rule has been revised to
clarify the permissibility of providing investment advice regarding
transactions with respect to any transactions in foreign exchange,
swaps and similar transactions, commodities, and forwards contracts,
futures, options, options on futures, and similar instruments.
Several commenters noted that there currently is uncertainty
regarding the jurisdiction of the CFTC over some transactions involving
foreign exchange. The final rule is not affected by the scope of CFTC
jurisdiction. The Board intends that references to transactions ``in
foreign exchange'' throughout the regulation include transactions in
foreign exchange, options on foreign exchange, futures on foreign
exchange, options on futures on foreign exchange, swaps in foreign
exchange, and similar foreign exchange-related instruments. A bank
holding company must, of course, comply with the rules of any other
federal or state agency to the extent that the bank holding company
conducts an activity subject to that agency's jurisdiction, as
determined by the relevant statute, agency rule or court decision.
7. Agency Transactional Services for Customer Investments
The final rule reorganizes into a single functional category the
various transactional services that a bank holding company may provide
as agent. This category includes securities brokerage activities,
private placement activities, riskless principal activities, execution
and clearance of derivatives contracts, foreign exchange execution
services, and other transactional services.
a. Securities Brokerage Activities
The current regulation differentiates between securities brokerage
services provided alone (i.e., discount brokerage services) and
securities brokerage services provided in combination with investment
advisory services (i.e., full-service brokerage activities). The final
rule permits securities brokerage without distinguishing between
discount and full-service brokerage activities.
Under the current regulation, bank holding companies providing
full-service brokerage services must make certain disclosures to
customers regarding the uninsured nature of securities and may not
disclose confidential customer information without the customer's
consent. These requirements were deleted in the proposal.
The Board sought comment on whether elimination of these
restrictions from the regulation would lead to adverse effects,
including customer confusion about the uninsured nature of non-deposit
investment products sold through bank holding companies. Several
commenters opposed the elimination of the disclosure requirements in
the regulation, contending that the interagency policy statement and
SEC regulations are not providing adequate consumer protection. A
number of commenters, however, supported the elimination of the
disclosure requirements in the regulation on the basis that these
requirements were duplicative of requirements contained in the
interagency policy statement and SEC regulations.
The final rule deletes the disclosure requirements. The disclosure
requirements--along with a number of other requirements that
specifically address the potential for customer confusion, training
requirements, suitability requirements and other matters--are already
contained in an interagency policy statement that governs the sale of
securities and other non-deposit investment products on bank premises
as well as in rules adopted by the SEC. In addition, similar disclosure
requirements are required by the Board's policy statement governing the
sale by bank holding companies of shares of mutual funds and other
investment companies that the bank holding company advises.
Recent supervisory experience indicates that banking organizations
and their affiliates, in general, are becoming more effective in
implementing the regulatory disclosure requirements and that customers
are becoming increasingly aware that investment products purchased at
banking organizations and their affiliates are not federally insured.
Moreover, the Board and the SEC have adequate supervisory authority to
ensure that bank holding companies comply with the regulatory
disclosure requirements. To the extent that disclosures to customers
are appropriate in areas not covered by the regulatory policy
statements or SEC regulations, the Board will consider whether to
develop supervisory guidance, on an interagency basis where
appropriate.
b. Riskless Principal Activities
The Board recently reduced the restrictions that govern riskless
principal activities.8 The restrictions that were retained were
designed to ensure that bank holding companies do not avoid the Glass-
Steagall Act provisions by classifying underwriting and dealing
activities as riskless principal activities. The restrictions that the
proposal retained prohibit:
---------------------------------------------------------------------------
\8\ The Bank of New York Company, Inc., 82 Federal Reserve
Bulletin 748 (1996).
---------------------------------------------------------------------------
* Selling bank-ineligible securities at the order of a customer who
is the issuer or in a transaction in which the bank holding company has
an agreement to place the securities of the issuer;
* Acting as riskless principal in any transaction involving a bank-
ineligible security for which the bank holding company or an affiliate
makes a market;
* Acting as riskless principal for any bank-ineligible security
carried in the inventory of the bank holding company or any affiliate;
and
* Acting as riskless principal on behalf of any U.S. affiliate that
engages in bank-ineligible securities underwriting or dealing
activities or any foreign affiliate that engages in securities
underwriting or dealing activities outside the U.S.
The Board requested comment on whether these restrictions, and in
particular the second and third restrictions, are necessary to assure
compliance with the Glass-Steagall Act. The majority of commenters
discussing the riskless principal activity argued for the deletion of
all four restrictions, contending that none of the restrictions are
necessary to ensure that a nonbanking subsidiary does not engage in
underwriting or dealing through its riskless principal transactions and
that any concern in this regard would be addressed by a requirement
that the subsidiary not hold itself out as a dealer with respect to any
security. Several commenters noted that the restrictions would prohibit
riskless principal
[[Page 9308]]
transactions on behalf of a section 20 affiliate even if this affiliate
was not the underwriter or dealer for the security in question. These
commenters maintained that this would put bank holding companies with
section 20 affiliates at a competitive disadvantage.
Several commenters also suggested that the Board permit riskless
principal transactions in the primary market generally. Some of these
commenters specifically urged the Board to allow bank holding companies
to act as riskless principal for the sale of commercial paper in the
primary market because commercial paper tends to have short maturities.
The final rule retains the requirement that riskless principal
transactions be conducted in the secondary market. The Board has
determined, however, to eliminate all but two restrictions in the final
rule. The final rule retains the first proposed restriction, which
prohibits a bank holding company from using its riskless principal
authority to sell bank-ineligible securities at the order of a customer
who is the issuer or in a transaction in which the bank holding company
has an agreement to place the securities of the issuer. This
restriction, as well as the requirement that the transactions be
conducted in the secondary market, is designed to distinguish riskless
principal activities from private placement and underwriting or dealing
activities. This classification of riskless principal transactions does
not prevent bank holding companies from engaging pursuant to other
authority in permissible private placement activities or in
underwriting and dealing activities, both of which permit transactions
in the primary market and with an issuer.
The Board has also determined to revise the second restriction to
focus on transactions involving a bank-ineligible security for which
the bank holding company or any affiliate acts as underwriter (during
the underwriting period and for 30 days thereafter) or dealer. This
revision narrows the scope of the restriction while addressing the
Board's concern that a nonbanking subsidiary not use its riskless
principal authority to engage in underwriting or dealing activities. As
modified, this provision also addresses the concerns covered by the
third and fourth restrictions. Consequently, the final rule deletes the
last two restrictions in the proposal.
c. Private Placement Activities
The Board proposed to add private placement activities to the
laundry list, using the definition of private placement activities
adopted by the SEC and the federal securities laws. The proposal
removed all but one restriction that had been imposed by Board order on
the conduct of this activity. That restriction prohibits a bank holding
company from purchasing for its own account securities that it is
placing and from holding in inventory unsold portions of securities it
is attempting to place.
Among the restrictions that the proposal removes from the conduct
of private placement activities are prohibitions on:
* Extending credit that enhances the marketability of a security
being placed;
* Lending to an issuer for the purposes of covering the funding
lost through the unsold portion of securities being placed;
* Lending to the issuer for the purpose of repurchasing securities
being placed;
* Acquiring securities through an account for which the bank
holding company has fiduciary authority;
* Providing advice to any purchaser regarding a security the bank
holding company is placing; and
* Placing securities with any non-institutional investors (the SEC
rules allow sales to institutional investors and up to 35 non-
institutional investors).
None of these restrictions have been applied to national banks that
conduct private placement activities.
The Board sought comment on whether any of these restrictions must
be retained to address potential adverse effects, including potential
conflicts of interest or customer confusion, or to assure fulfillment
of fiduciary duties. The commenters discussing private placement
activities strongly supported the removal of these restrictions from
private placement activities.
Several comments urged the Board, however, not to adopt the
definition of private placement in the federal securities statutes,
contending that such definition is too restrictive. The final rule, as
the proposal, defines private placement in accordance with the
Securities Act of 1933 (1933 Act) and the rules of the SEC. For
purposes of including private placement activities on the laundry list,
the Board believes it is reasonable to look to the definition of
private placement adopted by the SEC, the primary federal regulator of
securities activities, and the distinctions the SEC has drawn between
private placement and underwriting or dealing activities. This
definition does not limit bank holding companies from seeking to engage
in other securities activities pursuant to Board order.
One commenter also requested that the definition of private
placement be broadened to include private resales of securities to
institutional buyers and private placements of securities of registered
investment companies. The final rule would permit private resales of
privately placed securities if the transaction is conducted in
accordance with the requirements of the 1933 Act and the rules of the
SEC, the bank holding company acts only as agent for such private
resales by third parties, and the bank holding company neither
purchases for its own account securities that it is placing nor holds
in inventory unsold portions of securities it is attempting to place.
This would not include acting as a dealer with respect to resales of
privately placed securities, an activity that bank holding companies
may seek to engage in pursuant to Board order. Similarly, the final
rule would permit bank holding companies to act as agent for the
private placement of securities issued by any company, including an
investment company, to the extent that these private placements are
conducted in accordance with the requirements of the 1933 Act and the
SEC rules and the Board's restrictions on purchasing or inventorying
such securities.
Some commenters also recommended that the Board remove the
prohibition on a bank holding company purchasing or repurchasing the
securities it places. Several of these commenters contended that such
purchases should be permissible if the company made the decision to
purchase the securities for its own account simultaneously with or
after, and separate from, the decision to engage in the private
placement. One commenter maintained that a company engaged in private
placement activities should be permitted to invest in the securities
being placed so long as it had a bona fide expectation of and made a
bona fide effort in placing the securities. The final rule retains the
proposal's restriction on purchasing or repurchasing the securities
that are privately placed. The Board believes this restriction is
appropriate to prevent a bank holding company from classifying as
private placement activities its securities underwriting activities,
which are governed by the Glass-Steagall Act and the Board's section 20
decisions.
The final rule does not contain a limitation on the amount of a
particular issue of securities that a company may place with an
affiliate. As the Board noted when it first authorized a bank holding
company to place securities with an affiliate, banks privately place
securities with affiliates and no
[[Page 9309]]
particular supervisory problem appears to have arisen from these
investments.9 The Board continues to recognize the increased
potential for certain conflicts of interests if affiliates purchase a
substantial portion of an issue of securities placed by an affiliate.
In this regard, insured depository institutions that purchase
securities privately placed by an affiliate must comply with section
23B of the Federal Reserve Act as well as the limitations in the Glass
Steagall-Act relating to the purchase of investment securities. The
Board expects that nonbank affiliates that purchase these securities
will do so in accordance with appropriate internal policies and
procedures.
---------------------------------------------------------------------------
\9\ J.P. Morgan & Company Inc., 76 Federal Reserve Bulletin 26,
28 (1990)
---------------------------------------------------------------------------
d. Futures Commission Merchant Activities
i. In General
The current regulation authorizes bank holding companies to execute
and clear derivatives on certain financial instruments on major
exchanges, subject to a number of restrictions. The Board has, by
order, broadened this authority in two key respects. First, the Board
has by order permitted bank holding companies to execute and clear
derivative contracts on a broad range of nonfinancial commodities.
Second, the Board has permitted bank holding companies to clear
derivative contracts without simultaneously providing execution
services, and to provide execution services without also providing
clearing services. Commenters strongly favored modification of the
current regulation to reflect these Board orders.
As noted above, the final rule removes the restriction in the
current regulation prohibiting a bank holding company from providing
foreign exchange transactional services in the same subsidiary that
provides advice regarding foreign exchange. Banks are not subject to
this restriction. The final rule also would permit a bank holding
company to perform permissible futures commission merchant (``FCM'')
activities through a section 20 subsidiary.
The final rule permits a nonbanking subsidiary to act as an FCM
regarding any exchange-traded futures contract and options on a futures
contract based on a financial or nonfinancial commodity. The final rule
also deletes the restriction that a bank holding company not act as an
FCM on any exchange unless the rules of the exchange have been reviewed
by the Board. All U.S. commodities exchanges are supervised by the CFTC
and a review by the Federal Reserve System of the rules of an exchange,
whether domestic or foreign, would not be the most effective method for
addressing the safety of conducting FCM activities on the exchange. A
more effective method for addressing the risks of FCM activities--
whether on domestic or foreign exchanges--is through the on-site
inspection and supervision of the risk management systems of the bank
holding company. Accordingly, the Board would use the supervisory
process, which includes regular inspections of the holding company and
its affiliates, to address concerns about the effectiveness of the
holding company's risk management systems.
The final rule removes several other requirements, including that
the FCM subsidiary:
* Time stamp all orders and execute them in chronological order;
* Not trade for its own account;
* Not extend margin credit to customers; and
* Maintain adequate capital.
The CFTC has not found it necessary to prohibit FCMs from trading
for their own account, and removal of that restriction from the Board's
regulation allows an FCM affiliated with a bank holding company to
compete on the same basis as an FCM not affiliated with a holding
company. Experience has not indicated that the affiliation of an FCM
with a bank holding company itself increases the risks or conflicts
that could arise from the combination of FCM and proprietary trading
activities. Conduct in the other areas listed above is addressed in
rules of the CFTC or the relevant self-regulatory organizations, which
are applicable to any FCM.
Like the initial proposal, the final rule retains the requirements
of the current regulation that a bank holding company conduct its FCM
activities through a separately incorporated subsidiary (i.e., not
through the parent bank holding company). The proposal retained the
requirement of the current regulation that the subsidiary not become a
member of an exchange that requires the parent bank holding company
also to become a member of the exchange. The purpose of this
restriction was to limit the bank holding company's exposure to
contingent obligations under the loss sharing rules of exchange
clearinghouses in order to preserve the holding company's ability to
serve as a source of strength to its subsidiary insured depository
institutions. The Board invited comment, however, on whether this
restriction was appropriate and on whether the Board's concern could be
addressed more effectively by an alternative restriction, such as a
requirement that the parent bank holding company not provide a
guarantee of non-proprietary trades conducted by an FCM subsidiary.
Most commenters that discussed FCM activities supported the
alternative restriction as sufficient to address a bank holding
company's potential exposure to contingent obligations under loss
sharing rules of clearinghouses and to establish clear parameters for a
bank holding company's involvement on an exchange or clearing
association. Four commenters suggested that bank holding companies be
given the option of choosing which restriction is more suitable to
business conducted on a particular exchange. If a choice must be made
between a prohibition against membership or against a guarantee of non-
proprietary trades, these commenters generally preferred the latter,
noting that holding company membership is a prerequisite on a number of
exchanges for receiving reductions in fees or other benefits.
Based on its experience and a review of the comments, the Board has
determined that an alternative restriction that prohibits the parent
bank holding company from guaranteeing or otherwise becoming liable for
non-proprietary trades conducted by or through its FCM subsidiary more
effectively addresses the Board's concern about a parent bank holding
company's exposure to an exchange's or clearinghouse's loss sharing
rules than the current provision limiting the holding company's
membership on an exchange. This alternative restriction effectively
protects the parent bank holding company from potential exposure from
customer trades and open-ended contingent liability under loss sharing
rules while recognizing that most exchanges require a parent to
guarantee proprietary trades. Accordingly, the final rule revises the
regulation to prohibit the parent bank holding company from
guaranteeing or otherwise becoming liable to an exchange or
clearinghouse for trades other than those conducted by the subsidiary
for its own account or for the account of an affiliate. The final rule
eliminates the existing prohibition on an FCM subsidiary becoming a
member of an exchange that requires the parent bank holding company
also to become a member.
Other commenters requested confirmation that an FCM subsidiary may,
as an incidental activity, provide various futures-related financing to
customers, such as financing to cover margin obligations. Lending is a
[[Page 9310]]
permissible activity for bank holding companies, and the final rule
would not prohibit permissible lending activities in combination with
FCM activities. This permits an FCM owned by a bank holding company to
compete on the same terms with an FCM that is not affiliated with a
bank holding company. The Board notes, however, that some exchanges
prohibit FCMs from providing margin financing, and CFTC rules require
full capitalization for any extensions of credit to customers. An FCM
controlled by a bank holding company must continue to abide by the
rules of the CFTC and any exchange on which the FCM is a member or
trades.
Several commenters requested clarification that the authority for
an FCM subsidiary to become a member of an exchange included authority
to open an office in the country were the exchange is located. In
addition, several commenters requested clarification that the expanded
FCM activities permitted under Regulation Y also would be permitted
under the Board's Regulation K.
Regulation Y currently provides, and the final rule continues to
provide, that a nonbanking company permitted under section 4(c)(8) of
the BHC Act to engage in a nonbanking activity may open offices outside
the United States to conduct that same activity unless the bank holding
company has not received approval to conduct the activity outside the
United States. A bank holding company that currently has authority to
engage in FCM activities on a geographically limited basis may, if it
qualifies for the streamlined procedures, conduct these activities de
novo outside the U.S. through direct offices of its 4(c)(8) affiliate
without further approval. The scope of FCM and other activities that
fall under Regulation K will be considered by the Board in connection
with its review of Regulation K.
ii. Clearing-Only Activities
The Board has by order permitted bank holding companies to clear
trades that the FCM has not executed itself, and the final rule
incorporates this activity in the laundry list. The proposal retained
two restrictions currently imposed by Board order. These restrictions:
(1) Prohibit the clearing subsidiary from serving as the primary or
qualifying clearing firm for a customer; and (2) require the clearing
subsidiary to have a contractual right to decline to clear any trade
that the subsidiary believes poses unacceptable risks (a so-called
``give-up'' agreement).
The Board adopted these restrictions to ensure that the clearing
subsidiary of a bank holding company could limit its exposure to
traders that execute trades themselves or through third parties. In
particular, these restrictions prevent a bank holding company from
clearing trades executed by exchange locals or market makers. In 1991,
the Board rejected a proposal by a bank holding company to engage in
clearing trades for exchange locals and market makers because of
concerns about the inability of the bank holding company to monitor and
control its credit exposures during the trading day. The Board found
that the activity was closely related to banking, but believed that the
potential adverse effects of conducting the activity outweighed the
potential public benefits.10
---------------------------------------------------------------------------
\10\ Stichting Prioriteit ABN AMRO Holding, 77 Federal Reserve
Bulletin 189 (1991).
---------------------------------------------------------------------------
The Board sought comment on whether these two restrictions on the
conduct of clearing-only activities by bank holding companies should be
retained. The Board also invited comment on whether and how bank
holding companies are able to monitor and limit adequately the
potential exposure from conducting these activities.
Commenters who discussed FCM activities strongly supported the
removal of these two restrictions on clearing-only activities in favor
of the Board relying on on-site examination and supervision of a
clearing subsidiary's risk management systems for monitoring and
managing its credit exposures. Commenters maintained that the Board's
restrictions are not necessary in light of the risk management tools
currently available to clearing firms. They contended that clearing
firms can effectively monitor and limit their potential credit
exposures through various risk management procedures, including:
establishment of trading limits for each customer; adjustment of such
limits based on market conditions and ongoing credit evaluations;
monitoring of customer market risk, trading exposure and compliance
with trading limits; assessment and collection of initial and
maintenance performance bond or margin; and payment of gains and
collection of losses associated with open positions through a mark-to-
market process on both an intra-day and end-of-day basis.
Commenters explained that all exchanges provide clearing members
with complete information regarding trades cleared through that
member's account at the end of the trading day, which thereby limits a
clearing FCM's exposure to a client to the trading transactions on that
day. Commenters noted that technological improvements have enabled a
growing number of exchanges to develop systems that collect and report
intra-day trade matching information. Commenters also noted that, in
many markets, a clearing firm can, pursuant to exchange rules or
contractual arrangements, advise an executing broker that it will not
accept further trades of that customer. In agreements with customers,
clearing brokers also typically reserve the right to liquidate a
customer's position if the required margin is not posted promptly.
Commenters added that potential exposure is further mitigated by
various exchange rules relating to position limits, and large trading
position reporting. In addition, commenters contended that oversight by
the CFTC or the SEC, which includes capital, reporting, performance
bond and margin, and recordkeeping requirements, assists in monitoring
the management of risks associated with acting as a primary clearing
firm, including clearing trades executed by exchange locals and market
makers.
In light of these comments, the final rule deletes the proposal's
restrictions relating to primary clearing or qualifying firm activities
and customer ``give-up'' agreements.11 Examiners will assess and
supervise FCM policies, procedures and practices relating to clearing-
only activities, taking into consideration the nature of the FCM's
clients, the particular exchanges through with the subsidiary provides
clearing services, and the related risks involved. It is expected that
the Board would develop supervisory guidance on management of risks
involved in clearing-only activities.
---------------------------------------------------------------------------
\11\ A commenter requested that the Board clarify in the
regulation that the securities brokerage activity permitted in
Regulation Y encompasses clearing apart from executing trades in
securities. Both the current and final rule permit securities
brokerage activities broadly, including executing-without-clearing
and clearing-without-executing trades in securities. The final rule
specifies this.
---------------------------------------------------------------------------
e. Other Transactional Services
The proposal added a provision allowing a bank holding company to
provide transactional services for customers involving any derivative
or foreign exchange transaction that a bank holding company is
permitted to conduct for its own account. Commenters supported the
inclusion of these activities on the regulatory laundry list. Inclusion
of this activity is not intended to limit the securities brokerage,
FCM, private placement or riskless principal activities permitted under
the final rule.
[[Page 9311]]
Several commenters suggested that the scope of this provision be
expanded to include acting as a broker with respect to forward
contracts based on financial and nonfinancial commodities, regardless
of whether the bank holding company could invest in or trade such
instrument as principal. The commenters contended that providing
brokerage services, as agent, to customers with respect to forward
contracts on either financial or nonfinancial commodities should not be
dependent on whether the bank holding company may take a principal
position in the contract. In view of these comments, the final rule
clarifies that a bank holding company may act as a broker with respect
to forward contracts based on a financial or nonfinancial commodity
that also serves as the basis for an exchange-traded futures contract.
This permits a bank holding company to act as agent in a forward
contract that involves the same commodities and assessment of risk that
underlay the permissible FCM activities of bank holding companies
without extending this authority to forward contracts for the delayed
sale of commercial products (such as automobiles, consumer products,
etc.) or real estate.
Several commenters requested that acting as a commodity pool
operator (``CPO''), including acting as the general partner of a
partnership that invests in commodities as well as futures and options
on financial and nonfinancial commodities, be added to the list of
permissible activities. The commenters noted that the Board recently
permitted by order a bank holding company to act as a CPO, subject to a
number of limitations.12 Although some proposals to act as a CPO
may involve a combination of permissible activities, certain proposals
raise supervisory issues and open-end pool structures may raise Glass-
Steagall Act issues. In addition, some proposals raise questions about
the proper treatment of the CPO's interest in the commodity pool for
capital adequacy purposes.13 These issues can be evaluated more
effectively on a case-by-case basis through the application review
process. Accordingly, the Board has determined not to add acting as a
CPO as a separate activity on the laundry list at this time.
---------------------------------------------------------------------------
\12\ See The Bessemer Group, Incorporated, 82 Federal Reserve
Bulletin 569 (1996).
\13\ For example, the limitations in the case cited above
included a requirement to consolidate, for regulatory capital
purposes, the assets and liabilities of subsidiary partnerships for
which a wholly owned subsidiary of the bank holding company would
serve as a general partner. The subsidiary partnerships were to
employ leverage (including margin debt and short sales) in making
investments.
---------------------------------------------------------------------------
8. Investment or Trading Transactions as Principal
The final rule, as the proposal, incorporates decisions by the
Board that permit bank holding companies broadly to invest as principal
in derivatives on financial and nonfinancial commodities. The proposal
would allow a bank holding company to invest or trade as principal in a
derivative contract on a financial or nonfinancial commodity or index
of commodities, so long as any one of three conditions is met:
* The underlying asset is a permissible investment for state member
banks;
* The derivative contract requires cash settlement; or
* The derivative contract allows for assignment, termination or
offset prior to expiration and the bank holding company makes every
reasonable effort to avoid delivery.
Some commenters were concerned that the proposal as worded would
not include trading as principal in derivatives based on or linked to
bank ineligible securities, such as certain equity index swaps or
equity index futures contracts, an activity that the Board has approved
by order. The final rule clarifies that a bank holding company may
trade as principal a derivatives contract on an index of rates, prices
or the value of any financial or nonfinancial asset or group of assets,
so long as the contract requires cash settlement. This does not include
acting as a dealer in options based on indexes of bank-ineligible
securities when the options are traded on securities exchanges. These
options are securities for purposes of federal securities laws and are
bank-ineligible securities for purposes of the Glass-Steagall
Act.14 Similarly, activities authorized by this rule do not
include acting as a dealer in any other instruments that are bank-
ineligible securities for purposes of section 20. Thus, dealing in
securities, including acting as a market-maker, specialist or
registered options trader on an exchange, would be governed by the
Board's orders regarding bank-ineligible securities underwriting and
dealing activities. Under the final rule, the three alternative
conditions would not apply to derivative contracts based on an index,
but would apply to all other derivative contracts.
---------------------------------------------------------------------------
\14\ See Swiss Bank Corporation, 82 Federal Reserve Bulletin 685
n. 8 (1996).
---------------------------------------------------------------------------
Several commenters suggested that an additional alternative be
added that permits trading as principal in a derivative contract that
involves an asset that is a permissible investment for a national bank
or for a bank holding company. The final rule adopts a provision that
would include any other instruments approved by the Board.
In addition, some commenters requested clarification that the
alternative conditions apply only to a bank holding company's trading
activities and not to investments for the company's own account. Other
commenters maintained that trading for a bank holding company's own
account should not be viewed as a nonbanking activity subject to
section 4(c)(8) but as a servicing activity under section 4(c)(1)(C) of
the BHC Act.
Bank holding companies have increasingly proposed to acquire
companies engaged in, or to engage through an existing subsidiary in,
derivatives trading and investment activities that would be beyond the
scope of investment or trading activities encompassed within the bank
servicing exemption.15 The addition of proprietary trading
activities to the regulation clarifies the permissibility of this
activity as a separate business activity.
---------------------------------------------------------------------------
\15\ E.g., Swiss Bank Corporation, 81 Federal Reserve Bulletin
185 (1995).
---------------------------------------------------------------------------
The final rule, as the proposal, also includes authority that the
Board has previously granted by order permitting bank holding companies
to buy, sell and store gold, silver, platinum and palladium bullion,
coins, bars and rounds. To enable the regulation to remain current with
relevant regulatory pronouncements regarding the permissible activities
of banks, several commenters suggested that the proposed list of metals
be expanded to include copper (recently permitted for national banks)
and any other permissible investments for national banks or bank
holding companies. In view of these comments, the final rule adds
copper and includes any other metal approved by the Board.
Some commenters requested that the Board add to the regulatory
laundry list underwriting and dealing to a limited extent in certain
municipal revenue bonds, one-to-four family mortgage-related
securities, consumer receivable securities, and commercial paper
because the Board, by order, has permitted these activities. Several
commenters also urged the Board to add accepting delivery of
commodities to the list of activities because national banks may take
delivery of physical commodities by warehouse receipt or ``pass-through
delivery'' to another party when hedging financial exposures
[[Page 9312]]
arising from otherwise permissible activities. The final rule does not
expand the laundry list to include these activities because these
activities raise issues involving risk management policies and
procedures that are more appropriately addressed through the
application review process.
In this regard, the Board believes that, at this time, all
proposals to engage de novo or to make an initial acquisition of a
company engaged in corporate debt and/or equity securities underwriting
and dealing activities should be reviewed under the normal procedures,
and not under the streamlined procedures. This will allow the System to
conduct a review of the risk-management systems of the bank holding
company in connection with the initial entry of a bank holding company
into this activity. Bank holding companies that have already received
Board approval to engage in these broad securities activities may
acquire companies engaged in these activities if the bank holding
company and the proposed acquisition qualify for the streamlined
procedure, unless the System notifies the company that the normal
procedure should be used.
9. Management Consulting and Counseling Activities
The current regulation authorizes bank holding companies to provide
management consulting services on any matter to any depository
institution or affiliate of a depository institution. The rule has been
expanded in two respects. First, bank holding companies may provide
management consulting services regarding financial, economic,
accounting, or audit matters to any company. These are financial
activities that are directly related to the activities and expertise of
bank holding companies. Commenters discussing this issue agreed that
this activity is closely related to banking for purposes of section
4(c)(8) of the BHC Act.
Second, for the reasons explained above, the final rule permits a
bank holding company to derive up to 30 percent of its management
consulting revenue from management consulting services provided to any
customer on any matter. As noted above, commenters discussing this
activity strongly supported this provision as necessary to permit bank
holding companies to attract and retain the most qualified personnel,
and to compete effectively against unregulated companies that offer a
broad array of management consulting services to customers of bank
holding companies. For the reasons explained above, the Board has
determined not to raise the 30 percent limit on this basket of
permitted incidental activities at this time, and will monitor the
scope and nature of these activities.
Two restrictions have been retained governing interlocks with and
investments in client companies. While several commenters argued for
removal of these restrictions, the Board continues to believe that
these limits are necessary in the context of management consulting
arrangements in order to ensure that a bank holding company does not
exercise control over a client company through a management consulting
contract and to prevent conflicts of interest. These restrictions do
not limit the ability of a bank holding company to provide management
consulting services to an affiliate, which is a servicing activity
permitted under section 4(c)(1)(C) of the BHC Act.
10. Support Services
This category includes courier services (other than armored car
services) and printing checks and related documents. Both services are
included in the laundry list as they were authorized by the Board,
without change.
11. Insurance Agency and Underwriting Activities
The insurance provisions reflect the detailed restrictions on
insurance activities of bank holding companies specified in the BHC
Act. The current regulation has not been changed. Several commenters
urged the Board to take a variety of steps to authorize broader
insurance activities. The Board will continue to consider these
suggestions in light of the specific terms of the BHC Act.
12. Community Development Activities
The current regulation permits bank holding companies to make
equity and debt investments in corporations and projects designed
primarily to promote community welfare. The Board has adopted its
proposal clarifying that this activity includes providing advisory and
related services to community development programs. The Board has
permitted these advisory services by order.
13. Money Orders, Savings Bonds and Traveler's Checks
The current regulation limits the sale and issuance of money orders
and similar consumer payment instruments to instruments with a face
value of less than $1,000. The Board has by order authorized this
activity for payment instruments of any face amount. Accordingly, the
limitation on the face amount of these instruments has been removed.
14. Data Processing Activities
The current regulation broadly authorizes bank holding companies to
provide data processing and data transmission services by any
technological means so long as the data processed or furnished are
financial, banking, or economic. The final rule clarifies that a bank
holding company may render advice to anyone on processing and
transmitting banking, financial and economic data.
The following two restrictions on permissible data processing
activities have been deleted:
* All data processing services must be provided pursuant to a
written agreement with the third party that describes and limits the
services; and
* Data processing facilities must be designed, marketed and
operated for processing and transmitting financial, banking, or
economic data.
As explained above, the data processing activity has also been
revised to permit bank holding companies to derive up to 30 percent of
their data processing revenues from processing and transmitting data
that are not financial, banking, or economic. As explained above, most
commenters addressing this activity strongly supported all of these
changes and, in particular, the proposal to permit the conduct of some
nonfinancial data processing activities as an incident to financial
data processing activities.
D. Changes to Tying Restrictions
The Board has adopted significant amendments to its rules regarding
tying arrangements. The amendments remove Board-imposed tying
restrictions on bank holding companies and their nonbank subsidiaries;
create exceptions from the statutory restriction on bank tying
arrangements to allow banks greater flexibility to package products
with their affiliates; and establish a safe harbor from the tying
restrictions for certain foreign transactions. These amendments are
designed to enhance competition in banking and nonbanking products and
allow banks and their affiliates to provide more efficient and lower-
cost service to customers.
Section 106 of the BHC Act Amendments of 1970 contains five
restrictions intended to prohibit anti-competitive behavior by banks:
Two prohibit tying arrangements; two prohibit reciprocity arrangements;
and one prohibits exclusive dealing arrangements.16 The tying
restrictions,
[[Page 9313]]
which have the greatest effect on industry practices, prohibit a bank
from restricting the availability or varying the consideration for one
product or service (the ``tying product'') on the condition that a
customer purchase another product or service offered by the bank or by
any of its affiliates (the ``tied product''). Although section 106
applies only when a bank offers the tying product, the Board in 1971
extended these special restrictions to bank holding companies and their
nonbank subsidiaries.17
---------------------------------------------------------------------------
\16\ 12 U.S.C. Sec. 1972.
\17\ 36 FR 10777 (June 3, 1971).
---------------------------------------------------------------------------
Section 106 was adopted in 1970 when Congress expanded the
authority of the Board to approve proposals by bank holding companies
to engage in nonbanking activities. Section 106 was based on
congressional concern that banks' unique role in the economy, in
particular their power to extend credit, would allow them to create a
competitive advantage for their affiliates in the new, nonbanking
markets that they were being allowed to enter.18 Congress
therefore imposed special limitations on tying by banks--restrictions
beyond those imposed by the antitrust laws. Section 106 is a broader
prohibition, unlike the antitrust laws, a plaintiff in action under
section 106 need not show that: (1) the seller has market power in the
market for the tying product; (2) the tying arrangement has had an
anti-competitive effect in the market for the tied product; or (3) the
tying arrangement has had a substantial effect on interstate commerce.
---------------------------------------------------------------------------
\18\ See S. Rep. No. 1084, 91st Cong., 2d Sess. (1970).
---------------------------------------------------------------------------
The Board has authority to grant exceptions to section 106 and, in
the past few years, has used its exemptive authority to allow banking
organizations to package their products when doing so would benefit the
organization and its customers without anti-competitive effects. For
example, the Board has allowed arrangements that included discounts on
brokerage services and other products based on a customer's
relationship with the bank or bank holding company. The final rule
would build on this recent history by permitting broader categories of
packaging arrangements that also do not raise the concerns that section
106 was intended to address.
1. Rescind the Board's Regulatory Extension of the Statute
As noted above, the Board has by regulation extended the
restrictions of section 106 to bank holding companies and their nonbank
subsidiaries as if they were banks. This extension was adopted at the
same time that the Board approved by regulation the first laundry list
of nonbanking activities under section 4(c)(8) of the BHC Act,
apparently as a prophylactic measure addressed at potential anti-
competitive practices by companies engaging in nonbanking
activities.19
---------------------------------------------------------------------------
\19\ In recent years, the Board has enacted limited relief from
the anti-tying restrictions on nonbanks within bank holding company
structures. For example, the Board has permitted a nonbanking
subsidiary to offer discounts on products and services based on the
customer's obtaining some other product or service from that
subsidiary or another nonbank affiliate. 12 CFR 225.7(b)(3).
However, even with this relief, tying between a bank holding company
or its nonbank subsidiary and an affiliated bank has remained
restricted, as has any tying arrangement not limited to the offering
of a discount.
---------------------------------------------------------------------------
As noted in the preamble to the proposed rule, the Board has gained
extensive experience with bank holding companies, their nonbank
affiliates, and the markets in which they operate. Based on this
experience, the Board has concluded that these nonbank companies do not
possess the market power over credit or other unique competitive
advantages that Congress assumed that banks enjoyed in 1970.
Accordingly, the Board has decided that applying the special bank anti-
tying rules to such companies is no longer justified. Any competitive
problems that might arise would be isolated cases, better addressed not
through a special blanket prohibition but rather through the same
general antitrust laws that bind the non-bank-affiliated competitors of
these entities.
Commenters discussing the tying proposal overwhelmingly supported
the Board's proposal to rescind its regulatory extension of the anti-
tying rules to nonbanks. Commenters noted that, in rescinding its rule,
the Board would not be granting an ``exception'' to section 106, which
never envisioned that nonbank affiliates would be covered by the
special anti-tying rules applicable to banks, but rather returning the
coverage of the statute to that intended by Congress. Commenters argued
that the proposed rescission would benefit banking organizations and
the public by permitting bank holding companies and their nonbank
subsidiaries to package products and services more flexibly--
particularly in packages with products and services of bank
affiliates--thereby enabling the provision of more efficient and lower-
cost products and services to their business and retail customers.
Commenters also generally agreed that removal of these special
restrictions on bank holding companies and their nonbank subsidiaries
would eliminate a competitive disadvantage by allowing them the same
freedom to package products that their non-bank-affiliated competitors
currently enjoy. Some of these commenters noted that the Sherman Act
would continue to prohibit bank holding companies and their
subsidiaries from engaging in any tying arrangement that had an anti-
competitive effect.
Only two commenters opposed the Board's proposal to rescind the
regulatory extension of bank anti-tying rules to nonbank
affiliates.20 One commenter, a law firm representing a nonbanking
corporation, opposed the Board's proposal to free nonbank affiliates
from the special tying rules applicable to banks, as well as the other
proposed changes to the anti-tying regulation. This commenter stated
that the proposed changes should not be adopted without a comprehensive
study of their potential ramifications. The commenter also maintained
that the Board's regulatory extension of the anti-tying rules to
nonbank affiliates is consistent with the legislative history of
section 106, which evinced concern over possible unfair business
practices of nonbank affiliates as well as banks themselves. In
addition, the commenter questioned whether the general antitrust laws
and the nature of the competition faced by banking organizations would
be adequate to prevent unfair or anti-competitive practices, and
whether the proposal would produce efficiency, lower costs, and fair
competition between banking and nonbanking organizations.21
---------------------------------------------------------------------------
\20\ In addition, a community group generally opposed the
Board's proposed changes to the tying rules on the basis of concerns
about relationships between banks and their consumer finance company
affiliates. These concerns focused on fair lending and equal credit
opportunity, appropriate disclosure of referral fees and other
matters, and compliance with various consumer lending statutes and
regulations. The Board does not believe, and this commenter has
provided no basis for concluding, that the anti-tying statute or
regulations are intended to address or have the effect of addressing
these concerns. Moreover, these concerns are already addressed by
separate statutes and regulations, including the Equal Credit
Opportunity Act, Home Mortgage Disclosure Act, and Real Estate
Settlement Procedures Act of 1974.
\21\ With respect to fair competition between banking and
nonbanking organizations, the commenter asserted that banking
organizations have an inherent competitive advantage from being able
to conduct the business of banking. This commenter also noted the
increasing concentration of resources within the banking industry
itself, and indicated that the existing anti-tying rules may have
contributed to the competitive vitality of the markets in which
nonbank affiliates operate.
---------------------------------------------------------------------------
Another law firm, representing a group of insurance industry trade
associations, also opposed the Board's proposal to remove the special
anti-tying rules applicable to nonbank
[[Page 9314]]
affiliates. This commenter maintained that the bank anti-tying rules
should continue to apply to nonbank affiliates because these affiliates
may appear to the public to be indistinguishable from the banks
themselves and because the same public policy concern regarding banks'
power over credit warrants the extension of the prophylactic rule for
banks to entities having an affiliate relationship with banks.22
---------------------------------------------------------------------------
\22\ This commenter also advanced several arguments for not
rescinding these rules with respect to packaged offerings that
include insurance products, specifically: (1) That such packaging
arrangements may violate state insurance laws that prohibit
insurance agents from offering rebates on the sale of insurance
products; and (2) that permitting insurance premium payments as part
of a discount package may similarly violate state anti-rebate and
insurance advertising laws, and could result in customer confusion
and a conflict with the Interagency Statement on Retail Sales of
Nondeposit Investment Products. The commenter also argued that the
proposal could enable banks to coerce customers to purchase
insurance in order to obtain a loan, and that permitting a
combination of insured deposit and uninsured investment products in
a single package could obscure the differences between these
products and produce confusion among customers of banking
organizations.
---------------------------------------------------------------------------
The Board does not believe that these concerns warrant retention of
special anti-tying rules for nonbank affiliates of banks. In
particular, the Board's experience as regulator and supervisor of
banks, bank holding companies, and their subsidiaries provides an
adequate basis for judgments about the competitive nature of markets in
which banking organizations operate. Commenters have not provided
evidence to the contrary or proposed specific subjects for further
study. Moreover, commenters opposing the proposal have produced no
evidence that the antitrust rules and the nature of the nonbanking
markets in which bank affiliates operate would not be sufficient to
prevent unfair or anti-competitive practices, or that the proposed
liberalization of the Board's tying rules would not yield efficiencies
and corresponding lower costs for customers. The Board does not
believe, and commenters have provided no basis for concluding, that
affiliation with a bank creates a competitive advantage warranting the
application of special bank anti-tying rules to nonbank
affiliates.23 Finally, while the legislative history of section
106 may evince concern with the competitive practices of banks and
their affiliates, the statute itself clearly applies only to tying by
banks themselves.
---------------------------------------------------------------------------
\23\ The Board also notes that these commenters have not
provided any reason to conclude that an increased concentration of
resources in the banking industry itself warrants an extension of
anti-tying rules to the nonbanking markets in which bank affiliates
operate.
Other matters raised by commenters also provide no basis for
extending the special bank anti-tying rules to nonbank affiliates.
The Board does not believe that the rescission of this extension or
other aspects of the proposed rule would preempt state laws
regarding insurance or other matters. Furthermore, concerns about
possible customer confusion are effectively addressed through more
direct means such as the Interagency Statement on Retail Sales of
Nondeposit Investment Products. The Board also notes that section
106 would continue to prohibit banks from using their power over
credit to induce customers to purchase insurance products.
---------------------------------------------------------------------------
For the foregoing reasons, the Board is rescinding its extension of
bank anti-tying rules to bank holding companies and their nonbank
subsidiaries.
2. Retain Limited Prohibition on Tying Arrangements Involving
Electronic Benefit Transfer Services
In the proposed rule, the Board sought comment on whether it should
retain its regulatory extension of the statute for purposes of one type
of tying arrangement. Section 825(a)(3) of the Personal Responsibility
and Work Opportunity Reconciliation Act of 1996, signed into law on
August 22, 1996, amended the Food Stamp Act of 1977 to prohibit tying
the availability of electronic benefit transfer services to other
point-of-sale services. Enforcement of the Food Stamp Act is assigned
to the Secretary of Agriculture.24 Banks, bank holding companies,
and nonbank subsidiaries of bank holding companies were exempted from
the statute, apparently because they were already restricted by section
106 (in the case of banks) and the Board's regulation (in the case of
bank holding companies and their nonbank subsidiaries). Thus, unless
the Board were to retain a restriction on bank holding companies and
their nonbank subsidiaries, they would be the only companies not
subject to a special restriction on tying of electronic benefit
transfer services.
---------------------------------------------------------------------------
\24\ 104 Pub. L. 193, 110 Stat. 2105; 7 U.S.C. Sec. 2016(i)(11).
---------------------------------------------------------------------------
Commenters either supported or expressly did not object to this
limited retention of a special anti-tying rule for electronic benefit
transfer services. Commenters acknowledged that the principle of
competitive equality underlying the general rescission of special anti-
tying rules for nonbank entities dictated retention of the special
rules in this limited context.
The Board has decided to retain this restriction.
3. Treat Inter-affiliate Tying Arrangements the Same as Intra-bank
Arrangements
Section 106 contains an explicit exception (the ``statutory
traditional bank product exception'') that permits a bank to tie any
product or service to a loan, discount, deposit, or trust service
offered by that bank.25 For example, a bank could condition the
use of its messenger service on a customer's maintaining a deposit
account at the bank. Although the statutory traditional bank product
exception appears to have been effective in preserving traditional
relationships between a customer and bank, the exception is limited in
an important way: it does not extend to transactions involving products
offered by affiliates.
---------------------------------------------------------------------------
\25\ 12 U.S.C. 1972(1)(A).
---------------------------------------------------------------------------
The Board has adopted a ``regulatory traditional bank product
exception'' that generally extends the statutory exception to
transactions involving affiliates. However, the Board placed two
restrictions on the regulatory exception. First, the Board required
that both products involved in the tying arrangement be traditional
bank products. Second, the Board required that the arrangement consist
of discounting the tying product rather than restricting its
availability. However, as noted in the preamble to the proposed rule,
Congress decided not to apply these two restrictions to the statutory
traditional bank product exception for intra-bank transactions, and it
is difficult to argue that inter-affiliate transactions pose any
greater risk of anti-competitive behavior than those intra-bank
transactions. Moreover, Congress has already extended the statutory
traditional bank product exception to cover inter-affiliate
transactions, without restriction, for savings associations and their
affiliates.26 For these reasons, the Board proposed eliminating
the above restrictions so that any tying arrangement within a banking
organization would be permissible if the tied product is a loan,
discount, deposit, or trust service.
---------------------------------------------------------------------------
\26\ 12 U.S.C. 1464(q)(1)(A).
---------------------------------------------------------------------------
Commenters discussing this proposal overwhelmingly supported this
aspect of the proposal, agreeing with the Board that there is no reason
to subject inter-affiliate tying arrangements to restrictions that are
not applicable to intra-bank arrangements. Three commenters raised
general objections to the elimination of these restrictions. These
objections were similar to those advanced against the proposed
rescission of the tying rules applicable to nonbank affiliates. The
Board notes that, because insurance products are not among the
traditional bank products listed in the statute or the rule, this
aspect of the proposal would not
[[Page 9315]]
enhance a banking organization's ability to leverage possible market
power in other product markets to engage in anti-competitive behavior
in insurance markets.
A substantial number of commenters urged the Board to adopt an
expanded definition of the ``traditional bank products'' which may be
tied to other offerings under the statutory and regulatory exceptions.
Some of these commenters proposed a specific list of additional
products--such as foreign exchange, interest rate swaps and other
derivative products, and investment advisory services--to be exempted
by the rule. Other commenters proposed a more general approach for
expanding this definition: for example, exempting products authorized
as part of the business of banking under relevant chartering laws.
Others urged the Board to exempt all but a limited set of tying
arrangements from the statutory restrictions--for example, by covering
only transactions where the tying product is a consumer or small
business loan.27 The Board believes that these suggestions warrant
serious consideration, but intends to study this issue and provide
notice and seek comment before adopting any changes not suggested in
the proposed rule.
---------------------------------------------------------------------------
\27\ Some commenters also suggested that the Board issue
interpretations to clarify the scope of the statutory list of four
traditional bank products.
---------------------------------------------------------------------------
For the foregoing reasons, the Board has decided to adopt the
extension of the traditional bank product exception as proposed.
4. Extend the Expanded Regulatory ``Traditional Bank Product''
Exception to Reciprocity Arrangements
As noted above, section 106 prohibits not only tying arrangements
but also reciprocity arrangements (conditioning the availability of or
varying the consideration for one product on the providing of another
by the customer).28 Like the tying prohibition, the prohibition on
reciprocity arrangements contains an exception intended to preserve
traditional banking relationships. The exception provides that a bank
may condition the availability of a product or service on the
customer's providing to the bank some product or service ``related to
and usually provided in connection with'' a loan, discount, deposit, or
trust service.29 The Board noted in the proposed rule that it had
received only one request to extend this exception, and commenters
confirmed that these types of reciprocity arrangements are not common
in the industry.
---------------------------------------------------------------------------
\28\ 12 U.S.C. 1972(1)(C) and (D).
\29\ 12 U.S.C. 1972(1)(C).
---------------------------------------------------------------------------
Like the statutory traditional bank product exception to the tying
prohibition, this exception to the reciprocity prohibition does not
apply to inter-affiliate transactions, and, in the proposed rule, the
Board proposed to extend the statutory exception for traditional
banking relationships to cover such inter-affiliate transactions. For
reasons similar to those advanced with respect to the extension of the
statutory exception for tying arrangements, most commenters discussing
this aspect of the proposal strongly supported the extension of
permitted reciprocity arrangements, while a small number of commenters
opposed this aspect of the proposal. The opposing comments did not
raise any objections specific to reciprocity arrangements.
For the foregoing reasons, and because the Board does not believe
that inter-affiliate reciprocity arrangements pose any greater anti-
competitive threat than similar intra-bank arrangements permitted by
Congress, the Board is adopting substantially as proposed the extension
of the statutory exception for certain reciprocity arrangements. The
Board has decided to make technical changes to the proposed exception
to make clear that the regulatory exception is co-extensive with the
statutory exception.
5. Coverage of Foreign Transactions Under Section 106
In response to a request that the Board clarify whether section 106
restricts foreign transactions, the Board sought comment on whether it
should establish a ``safe harbor'' with respect to some set of foreign
transactions. In particular, the Board sought comment on whether the
safe harbor should define ``foreign transactions'' according to the
location of the customer, the location of the market where any
potential anti-competitive effects would occur, or some other factor.
Federal legislation is presumed to apply only within the
territorial jurisdiction of the United States, unless the legislation
clearly expresses a contrary intent on the part of Congress. No such
intent is evident in section 106.30 However, determining whether a
series of transactions has sufficient connection to the United States
to trigger section 106 can be a difficult process. The proposed safe
harbor was intended to provide certainty with respect to a defined set
of transactions. Thus, the proposed safe harbor was not intended to be
an interpretation of section 106, as some transactions outside the safe
harbor may not be covered by the statute.
---------------------------------------------------------------------------
\30\ See Gushi Bros. Co. v. Bank of Guam, 28 F.3d 1535, 1542-43
(9th Cir. 1994).
---------------------------------------------------------------------------
Commenters addressing this issue overwhelmingly supported the
creation of a safe harbor. Commenters argued that a safe harbor would
provide needed certainty to banking organizations operating abroad and
permit these organizations to compete with foreign firms. One commenter
noted that U.S. banks sometimes cannot participate in lending
syndicates dominated by foreign banks because the loan agreement
contains conditions that would violate section 106. Furthermore, in
some countries it is customary for a financial advisor or credit
provider to link services in formulating proposals and a U.S. bank's
inability to do so places it at a competitive disadvantage.
In terms of how the safe harbor would be defined, commenters
strongly urged that the locus of the customer be determinative.
Commenters uniformly rejected any test based on the locus of any anti-
competitive effects, on two grounds. First, such a test assumes that
there will be anti-competitive effects from the tying arrangements,
which is by definition true in the case of a Sherman Act violation but
not necessarily true in the case of a violation of the per se
prohibition on tying in section 106. Second, determining where a
transaction has its effect can be a difficult process yielding no clear
answer, and the test would therefore leave substantial uncertainty in
terms of compliance.
Some commenters also urged the Board to exempt transactions to
finance projects located outside the United States and transactions
with foreign branches of U.S. companies.
A small number of commenters objected generally to this proposed
change to the tying rules without providing any specific reason why a
safe harbor for foreign transactions should not be adopted. One
commenter maintained that a safe harbor was not necessary because
relevant case law had provided sufficient clarity and certainty with
respect to this question.
For the reasons advanced by commenters, the Board is adopting a
``safe harbor'' from the anti-tying rules for transactions with
corporate customers that are incorporated or otherwise organized, and
have their principal place of business, outside the United States, or
with individuals who are citizens of a foreign country and are not
resident in the United States. However, the safe harbor would not
protect tying arrangements where the
[[Page 9316]]
customer is a U.S.-incorporated division of a foreign company.
Furthermore, the safe harbor would not shelter a transaction from other
antitrust laws if they were otherwise applicable.
The Board agrees with commenters that some transactions with U.S.
persons may be so foreign in nature, because of the location of either
the project that is the subject of the transaction or the customer's
office that is entering into the transaction, that they do not raise
the competitive concerns that section 106 or the antitrust laws were
designed to address. The Board also believes, however, that many such
foreign-based transactions do have competitive implications in the
United States--for example, where a U.S. corporation seeks financing
for a project abroad, and the bank seeks to tie this financing to an
affiliate's U.S. securities underwriting services--and the Board does
not believe that commenters have provided an adequate and clear basis
for excluding such transactions from any ``safe harbor'' for foreign
transactions with U.S. persons.
6. Technical Changes
The Board also is adopting a definition of ``bank'' for purposes of
the anti-tying rules to clarify that any exemptions afforded to banks
generally also would be applicable to credit card and other limited
purpose institutions and to United States branches and agencies of
foreign banks.31
---------------------------------------------------------------------------
\31\ One commenter urged that the safe harbor for combined-
balance discounts be clarified by specifying that products offered
by an affiliate of the bank may be included as eligible products.
The Board notes that the proposed and final rule refer to ``products
specified by the bank'', and do not contain any limitation with
respect to the entity offering the product.
---------------------------------------------------------------------------
E. Other Changes
1. Filings Under the Change in Bank Control Act
The final rule, as the proposal, reorganizes, clarifies, and
simplifies the portion of Regulation Y that implements the Change in
Bank Control Act (``CIBC Act''). The final rule attempts to harmonize
the scope and procedural requirements of the Board's regulation
implementing the CIBC Act with those of the other federal banking
agencies and to reduce any unnecessary regulatory burden.
In particular, the final rule reduces regulatory burden by reducing
from two to one the number of times a person must receive permission
under the CIBC Act to acquire shares of the same state member bank or
bank holding company. Specifically, the final rule eliminates the
current requirement that all persons who have received authorization to
control in excess of 10 percent, but less than 25 percent, of the
voting shares of a member bank or bank holding company file a second
notice before acquiring control of 25 percent or more of the voting
shares of the institution.
The Board has determined that this new rule will apply to any
person who currently controls 10 percent (but less than 25 percent) of
the shares of a state member bank or bank holding company with Board
approval under the CIBC Act, unless the approval granted to the person
specifically limited the amount of shares that the person may control
or the person is otherwise notified in writing by the System that
additional approval is required. In future cases in which a person
appears to have sufficient financial resources to acquire more than 10
percent, but less than 100 percent of the shares of a bank, the System
may limit the approval granted on a case-by-case basis by requiring
further review of the financial resources of the person as appropriate.
Commenters that discussed the CIBC Act proposal supported the
proposed revisions. In particular, these commenters endorsed the
elimination of the requirement to file a second notice to the Board
upon exceeding 25 percent ownership of a member bank or bank holding
company when a prior notice to acquire in excess of 10 percent had been
filed and approved by the Board.
Commenters also supported the proposal to clarify certain terms
used in the CIBC Act portion of the rule. The final rule adds
definitions of key terms to clarify the scope of the regulation. In
particular, the final rule defines the terms acting in concert and
immediate family, and includes specific presumptions of concerted
action, to clarify the rule and to provide guidance to acquirors. In
addition, the final rule incorporates current Board practice that the
acquisition of a loan in default that is secured by voting securities
of a state member bank or bank holding company is presumed to be an
acquisition of the underlying securities.
The final rule also reduces regulatory burden on persons whose
ownership percentages increase as the result of an action outside the
control of the person, such as a redemption of voting securities by the
issuing bank or a sale of shares by a third party. In these situations,
the proposal would permit the person affected by the bank or third
party action to file a notice within 90 calendar days after the
transaction occurs, provided that the acquiring person does not
reasonably have advance knowledge of the triggering transaction.
In addition, the final rule provides for more flexible timing for
newspaper announcements of filings under the CIBC Act by permitting
notificants to publish the announcement up to 15 calendar days before
submitting the filing. The newspaper notice requirement also is
modified to eliminate the requirement that the notice include a
statement of the percentage of shares proposed to be acquired.
Finally, the final rule adds a new section reflecting the stock
loan reporting requirements in section 205 of the Federal Deposit
Insurance Corporation Improvement Act as amended by section 2226 of the
Regulatory Relief Act. Before the passage of the Regulatory Relief Act,
all financial institutions were required to file reports documenting
credit outstanding by the institution and its affiliates when the
credit was secured by 25 percent or more of any class of voting
securities of an insured depository institution. The Regulatory Relief
Act limits this requirement to credit outstanding by foreign banks and
their affiliates.
One commenter suggested that the Board require any person
participating in a proxy solicitation to obtain prior approval under
the CIBC Act and urged broadening the definition of persons who would
be deemed to be acting in concert (and thus required to join in a CIBC
Act filing) to include persons soliciting proxies. This commenter also
suggested that the institution that is the target of a proxy
solicitation be granted standing as a party to a CIBC Act filing, be
furnished copies of all filings, and be permitted to submit comments.
The Board has not adopted these suggestions. The Board has long
held, and a federal court has agreed, that the CIBC Act is not
automatically triggered by the formation of a group for the purpose of
acquiring proxies for voting shares and that private parties do not
have legal standing to challenge agency action under the CIBC
Act.32 The final rule provides for public notice of all CIBC Act
filings (unless immediate or expeditious action is required) and
permits any private party to submit comments for Board consideration.
This approach is in keeping with the purpose of the CIBC Act, which is
to permit the federal banking agencies to review changes in the
ownership of banks and bank holding companies and is not intended to be
a mechanism for private
[[Page 9317]]
parties to frustrate contested acquisitions.
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\32\ See Citizen First Bancorp, Inc. v. Harreld, 559 F.Supp.
867 (1982).
---------------------------------------------------------------------------
2. Notices of Changes in Directors and Senior Executive Officers
In addition to the BHC Act and the CIBC Act, Regulation Y
implements section 914 of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989, which requires a state member bank or bank
holding company (together, ``regulated institutions'') to give prior
notice to the System before changing directors or senior executive
officers under certain circumstances. The final rule has been modified
in light of amendments to section 914 enacted by the Regulatory Relief
Act and in cooperation with the staffs of the other federal financial
institutions supervisory agencies, in an attempt to develop uniform
procedures for requiring and reviewing section 914 notices.
As amended, section 914 no longer requires prior notice from
regulated institutions chartered for less than two years or regulated
institutions that underwent a change in control within two years.
Accordingly, provisions in the proposed rule relating to these
circumstances as triggering a section 914 notice have been deleted from
the final rule.
Section 914 also was amended by the Regulatory Relief Act to permit
the System to extend the 30-day prior notice period for an additional
period not to exceed 60 days. The Board expects to continue to process
most section 914 notices within 30 days and the final rule retains the
30-day prior notice period. In special circumstances, such as an
incomplete administrative record, the final rule permits the System to
extend the prior notice period for an additional 60 days as provided in
section 914 after notifying the regulated institution or individual
filing the notice of the extension and the reason for not processing
the notice within 30 days.
In all waiver requests, the final rule continues to require that
all information required to be filed under the rule be provided within
the time period specified by the System. The final rule also adopts the
System's current practice of granting individuals who are not proposed
by management and who are elected as new directors of regulated
institutions an automatic waiver of the 30-day prior notice requirement
in order to serve immediately as board members. To qualify for an
automatic waiver, the individual must also provide the System with all
information required to be filed under the rule within two business
days after the individual's election. The System may issue a notice of
disapproval within 30 days after a waiver request is granted or the
election of an individual serving pursuant to an automatic waiver.
One commenter argued that the automatic waiver procedures should
require an individual to resign as a director after a notice of
disapproval has been issued by the System. While disapproval would
require the individual to resign as a director, the final rule does not
incorporate the suggestion because the System has sufficient
enforcement authority under applicable law to remove a disapproved
director from the board.
The final rule also makes other changes, such as modifications to
the appeal procedure for a disapproved notice, that are intended to
clarify the proposed rule.
3. Other Changes
The Board received three comments requesting that the Board expand
its proposed presumption exempting testamentary trusts from the
definition of ``company'' so as to exempt inter vivos (or living)
trusts. Inter vivos trusts are trusts that are established by
individuals during their lifetime to facilitate estate planning. The
Board, on a case-by-case basis, has applied criteria similar to the
criteria proposed in Regulation Y in determining whether an inter vivos
trust is a ``company'' for purposes of the BHC Act. Accordingly, the
final rule has been expanded to presume that an inter vivos trust is
exempt from the definition of ``company'' if the trust meets the
criteria in the final rule and is not otherwise found to be a business
trust or company. The final rule also amends the time limit in which a
trust must terminate to reflect that the BHC Act permits certain trusts
to extend for 25 years.
The final rule also reduces from 30 to 15 the number of days notice
required before a large stock redemption by a bank holding company,
permits small bank holding companies to make stock redemptions without
prior notice if the holding company meets certain leverage and capital
requirements, and permits bank holding companies to take account of
intervening new issues of stock in computing when a stock redemption
notice must be filed.
In addition, the final rule adopts the changes enacted in the
Regulatory Relief Act to the period for divesting certain shares
acquired in satisfaction of a debt previously contracted. These changes
permit the Board to extend the divestiture period, under certain
circumstances, to a period of up to 10 years.
Moreover, the final rule deletes the provisions implementing
section 2(g)(3) of the BHC Act, which have been repealed by the
Regulatory Relief Act. The Board has also deleted references in
Regulation Y to limitations on asset growth imposed on certain
institution by the Competitive Equality Banking Act of 1987 (Pub. L.
100-86, 101 Stat 552) because these limitations were removed by section
2304 of the Regulatory Relief Act.
Finally, the final rule adopts the proposed definitions of ``class
of voting securities'' and ``immediate family'' and includes several
other technical changes.
Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act, the Board is required
to conduct an analysis of the effect on small institutions of the
revisions to Regulation Y. As of September 30, 1996, the number of bank
holding companies totalled 5,250.33 The following chart provides a
distribution, based on asset size, for those companies.
---------------------------------------------------------------------------
\33\ Financial top-tier domestic bank holding companies.
Excludes middle-tier bank holding companies, and foreign bank
holding companies that are not required to file a Y-9 report with
the Federal Reserve System.
------------------------------------------------------------------------
Percent of
Number of bank
Asset size category (M=million) bank holding
holding company
companies assets
------------------------------------------------------------------------
Less than $150M................................. 3,874 34 5.2
$150M-$300M..................................... 677 3.2
Greater than $300M.............................. 699 91.6
------------------------------------------------------------------------
The comprehensive revision to Regulation Y is intended to eliminate
unnecessary burden for all bank holding companies, including smaller
banking organizations. Included in the revision are expedited
application/notice procedures with minimal information requirements for
well-rated and well-run bank holding companies. The vast majority of
bank holding companies would qualify to use the streamlined procedures,
and it is estimated that more than 50 percent of the applications/
notices reviewed by the Federal Reserve System during 1995 would have
qualified for the new streamlined procedures. The revisions also
include a reorganization and streamlining of the regulatory laundry
list of permissible nonbanking activities,
[[Page 9318]]
the removal of unnecessary and outmoded regulatory restrictions, and a
waiver of filing requirements for bank acquisitions that are in-
substance bank-to-bank mergers. These changes apply to all bank holding
companies and will be particularly helpful to small bank holding
companies.
---------------------------------------------------------------------------
\34\ Bank holding companies with consolidated assets of less
than $150 million are not required to file financial regulatory
reports on a consolidated basis. Assets for this group are estimated
based on reports filed by the parent companies and subsidiaries.
---------------------------------------------------------------------------
The revisions include a number of other changes applicable to
smaller organizations in particular. These changes include a special
exception for small bank holding companies with assets of less than
$300 million from the aggregate size limit applying to the use of the
expedited application procedures, an update of the small bank holding
company policy statement that applies to bank holding companies with
assets of less than $150 million and reduces burden for qualifying
small bank holding companies, reduction of the thresholds for
qualification for streamlined formation of new bank holding companies,
reduction in the filing requirements under the Change in Bank Control
Act, and addition of a new exception for small bank holding companies
from the prior approval requirements regarding stock redemption
proposals. These and the other changes described above are explained in
more detail in the Supplementary Information portion of this document.
The Board expects that the final rule will result in a significant
reduction in regulatory filings, in the paperwork burden and processing
time associated with regulatory filings, and in the costs associated
with complying with the regulation, thereby improving the ability of
all bank holding companies, including small organizations, to conduct
business on a more cost-efficient basis.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
Ch. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the rule
under the authority delegated to the Board by the Office of Management
and Budget. The Federal Reserve may not conduct or sponsor, and an
organization is not required to respond to, the following information
collections unless it displays a currently valid OMB control number.
The OMB control numbers are indicated below.
The collection of information requirements in this regulation are
found in 12 CFR 225.11, 12 CFR 225.12, 12 CFR 225.14, 12 CFR 225.17, 12
CFR 225.23, 12 CFR 225.24, 12 USC 1817(j) and 1831(i), 12 CFR 225.73,
12 CFR 225.4, and 12 CFR 225.3(a). This information is required to
evidence compliance with the requirements of the Bank Holding Company
Act, the Change in Bank Control Act and provisions of the Federal
Deposit Insurance Act. The respondents are for-profit financial
institutions and other corporations, including small businesses, and
individuals.
The Board received no comments that specifically addressed burden
estimates.
The streamlining of applications to acquire banks and nonbanking
companies by institutions that meet the qualifying criteria should
result in a significant reduction in burden for respondents that file
the Application for Prior Approval To Become a Bank Holding Company, or
for a Bank Holding Company To Acquire an Additional Bank or Bank
Holding Company (FR Y-3; OMB No. 7100-0171). Approximately 196
respondents file the FR Y-3 annually pursuant to section 3(a)(1) of the
Bank Holding Company Act (Act) and 303 respondents file annually the FR
Y-3 pursuant to section 3(a)(3) and 3(a)(5) of the Act. The current
burden per response is 48.5 hours and 59.0 hours, respectively, for a
total estimated annual burden of 27,383 hours. Under the rule, it is
estimated that at least 50 percent of these respondents, or a total of
249 respondents for both types of applications, would meet the criteria
to qualify for the filing of a streamlined application. The average
number of hours per response for proposed applications of each type is
estimated to decrease to 2.5 hours. Therefore the total amount of
annual burden is estimated to be 14,343.5 hours. Based on an hourly
cost of $50, the annual cost to the public under the revision is
estimated to be $717,175, which represents an estimated cost reduction
of $651,975 from the estimated annual cost to the public of $1,369,150
under the current rule.
The final rule should result in a significant reduction in
regulatory burden by eliminating the prior review and approval
requirements for well-run bank holding companies to engage de novo in
nonbanking activities that are permissible by Board regulation;
streamlining the application process to engage de novo in nonbanking
activities that are permissible only by Board order and to acquire
nonbanking companies; and permitting bank holding companies to obtain
approval at one time to engage in a preauthorized list of nonbanking
activities. Thus, respondents that file the Application for Prior
Approval To Engage Directly or Indirectly in Certain Nonbanking
Activities (FR Y-4; OMB No. 7100-0121) will experience a significant
reduction in costs. Approximately 362 respondents file the FR Y-4
annually to meet application requirements, and 114 respondents file to
meet notification requirements. The current burden per response is 59.0
hours and 1.5 hours, respectively, for a total estimated annual burden
of 21,529 hours. Under the rule it is estimated that at least 50
percent of these respondents would meet the criteria to qualify either
for elimination or for the filing of a streamlined application,
representing 181 applications and 57 notifications. The average number
of hours per response for the required post-consummation notice is 0.5
hours and for the required streamlined notice is 1.5 hours. Therefore
the total amount of annual burden is estimated to be 11,121.5 hours.
Based on an hourly cost of $50, the annual cost to the public under the
revision is estimated to be $556,075, which represents an estimated
cost reduction of $520,375 from the current estimated annual cost to
the public of $1,076,450 under the current rule.
The elimination of the requirement that a person who has already
received Board approval under the Change in Bank Control Act obtain
additional approvals to acquire additional shares of the same bank or
bank holding company should result in a significant reduction in burden
for respondents that file the Notice of Change in Bank Control (FR
2081; OMB No. 7100-0134). Approximately 300 respondents file the FR
2081 annually to meet the notification requirements of change in
control, 280 respondents file to meet the requirements for notice of a
change in director or senior executive officer, and 1000 respondents
file to meet requirements to report certain biographical and financial
information. The current burden per response for each requirement is
30.0 hours, 2.0 hours, and 4.0 hours, respectively, for a total
estimated annual burden of 13,560 hours. Under the rule it is estimated
that 50 percent fewer notifications of change in control will be filed
for an annual total of 150 responses. The estimated number of filings
to meet the other two requirements and the estimated average hours per
response for each requirement remains unchanged. Therefore the total
amount of annual burden is estimated to be 9,060 hours. Based on an
hourly cost of $20, the total annual cost to the public under the
revision is estimated to be $181,200, which represents an estimated
cost reduction of $90,000 from the current estimated annual cost to the
public of $271,200 under the current rule.
The allowance for bank holding companies to take account of
[[Page 9319]]
intervening new issues of stock in computing when a stock redemption
notice must be filed and the exemption provided to small bank holding
companies that meet certain leverage and capital requirements should
result in a significant reduction in burden for respondents that file
the Notice of Proposed Stock Redemption (FR 4008; OMB No. 7100-0131).
Approximately 50 respondents file the FR 4008 annually. The current
burden per response is 15.5 hours, for a total estimated annual burden
of 775 hours. Under the rule it is estimated that 50 percent fewer
notifications will be filed for an annual total of 25 responses and the
estimated average hours per response remains unchanged. Therefore the
total amount of annual burden is estimated to be 387.5 hours. Based on
an hourly cost of $30, the total annual cost to the public under the
revision is estimated to be $11,625, which represents a cost reduction
of $11,625 from the current estimated cost to the public of $23,250
under the current rule.
The streamlining of application requirements are not expected to
change the ongoing annual burden associated with the Application for a
Foreign Organization to Become a Bank Holding Company (FR Y-1f; OMB No.
7100-0119). Approximately 2 respondents file the FR Y-1f annually. The
current burden per response is 77 hours for a total estimated annual
burden of 144 hours. Based on an hourly cost of $20, the annual cost to
the public is estimated to be $3,080.
All information contained in these collections of information are
available to the public unless the respondent can substantiate that
disclosure of certain information would result in substantial
competitive harm or an unwarranted invasion of personal privacy or
would otherwise qualify for an exemption under the Freedom of
Information Act.
The Federal Reserve has a continuing interest in the public's
opinions of our collections of information. At any time, comments
regarding the burden estimate, or any other aspect of this collection
of information, including suggestions for reducing the burden may be
sent to: Secretary, Board of Governors of the Federal Reserve System,
20th and C Streets, NW., Washington, DC 20551; and to the Office of
Management and Budget, Paperwork Reduction Project (7100-0196),
Washington, DC 20503.
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding Companies, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, the Board amends 12 CFR
part 225 as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. Subpart A is revised to read as follows:
Subpart A--General Provisions
Sec.
225.1 Authority, purpose, and scope.
225.2 Definitions.
225.3 Administration.
225.4 Corporate practices.
225.5 Registration, reports, and inspections.
225.6 Penalties for violations.
225.7 Exceptions to tying restrictions
Subpart A--General Provisions
Sec. 225.1 Authority, purpose, and scope.
(a) Authority. This part 1 (Regulation Y) is issued by the
Board of Governors of the Federal Reserve System (Board) under section
5(b) of the Bank Holding Company Act of 1956, as amended (12 U.S.C.
1844(b)) (BHC Act); sections 8 and 13(a) of the International Banking
Act of 1978 (12 U.S.C. 3106 and 3108); section 7(j)(13) of the Federal
Deposit Insurance Act, as amended by the Change in Bank Control Act of
1978 (12 U.S.C. 1817(j)(13)) (Bank Control Act); section 8(b) of the
Federal Deposit Insurance Act (12 U.S.C. 1818(b)); section 914 of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (12
U.S.C. 1831i); section 106 of the Bank Holding Company Act Amendments
of 1970 (12 U.S.C. 1972); and the International Lending Supervision Act
of 1983 (Pub. L. 98-181, title IX). The BHC Act is codified at 12
U.S.C. 1841, et seq.
---------------------------------------------------------------------------
\1\ Code of Federal Regulations, title 12, chapter II, part 225.
---------------------------------------------------------------------------
(b) Purpose. The principal purposes of this part are to:
(1) Regulate the acquisition of control of banks by companies and
individuals;
(2) Define and regulate the nonbanking activities in which bank
holding companies and foreign banking organizations with United States
operations may engage; and
(3) Set forth the procedures for securing approval for these
transactions and activities.
(c) Scope--(1) Subpart A contains general provisions and
definitions of terms used in this regulation.
(2) Subpart B governs acquisitions of bank or bank holding company
securities and assets by bank holding companies or by any company that
will become a bank holding company as a result of the acquisition.
(3) Subpart C defines and regulates the nonbanking activities in
which bank holding companies and foreign banking organizations may
engage directly or through a subsidiary. The Board's Regulation K
governs certain nonbanking activities conducted by foreign banking
organizations and certain foreign activities conducted by bank holding
companies (12 CFR part 211, International Banking Operations).
(4) Subpart D specifies situations in which a company is presumed
to control voting securities or to have the power to exercise a
controlling influence over the management or policies of a bank or
other company; sets forth the procedures for making a control
determination; and provides rules governing the effectiveness of
divestitures by bank holding companies.
(5) Subpart E governs changes in bank control resulting from the
acquisition by individuals or companies (other than bank holding
companies) of voting securities of a bank holding company or state
member bank of the Federal Reserve System.
(6) Subpart F specifies the limitations that govern companies that
control so-called nonbank banks and the activities of nonbank banks.
(7) Subpart G prescribes minimum standards that apply to the
performance of real estate appraisals and identifies transactions that
require state certified appraisers.
(8) Subpart H identifies the circumstances when written notice must
be provided to the Board prior to the appointment of a director or
senior officer of a bank holding company and establishes procedures for
obtaining the required Board approval.
(9) Appendix A to the regulation contains the Board's Risk-Based
Capital Adequacy Guidelines for bank holding companies.
(10) Appendix B contains the Board's Capital Adequacy Guidelines
for measuring leverage for bank holding companies and state member
banks.
(11) Appendix C contains the Board's policy statement governing
small bank holding companies.
(12) Appendix D contains the Board's Capital Adequacy Guidelines
for measuring tier 1 leverage for bank holding companies.
[[Page 9320]]
(13) Appendix E contains the Board's Capital Adequacy Guidelines
for measuring market risk of bank holding companies.
Sec. 225.2 Definitions.
Except as modified in this regulation or unless the context
otherwise requires, the terms used in this regulation have the same
meaning as set forth in the relevant statutes.
(a) Affiliate means any company that controls, is controlled by, or
is under common control with, another company.
(b)(1) Bank means:
(i) An insured bank as defined in section 3(h) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(h)); or
(ii) An institution organized under the laws of the United States
which both:
(A) Accepts demand deposits or deposits that the depositor may
withdraw by check or similar means for payment to third parties or
others; and
(B) Is engaged in the business of making commercial loans.
(2) Bank does not include those institutions qualifying under the
exceptions listed in section 2(c)(2) of the BHC Act (12 U.S.C.
1841(c)(2)).
(c)(1) Bank holding company means any company (including a bank)
that has direct or indirect control of a bank, other than control that
results from the ownership or control of:
(i) Voting securities held in good faith in a fiduciary capacity
(other than as provided in paragraphs (e)(2)(ii) and (iii) of this
section) without sole discretionary voting authority, or as otherwise
exempted under section 2(a)(5)(A) of the BHC Act;
(ii) Voting securities acquired and held only for a reasonable
period of time in connection with the underwriting of securities, as
provided in section 2(a)(5)(B) of the BHC Act;
(iii) Voting rights to voting securities acquired for the sole
purpose and in the course of participating in a proxy solicitation, as
provided in section 2(a)(5)(C) of the BHC Act;
(iv) Voting securities acquired in satisfaction of debts previously
contracted in good faith, as provided in section 2(a)(5)(D) of the BHC
Act, if the securities are divested within two years of acquisition (or
such later period as the Board may permit by order); or
(v) Voting securities of certain institutions owned by a thrift
institution or a trust company, as provided in sections 2(a)(5)(E) and
(F) of the BHC Act.
(2) Except for the purposes of Sec. 225.4(b) of this subpart and
subpart E of this part, or as otherwise provided in this regulation,
bank holding company includes a foreign banking organization. For the
purposes of subpart B of this part, bank holding company includes a
foreign banking organization only if it owns or controls a bank in the
United States.
(d)(1) Company includes any bank, corporation, general or limited
partnership, association or similar organization, business trust, or
any other trust unless by its terms it must terminate either within 25
years, or within 21 years and 10 months after the death of individuals
living on the effective date of the trust.
(2) Company does not include any organization, the majority of the
voting securities of which are owned by the United States or any state.
(3) Testamentary trusts exempt. Unless the Board finds that the
trust is being operated as a business trust or company, a trust is
presumed not to be a company if the trust:
(i) Terminates within 21 years and 10 months after the death of
grantors or beneficiaries of the trust living on the effective date of
the trust or within 25 years;
(ii) Is a testamentary or inter vivos trust established by an
individual or individuals for the benefit of natural persons (or trusts
for the benefit of natural persons) who are related by blood, marriage
or adoption;
(iii) Contains only assets previously owned by the individual or
individuals who established the trust;
(iv) Is not a Massachusetts business trust; and
(v) Does not issue shares, certificates, or any other evidence of
ownership.
(4) Qualified limited partnerships exempt. Company does not include
a qualified limited partnership, as defined in section 2(o)(10) of the
BHC Act.
(e)(1) Control of a bank or other company means (except for the
purposes of subpart E of this part):
(i) Ownership, control, or power to vote 25 percent or more of the
outstanding shares of any class of voting securities of the bank or
other company, directly or indirectly or acting through one or more
other persons;
(ii) Control in any manner over the election of a majority of the
directors, trustees, or general partners (or individuals exercising
similar functions) of the bank or other company;
(iii) The power to exercise, directly or indirectly, a controlling
influence over the management or policies of the bank or other company,
as determined by the Board after notice and opportunity for hearing in
accordance with Sec. 225.31 of subpart D of this part; or
(iv) Conditioning in any manner the transfer of 25 percent or more
of the outstanding shares of any class of voting securities of a bank
or other company upon the transfer of 25 percent or more of the
outstanding shares of any class of voting securities of another bank or
other company.
(2) A bank or other company is deemed to control voting securities
or assets owned, controlled, or held, directly or indirectly:
(i) By any subsidiary of the bank or other company;
(ii) In a fiduciary capacity (including by pension and profit-
sharing trusts) for the benefit of the shareholders, members, or
employees (or individuals serving in similar capacities) of the bank or
other company or any of its subsidiaries; or
(iii) In a fiduciary capacity for the benefit of the bank or other
company or any of its subsidiaries.
(f) Foreign banking organization and qualifying foreign banking
organization have the same meanings as provided in Sec. 211.21(n) and
Sec. 211.23 of the Board's Regulation K (12 CFR 211.21(n) and 211.23).
(g) Insured depository institution includes an insured bank as
defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C.
1813(h)) and a savings association.
(h) Lead insured depository institution means the largest insured
depository institution controlled by the bank holding company as of the
quarter ending immediately prior to the proposed filing, based on a
comparison of the average total risk-weighted assets controlled during
the previous 12-month period by each insured depository institution
subsidiary of the holding company.
(i) Management official means any officer, director (including
honorary or advisory directors), partner, or trustee of a bank or other
company, or any employee of the bank or other company with policy-
making functions.
(j) Nonbank bank means any institution that:
(1) Became a bank as a result of enactment of the Competitive
Equality Amendments of 1987 (Pub. L. 100-86), on the date of enactment
(August 10, 1987); and
(2) Was not controlled by a bank holding company on the day before
the enactment of the Competitive Equality Amendments of 1987 (August 9,
1987).
(k) Outstanding shares means any voting securities, but does not
include securities owned by the United States or by a company wholly
owned by the United States.
(l) Person includes an individual, bank, corporation, partnership,
trust, association, joint venture, pool,
[[Page 9321]]
syndicate, sole proprietorship, unincorporated organization, or any
other form of entity.
(m) Savings association means:
(1) Any federal savings association or federal savings bank;
(2) Any building and loan association, savings and loan
association, homestead association, or cooperative bank if such
association or cooperative bank is a member of the Savings Association
Insurance Fund; and
(3) Any savings bank or cooperative that is deemed by the director
of the Office of Thrift Supervision to be a savings association under
section 10(l) of the Home Owners Loan Act.
(n) Shareholder--(1) Controlling shareholder means a person that
owns or controls, directly or indirectly, 25 percent or more of any
class of voting securities of a bank or other company.
(2) Principal shareholder means a person that owns or controls,
directly or indirectly, 10 percent or more of any class of voting
securities of a bank or other company, or any person that the Board
determines has the power, directly or indirectly, to exercise a
controlling influence over the management or policies of a bank or
other company.
(o) Subsidiary means a bank or other company that is controlled by
another company, and refers to a direct or indirect subsidiary of a
bank holding company. An indirect subsidiary is a bank or other company
that is controlled by a subsidiary of the bank holding company.
(p) United States means the United States and includes any state of
the United States, the District of Columbia, any territory of the
United States, Puerto Rico, Guam, American Samoa, and the Virgin
Islands.
(q)(1) Voting securities means shares of common or preferred stock,
general or limited partnership shares or interests, or similar
interests if the shares or interest, by statute, charter, or in any
manner, entitle the holder:
(i) To vote for or to select directors, trustees, or partners (or
persons exercising similar functions of the issuing company); or
(ii) To vote on or to direct the conduct of the operations or other
significant policies of the issuing company.
(2) Nonvoting shares. Preferred shares, limited partnership shares
or interests, or similar interests are not voting securities if:
(i) Any voting rights associated with the shares or interest are
limited solely to the type customarily provided by statute with regard
to matters that would significantly and adversely affect the rights or
preference of the security or other interest, such as the issuance of
additional amounts or classes of senior securities, the modification of
the terms of the security or interest, the dissolution of the issuing
company, or the payment of dividends by the issuing company when
preferred dividends are in arrears;
(ii) The shares or interest represent an essentially passive
investment or financing device and do not otherwise provide the holder
with control over the issuing company; and
(iii) The shares or interest do not entitle the holder, by statute,
charter, or in any manner, to select or to vote for the selection of
directors, trustees, or partners (or persons exercising similar
functions) of the issuing company.
(3) Class of voting shares. Shares of stock issued by a single
issuer are deemed to be the same class of voting shares, regardless of
differences in dividend rights or liquidation preference, if the shares
are voted together as a single class on all matters for which the
shares have voting rights other than matters described in paragraph
(o)(2)(i) of this section that affect solely the rights or preferences
of the shares.
(r) Well-capitalized-(1) Bank holding company. In the case of a
bank holding company,2 well-capitalized means that:
---------------------------------------------------------------------------
\2\ For purposes of this subpart and subparts B and C of this
part, a bank holding company with consolidated assets under $150
million that is subject to the Small Bank Holding Company Policy
Statement in Appendix C of this part will be deemed to be ``well-
capitalized'' if the bank holding company meets the requirements for
expedited/waived processing in Appendix C.
---------------------------------------------------------------------------
(i) On a consolidated basis, the bank holding company maintains a
total risk-based capital ratio of 10.0 percent or greater, as defined
in Appendix A of this part;
(ii) On a consolidated basis, the bank holding company maintains a
Tier 1 risk-based capital ratio of 6.0 percent or greater, as defined
in Appendix A of this part; and
(iii) The bank holding company is not subject to any written
agreement, order, capital directive, or prompt corrective action
directive issued by the Board to meet and maintain a specific capital
level for any capital measure.
(2) Insured depository institution. In the case of an insured
depository institution, well-capitalized means that the institution
maintains at least the capital levels required to be ``well-
capitalized'' under the capital adequacy regulations or guidelines
applicable to the institution that have been adopted by the appropriate
federal banking agency for the institution under section 38 of the
Federal Deposit Insurance Act (12 U.S.C. 1831o).
(3) Foreign banks--(i) Standards applied. For purposes of
determining whether a foreign banking organization qualifies under
paragraph (r)(1) of this section:
(A) A foreign banking organization whose home country supervisor,
as defined in Sec. 211.21 of the Board's Regulation K (12 CFR 211.21),
has adopted capital standards consistent in all respects with the
Capital Accord of the Basle Committee on Banking Supervision (Basle
Accord) may calculate its capital ratios under the home country
standard; and
(B) A foreign banking organization whose home country supervisor
has not adopted capital standards consistent in all respects with the
Basle Accord shall obtain a determination from the Board that its
capital is equivalent to the capital that would be required of a U.S.
banking organization under paragraph (r)(1) of this section.
(ii) Branches and agencies. For purposes of determining, under
paragraph (r)(1) of this section, whether a branch or agency of a
foreign banking organization is well-capitalized, the branch or agency
shall be deemed to have the same capital ratios as the foreign banking
organization.
(s) Well-managed--(1) In general. A company, insured depository
institution, or branch or agency of a foreign banking organization is
well-managed if:
(i) At its most recent inspection or examination or subsequent
review by the appropriate federal banking agency for the company or
institution, the company or institution received:
(A) At least a satisfactory composite rating; and
(B) At least a satisfactory rating for management and for
compliance, if such a rating is given; or
(ii) In the case of a company or insured depository institution
that has not received an examination rating, the Board has determined,
after a review of the managerial and other resources of the company or
depository institution, that the company or institution qualifies for
the streamlined procedures in this subpart, and subparts B and C of
this part.
(2) Foreign banking organizations. A foreign banking organization
shall qualify under this paragraph if the combined operations of the
foreign banking organization in the United States have received at
least a satisfactory composite rating at the most recent annual
assessment.
Sec. 225.3 Administration.
(a) Delegation of authority. Designated Board members and officers
and the
[[Page 9322]]
Federal Reserve Banks are authorized by the Board to exercise various
functions prescribed in this regulation and in the Board's Rules
Regarding Delegation of Authority (12 CFR part 265) and the Board's
Rules of Procedure (12 CFR part 262).
(b) Appropriate Federal Reserve Bank. In administering this
regulation, unless a different Federal Reserve Bank is designated by
the Board, the appropriate Federal Reserve Bank is as follows:
(1) For a bank holding company (or a company applying to become a
bank holding company): the Reserve Bank of the Federal Reserve district
in which the company's banking operations are principally conducted, as
measured by total domestic deposits in its subsidiary banks on the date
it became (or will become) a bank holding company;
(2) For a foreign banking organization that has no subsidiary bank
and is not subject to paragraph (b)(1) of this section: the Reserve
Bank of the Federal Reserve district in which the total assets of the
organization's United States branches, agencies, and commercial lending
companies are the largest as of the later of January 1, 1980, or the
date it becomes a foreign banking organization;
(3) For an individual or company submitting a notice under subpart
E of this part: The Reserve Bank of the Federal Reserve district in
which the banking operations of the bank holding company or state
member bank to be acquired are principally conducted, as measured by
total domestic deposits on the date the notice is filed.
Sec. 225.4 Corporate practices.
(a) Bank holding company policy and operations. (1) A bank holding
company shall serve as a source of financial and managerial strength to
its subsidiary banks and shall not conduct its operations in an unsafe
or unsound manner.
(2) Whenever the Board believes an activity of a bank holding
company or control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) constitutes a serious risk to the financial
safety, soundness, or stability of a subsidiary bank of the bank
holding company and is inconsistent with sound banking principles or
the purposes of the BHC Act or the Financial Institutions Supervisory
Act of 1966, as amended (12 U.S.C. 1818(b) et seq.), the Board may
require the bank holding company to terminate the activity or to
terminate control of the subsidiary, as provided in section 5(e) of the
BHC Act.
(b) Purchase or redemption by bank holding company of its own
securities--(1) Filing notice. Except as provided in paragraph (b)(6)
of this section, a bank holding company shall give the Board prior
written notice before purchasing or redeeming its equity securities if
the gross consideration for the purchase or redemption, when aggregated
with the net consideration paid by the company for all such purchases
or redemptions during the preceding 12 months, is equal to 10 percent
or more of the company's consolidated net worth. For the purposes of
this section, ``net consideration'' is the gross consideration paid by
the company for all of its equity securities purchased or redeemed
during the period minus the gross consideration received for all of its
equity securities sold during the period.
(2) Contents of notice. Any notice under this section shall be
filed with the appropriate Reserve Bank and shall contain the following
information:
(i) The purpose of the transaction, a description of the securities
to be purchased or redeemed, the total number of each class
outstanding, the gross consideration to be paid, and the terms and
sources of funding for the transaction;
(ii) A description of all equity securities redeemed within the
preceding 12 months, the net consideration paid, and the terms of any
debt incurred in connection with those transactions; and
(iii) (A) If the bank holding company has consolidated assets of
$150 million or more, consolidated pro forma risk-based capital and
leverage ratio calculations for the bank holding company as of the most
recent quarter, and, if the redemption is to be debt funded, a parent-
only pro forma balance sheet as of the most recent quarter; or
(B) If the bank holding company has consolidated assets of less
than $150 million, a pro forma parent-only balance sheet as of the most
recent quarter, and, if the redemption is to be debt funded, one-year
income statement and cash flow projections.
(3) Acting on notice. Within 15 calendar days of receipt of a
notice under this section, the appropriate Reserve Bank shall either
approve the transaction proposed in the notice or refer the notice to
the Board for decision. If the notice is referred to the Board for
decision, the Board shall act on the notice within 30 calendar days
after the Reserve Bank receives the notice.
(4) Factors considered in acting on notice. (i) The Board may
disapprove a proposed purchase or redemption if it finds that the
proposal would constitute an unsafe or unsound practice, or would
violate any law, regulation, Board order, directive, or any condition
imposed by, or written agreement with, the Board.
(ii) In determining whether a proposal constitutes an unsafe or
unsound practice, the Board shall consider whether the bank holding
company's financial condition, after giving effect to the proposed
purchase or redemption, meets the financial standards applied by the
Board under section 3 of the BHC Act, including the Board's Capital
Adequacy Guidelines (Appendix A of this part) and the Board's Policy
Statement for Small Bank Holding Companies (Appendix C of this part).
(5) Disapproval and hearing. (i) The Board shall notify the bank
holding company in writing of the reasons for a decision to disapprove
any proposed purchase or redemption. Within 10 calendar days of receipt
of a notice of disapproval by the Board, the bank holding company may
submit a written request for a hearing.
(ii) The Board shall order a hearing within 10 calendar days of
receipt of the request if it finds that material facts are in dispute,
or if it otherwise appears appropriate. Any hearing conducted under
this paragraph shall be held in accordance with the Board's Rules of
Practice for Formal Hearings (12 CFR part 263).
(iii) At the conclusion of the hearing, the Board shall by order
approve or disapprove the proposed purchase or redemption on the basis
of the record of the hearing.
(6) Exception for well-capitalized bank holding companies. A bank
holding company is not required to obtain prior Board approval for the
redemption or purchase of its equity securities under this section
provided:
(i) Both before and immediately after the redemption, the bank
holding company is well-capitalized;
(ii) The bank holding company is well-managed; and
(iii) The bank holding company is not the subject of any unresolved
supervisory issues.
(c) Deposit insurance. Every bank that is a bank holding company or
a subsidiary of a bank holding company shall obtain Federal Deposit
Insurance and shall remain an insured bank as defined in section 3(h)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).
(d) Acting as transfer agent, municipal securities dealer, or
clearing agent. A bank holding company or any nonbanking subsidiary
that is a ``bank,'' as defined in section 3(a)(6) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(6)), and that is a transfer
agent of securities, a municipal securities dealer, a clearing agency,
or a
[[Page 9323]]
participant in a clearing agency (as those terms are defined in section
3(a) of the Securities Exchange Act (15 U.S.C. 78c(a)), shall be
subject to Secs. 208.8 (f)-(j) of the Board's Regulation H (12 CFR
208.8 (f)-(j)) as if it were a state member bank.
(e) Reporting requirement for credit secured by certain bank
holding company stock. Each executive officer or director of a bank
holding company the shares of which are not publicly traded shall
report annually to the board of directors of the bank holding company
the outstanding amount of any credit that was extended to the executive
officer or director and that is secured by shares of the bank holding
company. For purposes of this paragraph, the terms ``executive
officer'' and ``director'' shall have the meaning given in Sec. 215.2
of Regulation O (12 CFR 215.2).
(f) Suspicious activity report. A bank holding company or any
nonbank subsidiary thereof, or a foreign bank that is subject to the
BHC Act or any nonbank subsidiary of such foreign bank operating in the
United States, shall file a suspicious activity report in accordance
with the provisions of Sec. 208.20 of the Board's Regulation H (12 CFR
208.20).
Sec. 225.5 Registration, reports, and inspections.
(a) Registration of bank holding companies. Each company shall
register within 180 days after becoming a bank holding company by
furnishing information in the manner and form prescribed by the Board.
A company that receives the Board's prior approval under subpart B of
this part to become a bank holding company may complete this
registration requirement through submission of its first annual report
to the Board as required by paragraph (b) of this section.
(b) Reports of bank holding companies. Each bank holding company
shall furnish, in the manner and form prescribed by the Board, an
annual report of the company's operations for the fiscal year in which
it becomes a bank holding company, and for each fiscal year during
which it remains a bank holding company. Additional information and
reports shall be furnished as the Board may require.
(c) Examinations and inspections. The Board may examine or inspect
any bank holding company and each of its subsidiaries and prepare a
report of their operations and activities. With respect to a foreign
banking organization, the Board may also examine any branch or agency
of a foreign bank in any state of the United States and may examine or
inspect each of the organization's subsidiaries in the United States
and prepare reports of their operations and activities. The Board shall
rely, as far as possible, on the reports of examination made by the
primary federal or state supervisor of the subsidiary bank of the bank
holding company or of the branch or agency of the foreign bank.
Sec. 225.6 Penalties for violations.
(a) Criminal and civil penalties. (1) Section 8 of the BHC Act
provides criminal penalties for willful violation, and civil penalties
for violation, by any company or individual, of the BHC Act or any
regulation or order issued under it, or for making a false entry in any
book, report, or statement of a bank holding company.
(2) Civil money penalty assessments for violations of the BHC Act
shall be made in accordance with subpart C of the Board's Rules of
Practice for Hearings (12 CFR part 263, subpart C). For any willful
violation of the Bank Control Act or any regulation or order issued
under it, the Board may assess a civil penalty as provided in 12 U.S.C.
1817(j)(15).
(b) Cease-and-desist proceedings. For any violation of the BHC Act,
the Bank Control Act, this regulation, or any order or notice issued
thereunder, the Board may institute a cease-and-desist proceeding in
accordance with the Financial Institutions Supervisory Act of 1966, as
amended (12 U.S.C. 1818(b) et seq.).
Sec. 225.7 Exceptions to tying restrictions.
(a) Purpose. This section establishes exceptions to the anti-tying
restrictions of section 106 of the Bank Holding Company Act Amendments
of 1970 (12 U.S.C. 1971, 1972(1)). These exceptions are in addition to
those in section 106. The section also restricts tying of electronic
benefit transfer services by bank holding companies and their nonbank
subsidiaries.
(b) Exceptions to statute. Subject to the limitations of paragraph
(c) of this section, a bank may:
(1) Extension to affiliates of statutory exceptions preserving
traditional banking relationships. Extend credit, lease or sell
property of any kind, or furnish any service, or fix or vary the
consideration for any of the foregoing, on the condition or requirement
that a customer:
(i) Obtain a loan, discount, deposit, or trust service from an
affiliate of the bank; or
(ii) Provide to an affiliate of the bank some additional credit,
property, or service that the bank could require to be provided to
itself pursuant to section 106(b)(1)(C) of the Bank Holding Company Act
Amendments of 1970 (12 U.S.C. 1972(1)(C)).
(2) Safe harbor for combined-balance discounts. Vary the
consideration for any product or package of products based on a
customer's maintaining a combined minimum balance in certain products
specified by the bank (eligible products), if:
(i) The bank offers deposits, and all such deposits are eligible
products; and
(ii) Balances in deposits count at least as much as nondeposit
products toward the minimum balance.
(3) Safe harbor for foreign transactions. Engage in any transaction
with a customer if that customer is:
(i) A corporation, business, or other person (other than an
individual) that:
(A) Is incorporated, chartered, or otherwise organized outside the
United States; and
(B) Has its principal place of business outside the United States;
or
(ii) An individual who is a citizen of a foreign country and is not
resident in the United States.
(c) Limitations on exceptions. Any exception granted pursuant to
this section shall terminate upon a finding by the Board that the
arrangement is resulting in anti-competitive practices. The eligibility
of a bank to operate under any exception granted pursuant to this
section shall terminate upon a finding by the Board that its exercise
of this authority is resulting in anti-competitive practices.
(d) Extension of statute to electronic benefit transfer services. A
bank holding company or nonbank subsidiary of a bank holding company
that provides electronic benefit transfer services shall be subject to
the anti-tying restrictions applicable to such services set forth in
section 7(i)(11) of the Food Stamp Act of 1977 (7 U.S.C. 2016(i)(11)).
(e) For purposes of this section, bank has the meaning given that
term in section 106(a) of the Bank Holding Company Act Amendments of
1970 (12 U.S.C. 1971), but shall also include a United States branch,
agency, or commercial lending company subsidiary of a foreign bank that
is subject to section 106 pursuant to section 8(d) of the International
Banking Act of 1978 (12 U.S.C. 3106(d)), and any company made subject
to section 106 by section 4(f)(9) or 4(h) of the BHC Act.
3. Subpart B is revised to read as follows:
[[Page 9324]]
Subpart B--Acquisition of Bank Securities or Assets
Sec.
225.11 Transactions requiring Board approval.
225.12 Transactions not requiring Board approval.
225.13 Factors considered in acting on bank acquisition proposals.
225.14 Expedited action for certain bank acquisitions by well-run
bank holding companies.
225.15 Procedures for other bank acquisition proposals.
225.16 Public notice, comments, hearings, and other provisions
governing applications and notices.
225.17 Notice procedure for one-bank holding company formations.
Subpart B--Acquisition of Bank Securities or Assets
Sec. 225.11 Transactions requiring Board approval
The following transactions require the Board's prior approval under
section 3 of the Bank Holding Company Act except as exempted under
Sec. 225.12 or as otherwise covered by Sec. 225.17 of this subpart:
(a) Formation of bank holding company. Any action that causes a
bank or other company to become a bank holding company.
(b) Acquisition of subsidiary bank. Any action that causes a bank
to become a subsidiary of a bank holding company.
(c) Acquisition of control of bank or bank holding company
securities.
(1) The acquisition by a bank holding company of direct or indirect
ownership or control of any voting securities of a bank or bank holding
company, if the acquisition results in the company's control of more
than 5 percent of the outstanding shares of any class of voting
securities of the bank or bank holding company.
(2) An acquisition includes the purchase of additional securities
through the exercise of preemptive rights, but does not include
securities received in a stock dividend or stock split that does not
alter the bank holding company's proportional share of any class of
voting securities.
(d) Acquisition of bank assets. The acquisition by a bank holding
company or by a subsidiary thereof (other than a bank) of all or
substantially all of the assets of a bank.
(e) Merger of bank holding companies. The merger or consolidation
of bank holding companies, including a merger through the purchase of
assets and assumption of liabilities.
(f) Transactions by foreign banking organization. Any transaction
described in paragraphs (a) through (e) of this section by a foreign
banking organization that involves the acquisition of an interest in a
U.S. bank or in a bank holding company for which application would be
required if the foreign banking organization were a bank holding
company.
Sec. 225.12 Transactions not requiring Board approval.
The following transactions do not require the Board's approval
under Sec. 225.11 of this subpart:
(a) Acquisition of securities in fiduciary capacity. The
acquisition by a bank or other company (other than a trust that is a
company) of control of voting securities of a bank or bank holding
company in good faith in a fiduciary capacity, unless:
(1) The acquiring bank or other company has sole discretionary
authority to vote the securities and retains this authority for more
than two years; or
(2) The acquisition is for the benefit of the acquiring bank or
other company, or its shareholders, employees, or subsidiaries.
(b) Acquisition of securities in satisfaction of debts previously
contracted. The acquisition by a bank or other company of control of
voting securities of a bank or bank holding company in the regular
course of securing or collecting a debt previously contracted in good
faith, if the acquiring bank or other company divests the securities
within two years of acquisition. The Board or Reserve Bank may grant
requests for up to three one-year extensions.
(c) Acquisition of securities by bank holding company with majority
control. The acquisition by a bank holding company of additional voting
securities of a bank or bank holding company if more than 50 percent of
the outstanding voting securities of the bank or bank holding company
is lawfully controlled by the acquiring bank holding company prior to
the acquisition.
(d) Acquisitions involving bank mergers and internal corporate
reorganizations--(1) Transactions subject to Bank Merger Act. The
merger or consolidation of a subsidiary bank of a bank holding company
with another bank, or the purchase of assets by the subsidiary bank, or
a similar transaction involving subsidiary banks of a bank holding
company, if the transaction requires the prior approval of a federal
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c)) and
does not involve the acquisition of shares of a bank. This exception
does not include:
(i) The merger of a nonsubsidiary bank and a nonoperating
subsidiary bank formed by a company for the purpose of acquiring the
nonsubsidiary bank; or
(ii) Any transaction requiring the Board's prior approval under
Sec. 225.11(e) of this subpart.
The Board may require an application under this subpart if it
determines that the merger or consolidation would have a significant
adverse impact on the financial condition of the bank holding company,
or otherwise requires approval under section 3 of the BHC Act.
(2) Certain acquisitions subject to Bank Merger Act. The
acquisition by a bank holding company of shares of a bank or company
controlling a bank or the merger of a company controlling a bank with
the bank holding company, if the transaction is part of the merger or
consolidation of the bank with a subsidiary bank (other than a
nonoperating subsidiary bank) of the acquiring bank holding company, or
is part of the purchase of substantially all of the assets of the bank
by a subsidiary bank (other than a nonoperating subsidiary bank) of the
acquiring bank holding company, and if:
(i) The bank merger, consolidation, or asset purchase occurs
simultaneously with the acquisition of the shares of the bank or bank
holding company or the merger of holding companies, and the bank is not
operated by the acquiring bank holding company as a separate entity
other than as the survivor of the merger, consolidation, or asset
purchase;
(ii) The transaction requires the prior approval of a federal
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));
(iii) The transaction does not involve the acquisition of any
nonbank company that would require prior approval under section 4 of
the BHC Act (12 U.S.C. 1843);
(iv) Both before and after the transaction, the acquiring bank
holding company meets the Board's Capital Adequacy Guidelines
(Appendixes A, B, C, D, and E of this part);
(v) At least 10 days prior to the transaction, the acquiring bank
holding company has provided to the Reserve Bank written notice of the
transaction that contains:
(A) A copy of the filing made to the appropriate federal banking
agency under the Bank Merger Act; and
(B) A description of the holding company's involvement in the
transaction, the purchase price, and the source of funding for the
purchase price; and
(vi) Prior to expiration of the period provided in paragraph
(d)(2)(v) of this section, the Reserve Bank has not
[[Page 9325]]
informed the bank holding company that an application under Sec. 225.11
is required.
(3) Internal corporate reorganizations. (i) Subject to paragraph
(d)(3)(ii) of this section, any of the following transactions performed
in the United States by a bank holding company:
(A) The merger of holding companies that are subsidiaries of the
bank holding company;
(B) The formation of a subsidiary holding company; 1
---------------------------------------------------------------------------
\1\ In the case of a transaction that results in the formation
or designation of a new bank holding company, the new bank holding
company must complete the registration requirements described in
Sec. 225.5.
---------------------------------------------------------------------------
(C) The transfer of control or ownership of a subsidiary bank or a
subsidiary holding company between one subsidiary holding company and
another subsidiary holding company or the bank holding company.
(ii) A transaction described in paragraph (d)(3)(i) of this section
qualifies for this exception if:
(A) The transaction represents solely a corporate reorganization
involving companies and insured depository institutions that, both
preceding and following the transaction, are lawfully controlled and
operated by the bank holding company;
(B) The transaction does not involve the acquisition of additional
voting shares of an insured depository institution that, prior to the
transaction, was less than majority owned by the bank holding company;
(C) The bank holding company is not organized in mutual form; and
(D) Both before and after the transaction, the bank holding company
meets the Board's Capital Adequacy Guidelines (Appendixes A, B, C, D,
and E of this part).
(e) Holding securities in escrow. The holding of any voting
securities of a bank or bank holding company in an escrow arrangement
for the benefit of an applicant pending the Board's action on an
application for approval of the proposed acquisition, if title to the
securities and the voting rights remain with the seller and payment for
the securities has not been made to the seller.
(f) Acquisition of foreign banking organization. The acquisition of
a foreign banking organization where the foreign banking organization
does not directly or indirectly own or control a bank in the United
States, unless the acquisition is also by a foreign banking
organization and otherwise subject to Sec. 225.11(f) of this subpart.
Sec. 225.13 Factors considered in acting on bank acquisition
proposals.
(a) Factors requiring denial. As specified in section 3(c) of the
BHC Act, the Board may not approve any application under this subpart
if:
(1) The transaction would result in a monopoly or would further any
combination or conspiracy to monopolize, or to attempt to monopolize,
the business of banking in any part of the United States;
(2) The effect of the transaction may be substantially to lessen
competition in any section of the country, tend to create a monopoly,
or in any other manner be in restraint of trade, unless the Board finds
that the transaction's anti-competitive effects are clearly outweighed
by its probable effect in meeting the convenience and needs of the
community;
(3) The applicant has failed to provide the Board with adequate
assurances that it will make available such information on its
operations or activities, and the operations or activities of any
affiliate of the applicant, that the Board deems appropriate to
determine and enforce compliance with the BHC Act and other applicable
federal banking statutes, and any regulations thereunder; or
(4) In the case of an application involving a foreign banking
organization, the foreign banking organization is not subject to
comprehensive supervision or regulation on a consolidated basis by the
appropriate authorities in its home country, as provided in
Sec. 211.24(c)(1)(ii) of the Board's Regulation K (12 CFR
211.24(c)(1)(ii)).
(b) Other factors. In deciding applications under this subpart, the
Board also considers the following factors with respect to the
applicant, its subsidiaries, any banks related to the applicant through
common ownership or management, and the bank or banks to be acquired:
(1) Financial condition. Their financial condition and future
prospects, including whether current and projected capital positions
and levels of indebtedness conform to standards and policies
established by the Board.
(2) Managerial resources. The competence, experience, and integrity
of the officers, directors, and principal shareholders of the
applicant, its subsidiaries, and the banks and bank holding companies
concerned; their record of compliance with laws and regulations; and
the record of the applicant and its affiliates of fulfilling any
commitments to, and any conditions imposed by, the Board in connection
with prior applications.
(3) Convenience and needs of community. The convenience and needs
of the communities to be served, including the record of performance
under the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.)
and regulations issued thereunder, including the Board's Regulation BB
(12 CFR part 228).
(c) Interstate transactions. The Board may approve any application
or notice under this subpart by a bank holding company to acquire
control of all or substantially all of the assets of a bank located in
a state other than the home state of the bank holding company, without
regard to whether the transaction is prohibited under the law of any
state, if the transaction complies with the requirements of section
3(d) of the BHC Act (12 U.S.C. 1842(d)).
(d) Conditional approvals. The Board may impose conditions on any
approval, including conditions to address competitive, financial,
managerial, safety and soundness, convenience and needs, compliance or
other concerns, to ensure that approval is consistent with the relevant
statutory factors and other provisions of the BHC Act.
Sec. 225.14 Expedited action for certain bank acquisitions by well-run
bank holding companies.
(a) Filing of notice--(1) Information required and public notice.
As an alternative to the procedure provided in Sec. 225.15, a bank
holding company that meets the requirements of paragraph (c) of this
section may satisfy the prior approval requirements of Sec. 225.11 in
connection with the acquisition of shares, assets or control of a bank,
or a merger or consolidation between bank holding companies, by
providing the appropriate Reserve Bank with a written notice containing
the following:
(i) A certification that all of the criteria in paragraph (c) of
this section are met;
(ii) A description of the transaction that includes identification
of the companies and insured depository institutions involved in the
transaction 2 and identification of each banking market affected
by the transaction;
---------------------------------------------------------------------------
\2\ If, in connection with a transaction under this subpart, any
person or group of persons proposes to acquire control of the
acquiring bank holding company for purposes of the Bank Control Act
or Sec. 225.41, the person or group of persons may fulfill the
notice requirements of the Bank Control Act and Sec. 225.43 by
providing, as part of the submission by the acquiring bank holding
company under this subpart, identifying and biographical information
required in paragraph (6)(A) of the Bank Control Act (12 U.S.C.
1817(j)(6)(A)), as well as any financial or other information
requested by the Reserve Bank under Sec. 225.43.
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[[Page 9326]]
(iii) A description of the effect of the transaction on the
convenience and needs of the communities to be served and of the
actions being taken by the bank holding company to improve the CRA
performance of any insured depository institution subsidiary that does
not have at least a satisfactory CRA performance rating at the time of
the transaction;
(iv) Evidence that notice of the proposal has been published in
accordance with Sec. 225.16(b)(1);
(v)(A) If the bank holding company has consolidated assets of $150
million or more, an abbreviated consolidated pro forma balance sheet as
of the most recent quarter showing credit and debit adjustments that
reflect the proposed transaction, consolidated pro forma risk-based
capital ratios for the acquiring bank holding company as of the most
recent quarter, and a description of the purchase price and the terms
and sources of funding for the transaction;
(B) If the bank holding company has consolidated assets of less
than $150 million, a pro forma parent-only balance sheet as of the most
recent quarter showing credit and debit adjustments that reflect the
proposed transaction, and a description of the purchase price, the
terms and sources of funding for the transaction, and the sources and
schedule for retiring any debt incurred in the transaction;
(vi) If the bank holding company has consolidated assets of less
than $300 million, a list of and biographical information regarding any
directors or senior executive officers of the resulting bank holding
company that are not directors or senior executive officers of the
acquiring bank holding company or of a company or institution to be
acquired;
(vii) For each insured depository institution whose Tier 1 capital,
total capital, total assets or risk-weighted assets change as a result
of the transaction, the total risk-weighted assets, total assets, Tier
1 capital and total capital of the institution on a pro forma basis;
and
(viii) The market indexes for each relevant banking market
reflecting the pro forma effect of the transaction.
(2) Waiver of unnecessary information. The Reserve Bank may reduce
the information requirements in paragraph (a)(1)(v) through (viii) of
this section as appropriate.
(b)(1) Action on proposals under this section. The Board or the
appropriate Reserve Bank shall act on a proposal submitted under this
section or notify the bank holding company that the transaction is
subject to the procedure in Sec. 225.15 within 5 business days after
the close of the public comment period. The Board and the Reserve Bank
shall not approve any proposal under this section prior to the third
business day following the close of the public comment period, unless
an emergency exists that requires expedited or immediate action. The
Board may extend the period for action under this section for up to 5
business days.
(2) Acceptance of notice in event expedited procedure not
available. In the event that the Board or the Reserve Bank determines
after the filing of a notice under this section that a bank holding
company may not use the procedure in this section and must file an
application under Sec. 225.15, the application shall be deemed accepted
for purposes of Sec. 225.15 as of the date that the notice was filed
under this section.
(c) Criteria for use of expedited procedure. The procedure in this
section is available only if:
(1) Well-capitalized organization--(i) Bank holding company. Both
at the time of and immediately after the proposed transaction, the
acquiring bank holding company is well-capitalized;
(ii) Insured depository institutions. Both at the time of and
immediately after the proposed transaction:
(A) The lead insured depository institution of the acquiring bank
holding company is well-capitalized;
(B) Well-capitalized insured depository institutions control at
least 80 percent of the total risk-weighted assets of insured
depository institutions controlled by the acquiring bank holding
company; and
(C) No insured depository institution controlled by the acquiring
bank holding company is undercapitalized;
(2) Well-managed organization. (i) Satisfactory examination
ratings. At the time of the transaction, the acquiring bank holding
company, its lead insured depository institution, and insured
depository institutions that control at least 80 percent of the total
risk-weighted assets of insured depository institutions controlled by
the holding company are well-managed;
(ii) No poorly managed institutions. No insured depository
institution controlled by the acquiring bank holding company has
received 1 of the 2 lowest composite ratings at the later of the
institution's most recent examination or subsequent review by the
appropriate federal banking agency for the institution;
(iii) Recently acquired institutions excluded. Any insured
depository institution that has been acquired by the bank holding
company during the 12-month period preceding the date on which written
notice is filed under paragraph (a) of this section may be excluded for
purposes of paragraph (c)(2)(ii) of this section if :
(A) The bank holding company has developed a plan acceptable to the
appropriate federal banking agency for the institution to restore the
capital and management of the institution; and
(B) All insured depository institutions excluded under this
paragraph represent, in the aggregate, less than 10 percent of the
aggregate total risk-weighted assets of all insured depository
institutions controlled by the bank holding company;
(3) Convenience and needs criteria--(i) Effect on the community.
The record indicates that the proposed transaction would meet the
convenience and needs of the community standard in the BHC Act; and
(ii) Established CRA performance record. At the time of the
transaction, the lead insured depository institution of the acquiring
bank holding company and insured depository institutions that control
at least 80 percent of the total risk-weighted assets of insured
institutions controlled by the holding company have received a
satisfactory or better composite rating at the most recent examination
under the Community Reinvestment Act;
(4) Public comment. No comment that is timely and substantive as
provided in Sec. 225.16 is received by the Board or the appropriate
Reserve Bank other than a comment that supports approval of the
proposal;
(5) Competitive criteria--(i) Competitive screen. Without regard to
any divestitures proposed by the acquiring bank holding company, the
acquisition does not cause:
(A) Insured depository institutions controlled by the acquiring
bank holding company to control in excess of 35 percent of market
deposits in any relevant banking market; or
(B) The Herfindahl-Hirschman index to increase by more than 200
points in any relevant banking market with a post-acquisition index of
at least 1800; and
(ii) Department of Justice. The Department of Justice has not
indicated to the Board that consummation of the transaction is likely
to have a significantly adverse effect on competition in any relevant
banking market;
(6) Size of acquisition--(i) In general--(A) Limited Growth. Except
as provided in paragraph (c)(6)(ii) of this section, the sum of the
aggregate risk-weighted assets to be acquired in the proposal and the
aggregate risk-
[[Page 9327]]
weighted assets acquired by the acquiring bank holding company in all
other qualifying transactions does not exceed 35 percent of the
consolidated risk-weighted assets of the acquiring bank holding
company. For purposes of this paragraph other qualifying transactions
means any transaction approved under this section or Sec. 225.23 during
the 12 months prior to filing the notice under this section; and
(B) Individual size limitation. The total risk-weighted assets to
be acquired do not exceed $7.5 billion;
(ii) Small bank holding companies. Paragraph (c)(6)(i)(A) of this
section shall not apply if, immediately following consummation of the
proposed transaction, the consolidated risk-weighted assets of the
acquiring bank holding company are less than $300 million;
(7) Supervisory actions. During the 12-month period ending on the
date on which the bank holding company proposes to consummate the
proposed transaction, no formal administrative order, including a
written agreement, cease and desist order, capital directive, prompt
corrective action directive, asset maintenance agreement, or other
formal enforcement action, is or was outstanding against the bank
holding company or any insured depository institution subsidiary of the
holding company, and no formal administrative enforcement proceeding
involving any such enforcement action, order, or directive is or was
pending;
(8) Interstate acquisitions. Board-approval of the transaction is
not prohibited under section 3(d) of the BHC Act;
(9) Other supervisory considerations. Board approval of the
transaction is not prohibited under the informational sufficiency or
comprehensive home country supervision standards set forth in section
3(c)(3) of the BHC Act; and
(10) Notification. The acquiring bank holding company has not been
notified by the Board, in its discretion, prior to the expiration of
the period in paragraph (b)(1) of this section that an application
under Sec. 225.15 is required in order to permit closer review of any
financial, managerial, competitive, convenience and needs or other
matter related to the factors that must be considered under this part.
(d) Comment by primary banking supervisor--(1) Notice. Upon receipt
of a notice under this section, the appropriate Reserve Bank shall
promptly furnish notice of the proposal and a copy of the information
filed pursuant to paragraph (a) of this section to the primary banking
supervisor of the insured depository institutions to be acquired.
(2) Comment period. The primary banking supervisor shall have 30
calendar days (or such shorter time as agreed to by the primary banking
supervisor) from the date of the letter giving notice in which to
submit its views and recommendations to the Board.
(3) Action subject to supervisor's comment. Action by the Board or
the Reserve Bank on a proposal under this section is subject to the
condition that the primary banking supervisor not recommend in writing
to the Board disapproval of the proposal prior to the expiration of the
comment period described in paragraph (d)(2) of this section. In such
event, any approval given under this section shall be revoked and, if
required by section 3(b) of the BHC Act, the Board shall order a
hearing on the proposal.
(4) Emergencies. Notwithstanding paragraphs (d)(2) and (d)(3) of
this section, the Board may provide the primary banking supervisor with
10 calendar days' notice of a proposal under this section if the Board
finds that an emergency exists requiring expeditious action, and may
act during the notice period or without providing notice to the primary
banking supervisor if the Board finds that it must act immediately to
prevent probable failure.
(5) Primary banking supervisor. For purposes of this section and
Sec. 225.15(b), the primary banking supervisor for an institution is:
(i) The Office of the Comptroller of the Currency, in the case of a
national banking association or District bank;
(ii) The appropriate supervisory authority for the State in which
the bank is chartered, in the case of a State bank;
(iii) The Director of the Office of Thrift Supervision, in the case
of a savings association.
(e) Branches and agencies of foreign banking organizations. For
purposes of this section, a U.S. branch or agency of a foreign banking
organization shall be considered to be an insured depository
institution. A U.S. branch or agency of a foreign banking organization
shall be subject to paragraph (c)(3)(ii) of this section only to the
extent it is insured by the Federal Deposit Insurance Corporation in
accordance with section 6 of the International Banking Act of 1978 (12
U.S.C. 3104).
Sec. 225.15 Procedures for other bank acquisition proposals.
(a) Filing application. Except as provided in Sec. 225.14, an
application for the Board's prior approval under this subpart shall be
governed by the provisions of this section and shall be filed with the
appropriate Reserve Bank on the designated form.
(b) Notice to primary banking supervisor. Upon receipt of an
application under this subpart, the Reserve Bank shall promptly furnish
notice and a copy of the application to the primary banking supervisor
of each bank to be acquired. The primary supervisor shall have 30
calendar days from the date of the letter giving notice in which to
submit its views and recommendations to the Board.
(c) Accepting application for processing. Within 7 calendar days
after the Reserve Bank receives an application under this section, the
Reserve Bank shall accept it for processing as of the date the
application was filed or return the application if it is substantially
incomplete. Upon accepting an application, the Reserve Bank shall
immediately send copies to the Board. The Reserve Bank or the Board may
request additional information necessary to complete the record of an
application at any time after accepting the application for processing.
(d) Action on applications--(1) Action under delegated authority.
The Reserve Bank shall approve an application under this section within
30 calendar days after the acceptance date for the application, unless
the Reserve Bank, upon notice to the applicant, refers the application
to the Board for decision because action under delegated authority is
not appropriate.
(2) Board action. The Board shall act on an application under this
subpart that is referred to it for decision within 60 calendar days
after the acceptance date for the application, unless the Board
notifies the applicant that the 60-day period is being extended for a
specified period and states the reasons for the extension. In no event
may the extension exceed the 91-day period provided in Sec. 225.16(f).
The Board may, at any time, request additional information that it
believes is necessary for its decision.
Sec. 225.16 Public notice, comments, hearings, and other provisions
governing applications and notices.
(a) In general. The provisions of this section apply to all notices
and applications filed under Sec. 225.14 and Sec. 225.15.
(b) Public notice--(1) Newspaper publication--(i) Location of
publication. In the case of each notice or application submitted under
Sec. 225.14 or Sec. 225.15, the applicant shall publish a notice in a
newspaper of general circulation, in
[[Page 9328]]
the form and at the locations specified in Sec. 262.3 of the Rules of
Procedure (12 CFR 262.3);
(ii) Contents of notice. A newspaper notice under this paragraph
shall provide an opportunity for interested persons to comment on the
proposal for a period of at least 30 calendar days;
(iii) Timing of publication. Each newspaper notice published in
connection with a proposal under this paragraph shall be published no
more than 15 calendar days before and no later than 7 calendar days
following the date that a notice or application is filed with the
appropriate Reserve Bank.
(2) Federal Register notice. (i) Publication by Board. Upon receipt
of a notice or application under Sec. 225.14 or Sec. 225.15, the Board
shall promptly publish notice of the proposal in the Federal Register
and shall provide an opportunity for interested persons to comment on
the proposal for a period of no more than 30 days;
(ii) Request for advance publication. A bank holding company may
request that, during the 15-day period prior to filing a notice or
application under Sec. 225.14 or Sec. 225.15, the Board publish notice
of a proposal in the Federal Register. A request for advance Federal
Register publication shall be made in writing to the appropriate
Reserve Bank and shall contain the identifying information prescribed
by the Board for Federal Register publication;
(3) Waiver or shortening of notice. The Board may waive or shorten
the required notice periods under this section if the Board determines
that an emergency exists requiring expeditious action on the proposal,
or if the Board finds that immediate action is necessary to prevent the
probable failure of an insured depository institution.
(c) Public comment--(1) Timely comments. Interested persons may
submit information and comments regarding a proposal filed under this
subpart. A comment shall be considered timely for purposes of this
subpart if the comment, together with all supplemental information, is
submitted in writing in accordance with the Board's Rules of Procedure
and received by the Board or the appropriate Reserve Bank prior to the
expiration of the latest public comment period provided in paragraph
(b) of this section.
(2) Extension of comment period--(i) In general. The Board may, in
its discretion, extend the public comment period regarding any proposal
submitted under this subpart.
(ii) Requests in connection with obtaining application or notice.
In the event that an interested person has requested a copy of a notice
or application submitted under this subpart, the Board may, in its
discretion and based on the facts and circumstances, grant such person
an extension of the comment period for up to 15 calendar days.
(iii) Joint requests by interested person and acquiring company.
The Board will grant a joint request by an interested person and the
acquiring bank holding company for an extension of the comment period
for a reasonable period for a purpose related to the statutory factors
the Board must consider under this subpart.
(3) Substantive comment. A comment will be considered substantive
for purposes of this subpart unless it involves individual complaints,
or raises frivolous, previously-considered or wholly unsubstantiated
claims or irrelevant issues.
(d) Notice to Attorney General. The Board or Reserve Bank shall
immediately notify the United States Attorney General of approval of
any notice or application under Sec. 225.14 or Sec. 225.15.
(e) Hearings. As provided in section 3(b) of the BHC Act, the Board
shall order a hearing on any application or notice under Sec. 225.15 if
the Board receives from the primary supervisor of the bank to be
acquired, within the 30-day period specified in Sec. 225.15(b), a
written recommendation of disapproval of an application. The Board may
order a formal or informal hearing or other proceeding on the
application or notice, as provided in Sec. 262.3(i)(2) of the Board's
Rules of Procedure. Any request for a hearing (other than from the
primary supervisor) shall comply with Sec. 262.3(e) of the Rules of
Procedure (12 CFR 262.3(e)).
(f) Approval through failure to act--(1) Ninety-one day rule. An
application or notice under Sec. 225.14 or Sec. 225.15 shall be deemed
approved if the Board fails to act on the application or notice within
91 calendar days after the date of submission to the Board of the
complete record on the application. For this purpose, the Board acts
when it issues an order stating that the Board has approved or denied
the application or notice, reflecting the votes of the members of the
Board, and indicating that a statement of the reasons for the decision
will follow promptly.
(2) Complete record. For the purpose of computing the commencement
of the 91-day period, the record is complete on the latest of:
(i) The date of receipt by the Board of an application or notice
that has been accepted by the Reserve Bank;
(ii) The last day provided in any notice for receipt of comments
and hearing requests on the application or notice;
(iii) The date of receipt by the Board of the last relevant
material regarding the application or notice that is needed for the
Board's decision, if the material is received from a source outside of
the Federal Reserve System; or
(iv) The date of completion of any hearing or other proceeding.
(g) Exceptions to notice and hearing requirements.
(1) Probable bank failure. If the Board finds it must act
immediately on an application or notice in order to prevent the
probable failure of a bank or bank holding company, the Board may
modify or dispense with the notice and hearing requirements of this
section.
(2) Emergency. If the Board finds that, although immediate action
on an application or notice is not necessary, an emergency exists
requiring expeditious action, the Board shall provide the primary
supervisor 10 days to submit its recommendation. The Board may act on
such an application or notice without a hearing and may modify or
dispense with the other notice and hearing requirements of this
section.
(h) Waiting period. A transaction approved under Sec. 225.14 or
Sec. 225.15 shall not be consummated until 30 days after the date of
approval of the application, except that a transaction may be
consummated:
(1) Immediately upon approval, if the Board has determined under
paragraph (g) of this section that the application or notice involves a
probable bank failure;
(2) On or after the 5th calendar day following the date of
approval, if the Board has determined under paragraph (g) of this
section that an emergency exists requiring expeditious action; or
(3) On or after the 15th calendar day following the date of
approval, if the Board has not received any adverse comments from the
United States Attorney General relating to the competitive factors and
the Attorney General has consented to the shorter waiting period.
Sec. 225.17 Notice procedure for one-bank holding company formations.
(a) Transactions that qualify under this section. An acquisition by
a company of control of a bank may be consummated 30 days after
providing notice to the appropriate Reserve Bank in accordance with
paragraph (b) of this section, provided that all of the following
conditions are met:
(1) The shareholder or shareholders who control at least 67 percent
of the shares of the bank will control, immediately after the
reorganization, at
[[Page 9329]]
least 67 percent of the shares of the holding company in substantially
the same proportion, except for changes in shareholders' interests
resulting from the exercise of dissenting shareholders' rights under
state or federal law; 3
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\3\ A shareholder of a bank in reorganization will be considered
to have the same proportional interest in the holding company if the
shareholder interest increases, on a pro rata basis, as a result of
either the redemption of shares from dissenting shareholders by the
bank or bank holding company, or the acquisition of shares of
dissenting shareholders by the remaining shareholders.
---------------------------------------------------------------------------
(2) No shareholder, or group of shareholders acting in concert,
will, following the reorganization, own or control 10 percent or more
of any class of voting shares of the bank holding company, unless that
shareholder or group of shareholders was authorized, after review under
the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)) by the
appropriate federal banking agency for the bank, to own or control 10
percent or more of any class of voting shares of the bank; 4
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\4\ This procedure is not available in cases in which the
exercise of dissenting shareholders' rights would cause a company
that is not a bank holding company (other than the company in
formation) to be required to register as a bank holding company.
This procedure also is not available for the formation of a bank
holding company organized in mutual form.
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(3) The bank is adequately capitalized (as defined in section 38 of
the Federal Deposit Insurance Act (12 U.S.C. 1831o));
(4) The bank received at least a composite ``satisfactory'' rating
at its most recent examination, in the event that the bank was
examined;
(5) At the time of the reorganization, neither the bank nor any of
its officers, directors, or principal shareholders is involved in any
unresolved supervisory or enforcement matters with any appropriate
federal banking agency;
(6) The company demonstrates that any debt that it incurs at the
time of the reorganization, and the proposed means of retiring this
debt, will not place undue burden on the holding company or its
subsidiary on a pro forma basis; 5
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\5\ For a banking organization with consolidated assets, on a
pro forma basis, of less than $150 million (other than a banking
organization that will control a de novo bank), this requirement is
satisfied if the proposal complies with the Board's policy statement
on small bank holding companies (Appendix C of this part).
---------------------------------------------------------------------------
(7) The holding company will not, as a result of the
reorganization, acquire control of any additional bank or engage in any
activities other than those of managing and controlling banks; and
(8) During this period, neither the appropriate Reserve Bank nor
the Board objected to the proposal or required the filing of an
application under Sec. 225.15 of this subpart.
(b) Contents of notice. A notice filed under this paragraph shall
include:
(1) Certification by the notificant's board of directors that the
requirements of 12 U.S.C. 1842(a)(C) and this section are met by the
proposal;
(2) A list identifying all principal shareholders of the bank prior
to the reorganization and of the holding company following the
reorganization, and specifying the percentage of shares held by each
principal shareholder in the bank and proposed to be held in the new
holding company;
(3) A description of the resulting management of the proposed bank
holding company and its subsidiary bank, including:
(i) Biographical information regarding any senior officers and
directors of the resulting bank holding company who were not senior
officers or directors of the bank prior to the reorganization; and
(ii) A detailed history of the involvement of any officer,
director, or principal shareholder of the resulting bank holding
company in any administrative or criminal proceeding; and
(4) Pro forma financial statements for the holding company, and a
description of the amount, source, and terms of debt, if any, that the
bank holding company proposes to incur, and information regarding the
sources and timing for debt service and retirement.
(c) Acknowledgment of notice. Within 7 calendar days following
receipt of a notice under this section, the Reserve Bank shall provide
the notificant with a written acknowledgment of receipt of the notice.
This written acknowledgment shall indicate that the transaction
described in the notice may be consummated on the 30th calendar day
after the date of receipt of the notice if the Reserve Bank or the
Board has not objected to the proposal during that time.
(d) Application required upon objection. The Reserve Bank or the
Board may object to a proposal during the notice period by providing
the bank holding company with a written explanation of the reasons for
the objection. In such case, the bank holding company may file an
application for prior approval of the proposal pursuant to Sec. 225.15
of this subpart.
4. Subpart C is revised to read as follows:
Subpart C--Nonbanking Activities and Acquisitions by Bank Holding
Companies
Sec.
225.21 Prohibited nonbanking activities and acquisitions; exempt
bank holding companies.
225.22 Exempt nonbanking activities and acquisitions.
225.23 Expedited action for nonbanking proposals by well-run bank
holding companies.
225.24 Procedures for other nonbanking proposals.
225.25 Hearings, alteration of activities, and other matters.
225.26 Factors considered in acting on nonbanking proposals.
225.27 Procedures for determining scope of nonbanking activities.
225.28 List of permissible nonbanking activities.
Subpart C--Nonbanking Activities and Acquisitions by Bank Holding
Companies
Sec. 225.21 Prohibited nonbanking activities and acquisitions; exempt
bank holding companies.
(a) Prohibited nonbanking activities and acquisitions. Except as
provided in Sec. 225.22 of this subpart, a bank holding company or a
subsidiary may not engage in, or acquire or control, directly or
indirectly, voting securities or assets of a company engaged in, any
activity other than:
(1) Banking or managing or controlling banks and other subsidiaries
authorized under the BHC Act; and
(2) An activity that the Board determines to be so closely related
to banking, or managing or controlling banks as to be a proper incident
thereto, including any incidental activities that are necessary to
carry on such an activity, if the bank holding company has obtained the
prior approval of the Board for that activity in accordance with the
requirements of this regulation.
(b) Exempt bank holding companies. The following bank holding
companies are exempt from the provisions of this subpart:
(1) Family-owned companies. Any company that is a ``company covered
in 1970'' (as defined in section 2(b) of the BHC Act), more than 85
percent of the voting securities of which was collectively owned on
June 30, 1968, and continuously thereafter, by members of the same
family (or their spouses) who are lineal descendants of common
ancestors.
(2) Labor, agricultural, and horticultural organizations. Any
company that was on January 4, 1977, both a bank holding company and a
labor, agricultural, or horticultural organization exempt from taxation
[[Page 9330]]
under section 501 of the Internal Revenue Code (26 U.S.C. 501(c)).
(3) Companies granted hardship exemption. Any bank holding company
that has controlled only one bank since before July 1, 1968, and that
has been granted an exemption by the Board under section 4(d) of the
BHC Act, subject to any conditions imposed by the Board.
(4) Companies granted exemption on other grounds. Any company that
acquired control of a bank before December 10, 1982, without the
Board's prior approval under section 3 of the BHC Act, on the basis of
a narrow interpretation of the term demand deposit or commercial loan,
if the Board has determined that:
(i) Coverage of the company as a bank holding company under this
subpart would be unfair or represent an unreasonable hardship; and
(ii) Exclusion of the company from coverage under this part is
consistent with the purposes of the BHC Act and section 106 of the Bank
Holding Company Act Amendments of 1970 (12 U.S.C. 1971, 1972(1)). The
provisions of Sec. 225.4 of subpart A of this part do not apply to a
company exempt under this paragraph.
Sec. 225.22 Exempt nonbanking activities and acquisitions.
(a) Certain de novo activities. A bank holding company may, either
directly or indirectly, engage de novo in any nonbanking activity
listed in Sec. 225.28(b) (other than operation of an insured depository
institution) without obtaining the Board's prior approval if the bank
holding company:
(1) Meets the requirements of paragraphs (c) (1), (2), and (6) of
Sec. 225.23;
(2) Conducts the activity in compliance with all Board orders and
regulations governing the activity; and
(3) Within 10 business days after commencing the activity, provides
written notice to the appropriate Reserve Bank describing the activity,
identifying the company or companies engaged in the activity, and
certifying that the activity will be conducted in accordance with the
Board's orders and regulations and that the bank holding company meets
the requirements of paragraphs (c) (1), (2), and (6) of Sec. 225.23.
(b) Servicing activities. A bank holding company may, without the
Board's prior approval under this subpart, furnish services to or
perform services for, or establish or acquire a company that engages
solely in servicing activities for:
(1) The bank holding company or its subsidiaries in connection with
their activities as authorized by law, including services that are
necessary to fulfill commitments entered into by the subsidiaries with
third parties, if the bank holding company or servicing company
complies with the Board's published interpretations and does not act as
principal in dealing with third parties; and
(2) The internal operations of the bank holding company or its
subsidiaries. Services for the internal operations of the bank holding
company or its subsidiaries include, but are not limited to:
(i) Accounting, auditing, and appraising;
(ii) Advertising and public relations;
(iii) Data processing and data transmission services, data bases,
or facilities;
(iv) Personnel services;
(v) Courier services;
(vi) Holding or operating property used wholly or substantially by
a subsidiary in its operations or for its future use;
(vii) Liquidating property acquired from a subsidiary;
(viii) Liquidating property acquired from any sources either prior
to May 9, 1956, or the date on which the company became a bank holding
company, whichever is later; and
(ix) Selling, purchasing, or underwriting insurance, such as
blanket bond insurance, group insurance for employees, and property and
casualty insurance.
(c) Safe deposit business. A bank holding company or nonbank
subsidiary may, without the Board's prior approval, conduct a safe
deposit business, or acquire voting securities of a company that
conducts such a business.
(d) Nonbanking acquisitions not requiring prior Board approval. The
Board's prior approval is not required under this subpart for the
following acquisitions:
(1) DPC acquisitions. (i) Voting securities or assets, acquired by
foreclosure or otherwise, in the ordinary course of collecting a debt
previously contracted (DPC property) in good faith, if the DPC property
is divested within two years of acquisition.
(ii) The Board may, upon request, extend this two-year period for
up to three additional years. The Board may permit additional
extensions for up to 5 years (for a total of 10 years), for shares,
real estate or other assets where the holding company demonstrates that
each extension would not be detrimental to the public interest and
either the bank holding company has made good faith attempts to dispose
of such shares, real estate or other assets or disposal of the shares,
real estate or other assets during the initial period would have been
detrimental to the company.
(iii) Transfers of DPC property within the bank holding company
system do not extend any period for divestiture of the property.
(2) Securities or assets required to be divested by subsidiary.
Voting securities or assets required to be divested by a subsidiary at
the request of an examining federal or state authority (except by the
Board under the BHC Act or this regulation), if the bank holding
company divests the securities or assets within two years from the date
acquired from the subsidiary.
(3) Fiduciary investments. Voting securities or assets acquired by
a bank or other company (other than a trust that is a company) in good
faith in a fiduciary capacity, if the voting securities or assets are:
(i) Held in the ordinary course of business; and
(ii) Not acquired for the benefit of the company or its
shareholders, employees, or subsidiaries.
(4) Securities eligible for investment by national bank. Voting
securities of the kinds and amounts explicitly eligible by federal
statute (other than section 4 of the Bank Service Corporation Act, 12
U.S.C. 1864) for investment by a national bank, and voting securities
acquired prior to June 30, 1971, in reliance on section 4(c)(5) of the
BHC Act and interpretations of the Comptroller of the Currency under
section 5136 of the Revised Statutes (12 U.S.C. 24(7)).
(5) Securities or property representing 5 percent or less of a
company. Voting securities of a company or property that, in the
aggregate, represent 5 percent or less of the outstanding shares of any
class of voting securities of a company, or that represent a 5 percent
interest or less in the property, subject to the provisions of 12 CFR
225.137.
(6) Securities of investment company. Voting securities of an
investment company that is solely engaged in investing in securities
and that does not own or control more than 5 percent of the outstanding
shares of any class of voting securities of any company.
(7) Assets acquired in ordinary course of business. Assets of a
company acquired in the ordinary course of business, subject to the
provisions of 12 CFR 225.132, if the assets relate to activities in
which the acquiring company has previously received Board
[[Page 9331]]
approval under this regulation to engage.
(8) Asset acquisitions by lending company or industrial bank.
Assets of an office(s) of a company, all or substantially all of which
relate to making, acquiring, or servicing loans if:
(i) The acquiring company has previously received Board approval
under this regulation or is not required to obtain prior Board approval
under this regulation to engage in lending activities or industrial
banking activities;
(ii) The assets acquired during any 12-month period do not
represent more than 50 percent of the risk-weighted assets (on a
consolidated basis) of the acquiring lending company or industrial
bank, or more than $100 million, whichever amount is less;
(iii) The assets acquired do not represent more than 50 percent of
the selling company's consolidated assets that are devoted to lending
activities or industrial banking business;
(iv) The acquiring company notifies the Reserve Bank of the
acquisition within 30 days after the acquisition; and
(v) The acquiring company, after giving effect to the transaction,
meets the Board's Capital Adequacy Guidelines (Appendix A of this
part), and the Board has not previously notified the acquiring company
that it may not acquire assets under the exemption in this paragraph.
(e) Acquisition of securities by subsidiary banks--(1) National
bank. A national bank or its subsidiary may, without the Board's
approval under this subpart, acquire or retain securities on the basis
of section 4(c)(5) of the BHC Act in accordance with the regulations of
the Comptroller of the Currency.
(2) State bank. A state-chartered bank or its subsidiary may,
insofar as federal law is concerned, and without the Board's prior
approval under this subpart:
(i) Acquire or retain securities, on the basis of section 4(c)(5)
of the BHC Act, of the kinds and amounts explicitly eligible by federal
statute for investment by a national bank; or
(ii) Acquire or retain all (but, except for directors' qualifying
shares, not less than all) of the securities of a company that engages
solely in activities in which the parent bank may engage, at locations
at which the bank may engage in the activity, and subject to the same
limitations as if the bank were engaging in the activity directly.
(f) Activities and securities of new bank holding companies. A
company that becomes a bank holding company may, for a period of two
years, engage in nonbanking activities and control voting securities or
assets of a nonbank subsidiary, if the bank holding company engaged in
such activities or controlled such voting securities or assets on the
date it became a bank holding company. The Board may grant requests for
up to three one-year extensions of the two-year period.
(g) Grandfathered activities and securities. Unless the Board
orders divestiture or termination under section 4(a)(2) of the BHC Act,
a ``company covered in 1970,'' as defined in section 2(b) of the BHC
Act, may:
(1) Retain voting securities or assets and engage in activities
that it has lawfully held or engaged in continuously since June 30,
1968; and
(2) Acquire voting securities of any newly formed company to engage
in such activities.
(h) Securities or activities exempt under Regulation K. A bank
holding company may acquire voting securities or assets and engage in
activities as authorized in Regulation K (12 CFR part 211).
Sec. 225.23 Expedited action for certain nonbanking proposals by well-
run bank holding companies.
(a) Filing of notice--(1) Information required. A bank holding
company that meets the requirements of paragraph (c) of this section
may satisfy the notice requirement of this subpart in connection with
the acquisition of voting securities or assets of a company engaged in
nonbanking activities that the Board has permitted by order or
regulation (other than an insured depository institution) 1, or a
proposal to engage de novo, either directly or indirectly, in a
nonbanking activity that the Board has permitted by order or by
regulation, by providing the appropriate Reserve Bank with a written
notice containing the following:
---------------------------------------------------------------------------
\1\ A bank holding company may acquire voting securities or
assets of a savings association or other insured depository
institution that is not a bank by using the procedures in
Sec. 225.14 of subpart B if the bank holding company and the
proposal qualify under that section as if the savings association or
other institution were a bank for purposes of that section.
---------------------------------------------------------------------------
(i) A certification that all of the criteria in paragraph (c) of
this section are met;
(ii) A description of the transaction that includes identification
of the companies involved in the transaction, the activities to be
conducted, and a commitment to conduct the proposed activities in
conformity with the Board's regulations and orders governing the
conduct of the proposed activity;
(iii) If the proposal involves an acquisition of a going concern:
(A) If the bank holding company has consolidated assets of $150
million or more, an abbreviated consolidated pro forma balance sheet
for the acquiring bank holding company as of the most recent quarter
showing credit and debit adjustments that reflect the proposed
transaction, consolidated pro forma risk-based capital ratios for the
acquiring bank holding company as of the most recent quarter, a
description of the purchase price and the terms and sources of funding
for the transaction, and the total revenue and net income of the
company to be acquired;
(B) If the bank holding company has consolidated assets of less
than $150 million, a pro forma parent-only balance sheet as of the most
recent quarter showing credit and debit adjustments that reflect the
proposed transaction, a description of the purchase price and the terms
and sources of funding for the transaction and the sources and schedule
for retiring any debt incurred in the transaction, and the total
assets, off-balance sheet items, revenue and net income of the company
to be acquired;
(C) For each insured depository institution whose Tier 1 capital,
total capital, total assets or risk-weighted assets change as a result
of the transaction, the total risk-weighted assets, total assets, Tier
1 capital and total capital of the institution on a pro forma basis;
(iv) Identification of the geographic markets in which competition
would be affected by the proposal, a description of the effect of the
proposal on competition in the relevant markets, a list of the major
competitors in that market in the proposed activity if the affected
market is local in nature, and, if requested, the market indexes for
the relevant market; and
(v) A description of the public benefits that can reasonably be
expected to result from the transaction.
(2) Waiver of unnecessary information. The Reserve Bank may reduce
the information requirements in paragraphs (a)(1) (iii) and (iv) of
this section as appropriate.
(b)(1) Action on proposals under this section. The Board or the
appropriate Reserve Bank shall act on a proposal submitted under this
section, or notify the bank holding company that the transaction is
subject to the procedure in Sec. 225.24, within 12 business days
following the filing of all of the information required in paragraph
(a) of this section.
(2) Acceptance of notice if expedited procedure not available. If
the Board or the Reserve Bank determines, after the filing of a notice
under this section, that a bank holding company may not use
[[Page 9332]]
the procedure in this section and must file a notice under Sec. 225.24,
the notice shall be deemed accepted for purposes of Sec. 225.24 as of
the date that the notice was filed under this section.
(c) Criteria for use of expedited procedure. The procedure in this
section is available only if:
(1) Well-capitalized organization--(i) Bank holding company. Both
at the time of and immediately after the proposed transaction, the
acquiring bank holding company is well-capitalized;
(ii) Insured depository institutions. Both at the time of and
immediately after the transaction:
(A) The lead insured depository institution of the acquiring bank
holding company is well-capitalized;
(B) Well-capitalized insured depository institutions control at
least 80 percent of the total risk-weighted assets of insured
depository institutions controlled by the acquiring bank holding
company; and
(C) No insured depository institution controlled by the acquiring
bank holding company is undercapitalized;
(2) Well-managed organization--(i) Satisfactory examination
ratings. At the time of the transaction, the acquiring bank holding
company, its lead insured depository institution, and insured
depository institutions that control at least 80 percent of the total
risk-weighted assets of insured depository institutions controlled by
such holding company are well-managed;
(ii) No poorly managed institutions. No insured depository
institution controlled by the acquiring bank holding company has
received 1 of the 2 lowest composite ratings at the later of the
institution's most recent examination or subsequent review by the
appropriate federal banking agency for the institution.
(iii) Recently acquired institutions excluded. Any insured
depository institution that has been acquired by the bank holding
company during the 12-month period preceding the date on which written
notice is filed under paragraph (a) of this section may be excluded for
purposes of paragraph (c)(2)(ii) of this section if:
(A) The bank holding company has developed a plan acceptable to the
appropriate federal banking agency for the institution to restore the
capital and management of the institution; and
(B) All insured depository institutions excluded under this
paragraph represent, in the aggregate, less than 10 percent of the
aggregate total risk-weighted assets of all insured depository
institutions controlled by the bank holding company;
(3) Permissible activity. (i) The Board has determined by
regulation or order that each activity proposed to be conducted is so
closely related to banking, or managing or controlling banks, as to be
a proper incident thereto; and
(ii) The Board has not indicated that proposals to engage in the
activity are subject to the notice procedure provided in Sec. 225.24;
(4) Competitive criteria--(i) Competitive screen. In the case of
the acquisition of a going concern, the acquisition, without regard to
any divestitures proposed by the acquiring bank holding company, does
not cause:
(A) The acquiring bank holding company to control in excess of 35
percent of the market share in any relevant market; or
(B) The Herfindahl-Hirschman index to increase by more than 200
points in any relevant market with a post-acquisition index of at least
1800; and
(ii) Other competitive factors. The Board has not indicated that
the transaction is subject to close scrutiny on competitive grounds;
(5) Size of acquisition--(i) In general--(A) Limited growth. Except
as provided in paragraph (c)(5)(ii) of this section, the sum of
aggregate risk-weighted assets to be acquired in the proposal and the
aggregate risk-weighted assets acquired by the acquiring bank holding
company in all other qualifying transactions does not exceed 35 percent
of the consolidated risk-weighted assets of the acquiring bank holding
company. For purposes of this paragraph, ``other qualifying
transactions'' means any transaction approved under this section or
Sec. 225.14 during the 12 months prior to filing the notice under this
section;
(B) Consideration paid. The gross consideration to be paid by the
acquiring bank holding company in the proposal does not exceed 15
percent of the consolidated Tier 1 capital of the acquiring bank
holding company; and
(C) Individual size limitation. The total risk-weighted assets to
be acquired do not exceed $7.5 billion;
(ii) Small bank holding companies. Paragraph (c)(5)(i)(A) of this
section shall not apply if, immediately following consummation of the
proposed transaction, the consolidated risk-weighted assets of the
acquiring bank holding company are less than $300 million;
(6) Supervisory actions. During the 12-month period ending on the
date on which the bank holding company proposes to consummate the
proposed transaction, no formal administrative order, including a
written agreement, cease and desist order, capital directive, prompt
corrective action directive, asset maintenance agreement, or other
formal enforcement order is or was outstanding against the bank holding
company or any insured depository institution subsidiary of the holding
company, and no formal administrative enforcement proceeding involving
any such enforcement action, order, or directive is or was pending; and
(7) Notification. The bank holding company has not been notified by
the Board, in its discretion, prior to the expiration of the period in
paragraph (b) of this section that a notice under Sec. 225.24 is
required in order to permit closer review of any potential adverse
effect or other matter related to the factors that must be considered
under this part.
(d) Branches and agencies of foreign banking organizations. For
purposes of this section, a U.S. branch or agency of a foreign banking
organization shall be considered to be an insured depository
institution.
Sec. 225.24 Procedures for other nonbanking proposals.
(a) Notice required for nonbanking activities. Except as provided
in Sec. 225.22 and Sec. 225.23, a notice for the Board's prior approval
under Sec. 225.21(a) to engage in or acquire a company engaged in a
nonbanking activity shall be filed by a bank holding company (including
a company seeking to become a bank holding company) with the
appropriate Reserve Bank in accordance with this section and the
Board's Rules of Procedure (12 CFR 262.3).
(1) Engaging de novo in listed activities. A bank holding company
seeking to commence or to engage de novo, either directly or through a
subsidiary, in a nonbanking activity listed in Sec. 225.28 shall file a
notice containing a description of the activities to be conducted and
the identity of the company that will conduct the activity.
(2) Acquiring company engaged in listed activities. A bank holding
company seeking to acquire or control voting securities or assets of a
company engaged in a nonbanking activity listed in Sec. 225.28 shall
file a notice containing the following:
(i) A description of the proposal, including a description of each
proposed activity, and the effect of the proposal on competition among
entities engaging in each proposed activity in each relevant market
with relevant market indexes;
(ii) The identity of any entity involved in the proposal, and, if
the notificant proposes to conduct the activity through
[[Page 9333]]
an existing subsidiary, a description of the existing activities of the
subsidiary;
(iii) A statement of the public benefits that can reasonably be
expected to result from the proposal;
(iv) If the bank holding company has consolidated assets of $150
million or more:
(A) Parent company and consolidated pro forma balance sheets for
the acquiring bank holding company as of the most recent quarter
showing credit and debit adjustments that reflect the proposed
transaction;
(B) Consolidated pro forma risk-based capital and leverage ratio
calculations for the acquiring bank holding company as of the most
recent quarter; and
(C) A description of the purchase price and the terms and sources
of funding for the transaction;
(v) If the bank holding company has consolidated assets of less
than $150 million:
(A) A pro forma parent-only balance sheet as of the most recent
quarter showing credit and debit adjustments that reflect the proposed
transaction; and
(B) A description of the purchase price and the terms and sources
of funding for the transaction and, if the transaction is debt funded,
one-year income statement and cash flow projections for the parent
company, and the sources and schedule for retiring any debt incurred in
the transaction;
(vi) For each insured depository institution whose Tier 1 capital,
total capital, total assets or risk-weighted assets change as a result
of the transaction, the total risk-weighted assets, total assets, Tier
1 capital and total capital of the institution on a pro forma basis;
and
(vii) A description of the management expertise, internal controls
and risk management systems that will be utilized in the conduct of the
proposed activities; and
(viii) A copy of the purchase agreements, and balance sheet and
income statements for the most recent quarter and year-end for any
company to be acquired.
(3) Engaging in or acquiring company to engage in unlisted
activities. A bank holding company seeking to engage de novo in, or to
acquire or control voting securities or assets of a company engaged in,
any activity not listed in Sec. 225.28 shall file a notice containing
the following:
(i) Evidence that the proposed activity is so closely related to
banking or managing or controlling banks as to be a proper incident
thereto, or, if the Board previously determined by order that the
activity is permissible for a bank holding company to conduct, a
commitment to comply with all the conditions and limitations
established by the Board governing the activity; and
(ii) The information required in paragraphs (a)(1) or (a)(2) of
this section, as appropriate.
(b) Notice provided to Board. The Reserve Bank shall immediately
send to the Board a copy of any notice received under paragraphs (a)(2)
or (a)(3) of this section.
(c) Notice to public--(1) Listed activities and activities approved
by order--(i) In a case involving an activity listed in Sec. 225.28 or
previously approved by the Board by order, the Reserve Bank shall
notify the Board for publication in the Federal Register immediately
upon receipt by the Reserve Bank of:
(A) A notice under this section; or
(B) A written request that notice of a proposal under this section
or Sec. 225.23 be published in the Federal Register. Such a request may
request that Federal Register publication occur up to 15 calendar days
prior to submission of a notice under this subpart.
(ii) The Federal Register notice published under this paragraph
shall invite public comment on the proposal, generally for a period of
15 days.
(2) New activities--(i) In general. In the case of a notice under
this subpart involving an activity that is not listed in Sec. 225.28
and that has not been previously approved by the Board by order, the
Board shall send notice of the proposal to the Federal Register for
publication, unless the Board determines that the notificant has not
demonstrated that the activity is so closely related to banking or to
managing or controlling banks as to be a proper incident thereto. The
Federal Register notice shall invite public comment on the proposal for
a reasonable period of time, generally for 30 days.
(ii) Time for publication. The Board shall send the notice required
under this paragraph to the Federal Register within 10 business days of
acceptance by the Reserve Bank. The Board may extend the 10-day period
for an additional 30 calendar days upon notice to the notificant. In
the event notice of a proposal is not published for comment, the Board
shall inform the notificant of the reasons for the decision.
(d) Action on notices--(1) Reserve Bank action--(i) In general.
Within 30 calendar days after receipt by the Reserve Bank of a notice
filed pursuant to paragraphs (a)(1) or (a)(2) of this section, the
Reserve Banks shall:
(A) Approve the notice; or
(B) Refer the notice to the Board for decision because action under
delegated authority is not appropriate.
(ii) Return of incomplete notice. Within 7 calendar days of
receipt, the Reserve Bank may return any notice as informationally
incomplete that does not contain all of the information required by
this subpart. The return of such a notice shall be deemed action on the
notice.
(iii) Notice of action. The Reserve Bank shall promptly notify the
bank holding company of any action or referral under this paragraph.
(iv) Close of public comment period. The Reserve Bank shall not
approve any notice under this paragraph (d)(1) of this section prior to
the third business day after the close of the public comment period,
unless an emergency exists that requires expedited or immediate action.
(2) Board action--(i) Internal schedule. The Board seeks to act on
every notice referred to it for decision within 60 days of the date
that the notice is filed with the Reserve Bank. If the Board is unable
to act within this period, the Board shall notify the notificant and
explain the reasons and the date by which the Board expects to act.
(ii) Extension of required period for action--(A) In general. The
Board may extend the 60-day period required for Board action under
paragraph (d)(2)(i) of this section for an additional 30 days upon
notice to the notificant.
(B) Unlisted activities. If a notice involves a proposal to engage
in an activity that is not listed in Sec. 225.28, the Board may extend
the period required for Board action under paragraph (d)(2)(i) of this
section for an additional 90 days. This 90-day extension is in addition
to the 30-day extension period provided in paragraph (d)(2)(ii)(A) of
this section. The Board shall notify the notificant that the notice
period has been extended and explain the reasons for the extension.
(3) Requests for additional information. The Board or the Reserve
Bank may modify the information requirements under this section or at
any time request any additional information that either believes is
needed for a decision on any notice under this section.
(4) Tolling of period. The Board or the Reserve Bank may at any
time extend or toll the time period for action on a notice for any
period with the consent of the notificant.
Sec. 225.25 Hearings, alteration of activities, and other matters.
(a) Hearings--(1) Procedure to request hearing. Any request for a
hearing on a
[[Page 9334]]
notice under this subpart shall comply with the provisions of 12 CFR
262.3(e).
(2) Determination to hold hearing. The Board may order a formal or
informal hearing or other proceeding on a notice as provided in 12 CFR
262.3(i)(2). The Board shall order a hearing only if there are disputed
issues of material fact that cannot be resolved in some other manner.
(3) Extension of period for hearing. The Board may extend the time
for action on any notice for such time as is reasonably necessary to
conduct a hearing and evaluate the hearing record. Such extension shall
not exceed 91 calendar days after the date of submission to the Board
of the complete record on the notice. The procedures for computation of
the 91-day rule as set forth in Sec. 225.16(f) apply to notices under
this subpart that involve hearings.
(b) Approval through failure to act. (1) Except as provided in
paragraph (a) of this section or Sec. 225.24(d)(4), a notice under this
subpart shall be deemed to be approved at the conclusion of the period
that begins on the date the complete notice is received by the Reserve
Bank or the Board and that ends 60 calendar days plus any applicable
extension and tolling period thereafter.
(2) Complete notice. For purposes of paragraph (b)(1) of this
section, a notice shall be deemed complete at such time as it contains
all information required by this subpart and all other information
requested by the Board or the Reserve Bank.
(c) Notice to expand or alter nonbanking activities--(1) De novo
expansion. A notice under this subpart is required to open a new office
or to form a subsidiary to engage in, or to relocate an existing office
engaged in, a nonbanking activity that the Board has previously
approved for the bank holding company under this regulation, only if:
(i) The Board's prior approval was limited geographically;
(ii) The activity is to be conducted in a country outside of the
United States and the bank holding company has not previously received
prior Board approval under this regulation to engage in the activity in
that country; or
(iii) The Board or appropriate Reserve Bank has notified the
company that a notice under this subpart is required.
(2) Activities outside United States. With respect to activities to
be engaged in outside the United States that require approval under
this subpart, the procedures of this section apply only to activities
to be engaged in directly by a bank holding company that is not a
qualifying foreign banking organization, or by a nonbank subsidiary of
a bank holding company approved under this subpart. Regulation K (12
CFR part 211) governs other international operations of bank holding
companies.
(3) Alteration of nonbanking activity. Unless otherwise permitted
by the Board, a notice under this subpart is required to alter a
nonbanking activity in any material respect from that considered by the
Board in acting on the application or notice to engage in the activity.
(d) Emergency savings association acquisitions. In the case of a
notice to acquire a savings association, the Board may modify or
dispense with the public notice and hearing requirements of this
subpart if the Board finds that an emergency exists that requires the
Board to act immediately and the primary federal regulator of the
institution concurs.
Sec. 225.26 Factors considered in acting on nonbanking proposals.
(a) In general. In evaluating a notice under Sec. 225.23 or
Sec. 225.24, the Board shall consider whether the notificant's
performance of the activities can reasonably be expected to produce
benefits to the public (such as greater convenience, increased
competition, and gains in efficiency) that outweigh possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, and unsound banking practices).
(b) Financial and managerial resources. Consideration of the
factors in paragraph (a) of this section includes an evaluation of the
financial and managerial resources of the notificant, including its
subsidiaries and any company to be acquired, the effect of the proposed
transaction on those resources, and the management expertise, internal
control and risk-management systems, and capital of the entity
conducting the activity.
(c) Competitive effect of de novo proposals. Unless the record
demonstrates otherwise, the commencement or expansion of a nonbanking
activity de novo is presumed to result in benefits to the public
through increased competition.
(d) Denial for lack of information. The Board may deny any notice
submitted under this subpart if the notificant neglects, fails, or
refuses to furnish all information required by the Board.
(e) Conditional approvals. The Board may impose conditions on any
approval, including conditions to address permissibility, financial,
managerial, safety and soundness, competitive, compliance, conflicts of
interest, or other concerns to ensure that approval is consistent with
the relevant statutory factors and other provisions of the BHC Act.
Sec. 225.27 Procedures for determining scope of nonbanking activities.
(a) Advisory opinions regarding scope of previously approved
nonbanking activities--(1) Request for advisory opinion. Any person may
submit a request to the Board for an advisory opinion regarding the
scope of any permissible nonbanking activity. The request shall be
submitted in writing to the Board and shall identify the proposed
parameters of the activity, or describe the service or product that
will be provided, and contain an explanation supporting an
interpretation regarding the scope of the permissible nonbanking
activity.
(2) Response to request. The Board shall provide an advisory
opinion within 45 days of receiving a written request under this
paragraph.
(b) Procedure for consideration of new activities--(1) Initiation
of proceeding. The Board may, at any time, on its own initiative or in
response to a written request from any person, initiate a proceeding to
determine whether any activity is so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
(2) Requests for determination. Any request for a Board
determination that an activity is so closely related to banking or
managing or controlling banks as to be a proper incident thereto, shall
be submitted to the Board in writing, and shall contain evidence that
the proposed activity is so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
(3) Publication. The Board shall publish in the Federal Register
notice that it is considering the permissibility of a new activity and
invite public comment for a period of at least 30 calendar days. In the
case of a request submitted under paragraph (b) of this section, the
Board may determine not to publish notice of the request if the Board
determines that the requester has provided no reasonable basis for a
determination that the activity is so closely related to banking, or
managing or controlling banks as to be a proper incident thereto, and
notifies the requester of the determination.
(4) Comments and hearing requests. Any comment and any request for
a hearing regarding a proposal under this section shall comply with the
provisions of Sec. 262.3(e) of the Board's Rules of Procedure (12 CFR
262.3(e)).
[[Page 9335]]
Sec. 225.28 List of permissible nonbanking activities.
(a) Closely related nonbanking activities. The activities listed in
paragraph (b) of this section are so closely related to banking or
managing or controlling banks as to be a proper incident thereto, and
may be engaged in by a bank holding company or its subsidiary in
accordance with the requirements of this regulation.
(b) Activities determined by regulation to be permissible--(1)
Extending credit and servicing loans. Making, acquiring, brokering, or
servicing loans or other extensions of credit (including factoring,
issuing letters of credit and accepting drafts) for the company's
account or for the account of others.
(2) Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing loans or
other extensions of credit, as determined by the Board. The Board has
determined that the following activities are usual in connection with
making, acquiring, brokering or servicing loans or other extensions of
credit:
(i) Real estate and personal property appraising. Performing
appraisals of real estate and tangible and intangible personal
property, including securities.
(ii) Arranging commercial real estate equity financing. Acting as
intermediary for the financing of commercial or industrial income-
producing real estate by arranging for the transfer of the title,
control, and risk of such a real estate project to one or more
investors, if the bank holding company and its affiliates do not have
an interest in, or participate in managing or developing, a real estate
project for which it arranges equity financing, and do not promote or
sponsor the development of the property.
(iii) Check-guaranty services. Authorizing a subscribing merchant
to accept personal checks tendered by the merchant's customers in
payment for goods and services, and purchasing from the merchant
validly authorized checks that are subsequently dishonored.
(iv) Collection agency services. Collecting overdue accounts
receivable, either retail or commercial.
(v) Credit bureau services. Maintaining information related to the
credit history of consumers and providing the information to a credit
grantor who is considering a borrower's application for credit or who
has extended credit to the borrower.
(vi) Asset management, servicing, and collection activities.
Engaging under contract with a third party in asset management,
servicing, and collection 2 of assets of a type that an insured
depository institution may originate and own, if the company does not
engage in real property management or real estate brokerage services as
part of these services.
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\2\ Asset management services include acting as agent in the
liquidation or sale of loans and collateral for loans, including
real estate and other assets acquired through foreclosure or in
satisfaction of debts previously contracted.
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(vii) Acquiring debt in default. Acquiring debt that is in default
at the time of acquisition, if the company:
(A) Divests shares or assets securing debt in default that are not
permissible investments for bank holding companies, within the time
period required for divestiture of property acquired in satisfaction of
a debt previously contracted under Sec. 225.12(b); 3
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\3\ For this purpose, the divestiture period for property begins
on the date that the debt is acquired, regardless of when legal
title to the property is acquired.
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(B) Stands only in the position of a creditor and does not purchase
equity of obligors of debt in default (other than equity that may be
collateral for such debt); and
(C) Does not acquire debt in default secured by shares of a bank or
bank holding company.
(viii) Real estate settlement servicing. Providing real estate
settlement services.4
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\4\ For purposes of this section, real estate settlement
services do not include providing title insurance as principal,
agent, or broker.
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(3) Leasing personal or real property. Leasing personal or real
property or acting as agent, broker, or adviser in leasing such
property if:
(i) The lease is on a nonoperating basis; 5
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\5\ The requirement that the lease be on a nonoperating basis
means that the bank holding company may not, directly or indirectly,
engage in operating, servicing, maintaining, or repairing leased
property during the lease term. For purposes of the leasing of
automobiles, the requirement that the lease be on a nonoperating
basis means that the bank holding company may not, directly or
indirectly: (1) Provide servicing, repair, or maintenance of the
leased vehicle during the lease term; (2) purchase parts and
accessories in bulk or for an individual vehicle after the lessee
has taken delivery of the vehicle; (3) provide the loan of an
automobile during servicing of the leased vehicle; (4) purchase
insurance for the lessee; or (5) provide for the renewal of the
vehicle's license merely as a service to the lessee where the lessee
could renew the license without authorization from the lessor. The
bank holding company may arrange for a third party to provide these
services or products.
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(ii) The initial term of the lease is at least 90 days;
(iii) In the case of leases involving real property:
(A) At the inception of the initial lease, the effect of the
transaction will yield a return that will compensate the lessor for not
less than the lessor's full investment in the property plus the
estimated total cost of financing the property over the term of the
lease from rental payments, estimated tax benefits, and the estimated
residual value of the property at the expiration of the initial lease;
and
(B) The estimated residual value of property for purposes of
paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent of
the acquisition cost of the property to the lessor.
(4) Operating nonbank depository institutions--(i) Industrial
banking. Owning, controlling, or operating an industrial bank, Morris
Plan bank, or industrial loan company, so long as the institution is
not a bank.
(ii) Operating savings association. Owning, controlling, or
operating a savings association, if the savings association engages
only in deposit-taking activities, lending, and other activities that
are permissible for bank holding companies under this subpart C.
(5) Trust company functions. Performing functions or activities
that may be performed by a trust company (including activities of a
fiduciary, agency, or custodial nature), in the manner authorized by
federal or state law, so long as the company is not a bank for purposes
of section 2(c) of the Bank Holding Company Act.
(6) Financial and investment advisory activities. Acting as
investment or financial advisor to any person, including (without, in
any way, limiting the foregoing):
(i) Serving as investment adviser (as defined in section 2(a)(20)
of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an
investment company registered under that act, including sponsoring,
organizing, and managing a closed-end investment company;
(ii) Furnishing general economic information and advice, general
economic statistical forecasting services, and industry studies;
(iii) Providing advice in connection with mergers, acquisitions,
divestitures, investments, joint ventures, leveraged buyouts,
recapitalizations, capital structurings, financing transactions and
similar transactions, and conducting financial feasibility studies;
6
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\6\ Feasibility studies do not include assisting management with
the planning or marketing for a given project or providing general
operational or management advice.
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(iv) Providing information, statistical forecasting, and advice
with respect to any transaction in foreign exchange, swaps, and similar
transactions,
[[Page 9336]]
commodities, and any forward contract, option, future, option on a
future, and similar instruments;
(v) Providing educational courses, and instructional materials to
consumers on individual financial management matters; and
(vi) Providing tax-planning and tax-preparation services to any
person.
(7) Agency transactional services for customer investments--(i)
Securities brokerage. Providing securities brokerage services
(including securities clearing and/or securities execution services on
an exchange), whether alone or in combination with investment advisory
services, and incidental activities (including related securities
credit activities and custodial services), if the securities brokerage
services are restricted to buying and selling securities solely as
agent for the account of customers and do not include securities
underwriting or dealing.
(ii) Riskless principal transactions. Buying and selling in the
secondary market all types of securities on the order of customers as a
``riskless principal'' to the extent of engaging in a transaction in
which the company, after receiving an order to buy (or sell) a security
from a customer, purchases (or sells) the security for its own account
to offset a contemporaneous sale to (or purchase from) the customer.
This does not include:
(A) Selling bank-ineligible securities 7 at the order of a
customer that is the issuer of the securities, or selling bank-
ineligible securities in any transaction where the company has a
contractual agreement to place the securities as agent of the issuer;
or
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\7\ A bank-ineligible security is any security that a State
member bank is not permitted to underwrite or deal in under 12
U.S.C. 24 and 335.
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(B) Acting as a riskless principal in any transaction involving a
bank-ineligible security for which the company or any of its affiliates
acts as underwriter (during the period of the underwriting or for 30
days thereafter) or dealer.8
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\8\ A company or its affiliates may not enter quotes for
specific bank-ineligible securities in any dealer quotation system
in connection with the company's riskless principal transactions;
except that the company or its affiliates may enter ``bid'' or
``ask'' quotations, or publish ``offering wanted'' or ``bid wanted''
notices on trading systems other than NASDAQ or an exchange, if the
company or its affiliate does not enter price quotations on
different sides of the market for a particular security during any
two-day period.
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(iii) Private placement services. Acting as agent for the private
placement of securities in accordance with the requirements of the
Securities Act of 1933 (1933 Act) and the rules of the Securities and
Exchange Commission, if the company engaged in the activity does not
purchase or repurchase for its own account the securities being placed,
or hold in inventory unsold portions of issues of these securities.
(iv) Futures commission merchant. Acting as a futures commission
merchant (FCM) for unaffiliated persons in the execution, clearance, or
execution and clearance of any futures contract and option on a futures
contract traded on an exchange in the United States or abroad if:
(A) The activity is conducted through a separately incorporated
subsidiary of the bank holding company, which may engage in activities
other than FCM activities (including, but not limited to, permissible
advisory and trading activities); and
(B) The parent bank holding company does not provide a guarantee or
otherwise become liable to the exchange or clearing association other
than for those trades conducted by the subsidiary for its own account
or for the account of any affiliate.
(v) Other transactional services. Providing to customers as agent
transactional services with respect to swaps and similar transactions,
any transaction described in paragraph (b)(8) of this section, any
transaction that is permissible for a state member bank, and any other
transaction involving a forward contract, option, futures, option on a
futures or similar contract (whether traded on an exchange or not)
relating to a commodity that is traded on an exchange.
(8) Investment transactions as principal--(i) Underwriting and
dealing in government obligations and money market instruments.
Underwriting and dealing in obligations of the United States, general
obligations of states and their political subdivisions, and other
obligations that state member banks of the Federal Reserve System may
be authorized to underwrite and deal in under 12 U.S.C. 24 and 335,
including banker's acceptances and certificates of deposit, under the
same limitations as would be applicable if the activity were performed
by the bank holding company's subsidiary member banks or its subsidiary
nonmember banks as if they were member banks.
(ii) Investing and trading activities. Engaging as principal in:
(A) Foreign exchange;
(B) Forward contracts, options, futures, options on futures, swaps,
and similar contracts, whether traded on exchanges or not, based on any
rate, price, financial asset (including gold, silver, platinum,
palladium, copper, or any other metal approved by the Board),
nonfinancial asset, or group of assets, other than a bank-ineligible
security,9 if:
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\9\ A bank-ineligible security is any security that a state
member bank is not permitted to underwrite or deal in under 12
U.S.C. 24 and 335.
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(1) A state member bank is authorized to invest in the asset
underlying the contract;
(2) The contract requires cash settlement; or
(3) The contract allows for assignment, termination, or offset
prior to delivery or expiration, and the company makes every reasonable
effort to avoid taking or making delivery; and
(C) Forward contracts, options,10 futures, options on futures,
swaps, and similar contracts, whether traded on exchanges or not, based
on an index of a rate, a price, or the value of any financial asset,
nonfinancial asset, or group of assets, if the contract requires cash
settlement.
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\10\ This reference does not include acting as a dealer in
options based on indices of bank-ineligible securities when the
options are traded on securities exchanges. These options are
securities for purposes of the federal securities laws and bank-
ineligible securities for purposes of section 20 of the Glass-
Steagall Act, 12 U.S.C. 337. Similarly, this reference does not
include acting as a dealer in any other instrument that is a bank-
ineligible security for purposes of section 20. A bank holding
company may deal in these instruments in accordance with the Board's
orders on dealing in bank-ineligible securities.
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(iii) Buying and selling bullion, and related activities. Buying,
selling and storing bars, rounds, bullion, and coins of gold, silver,
platinum, palladium, copper, and any other metal approved by the Board,
for the company's own account and the account of others, and providing
incidental services such as arranging for storage, safe custody,
assaying, and shipment.
(9) Management consulting and counseling activities--(i) Management
consulting. (A) Providing management consulting advice: 11
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\11\ In performing this activity, bank holding companies are not
authorized to perform tasks or operations or provide services to
client institutions either on a daily or continuing basis, except as
necessary to instruct the client institution on how to perform such
services for itself. See also the Board's interpretation of bank
management consulting advice (12 CFR 225.131).
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(1) On any matter to unaffiliated depository institutions,
including commercial banks, savings and loan associations, savings
banks, credit unions, industrial banks, Morris Plan banks, cooperative
banks, industrial loan companies, trust companies, and branches or
agencies of foreign banks;
(2) On any financial, economic, accounting, or audit matter to any
other company.
(B) A company conducting management consulting activities under
this subparagraph and any affiliate of such company may not:
[[Page 9337]]
(1) Own or control, directly or indirectly, more than 5 percent of
the voting securities of the client institution; and
(2) Allow a management official, as defined in 12 CFR 212.2(h), of
the company or any of its affiliates to serve as a management official
of the client institution, except where such interlocking relationship
is permitted pursuant to an exemption granted under 12 CFR 212.4(b) or
otherwise permitted by the Board.
(C) A company conducting management consulting activities may
provide management consulting services to customers not described in
paragraph (b)(9)(i)(A)(1) of this section or regarding matters not
described in paragraph (b)(9)(i)(A)(2) of this section, if the total
annual revenue derived from those management consulting services does
not exceed 30 percent of the company's total annual revenue derived
from management consulting activities.
(ii) Employee benefits consulting services. Providing consulting
services to employee benefit, compensation and insurance plans,
including designing plans, assisting in the implementation of plans,
providing administrative services to plans, and developing employee
communication programs for plans.
(iii) Career counseling services. Providing career counseling
services to:
(A) A financial organization 12 and individuals currently
employed by, or recently displaced from, a financial organization;
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\12\ Financial organization refers to insured depository
institution holding companies and their subsidiaries, other than
nonbanking affiliates of diversified savings and loan holding
companies that engage in activities not permissible under section
4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1842(c)(8)).
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(B) Individuals who are seeking employment at a financial
organization; and
(C) Individuals who are currently employed in or who seek positions
in the finance, accounting, and audit departments of any company.
(10) Support services--(i) Courier services. Providing courier
services for:
(A) Checks, commercial papers, documents, and written instruments
(excluding currency or bearer-type negotiable instruments) that are
exchanged among banks and financial institutions; and
(B) Audit and accounting media of a banking or financial nature and
other business records and documents used in processing such
media.13
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\13\ See also the Board's interpretation on courier activities
(12 CFR 225.129), which sets forth conditions for bank holding
company entry into the activity.
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(ii) Printing and selling MICR-encoded items. Printing and selling
checks and related documents, including corporate image checks, cash
tickets, voucher checks, deposit slips, savings withdrawal packages,
and other forms that require Magnetic Ink Character Recognition (MICR)
encoding.
(11) Insurance agency and underwriting--(i) Credit insurance.
Acting as principal, agent, or broker for insurance (including home
mortgage redemption insurance) that is:
(A) Directly related to an extension of credit by the bank holding
company or any of its subsidiaries; and
(B) Limited to ensuring the repayment of the outstanding balance
due on the extension of credit 14 in the event of the death,
disability, or involuntary unemployment of the debtor.
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\14\ Extension of credit includes direct loans to borrowers,
loans purchased from other lenders, and leases of real or personal
property so long as the leases are nonoperating and full-payout
leases that meet the requirements of paragraph (b)(3) of this
section.
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(ii) Finance company subsidiary. Acting as agent or broker for
insurance directly related to an extension of credit by a finance
company 15 that is a subsidiary of a bank holding company, if:
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\15\ Finance company includes all non-deposit-taking financial
institutions that engage in a significant degree of consumer lending
(excluding lending secured by first mortgages) and all financial
institutions specifically defined by individual states as finance
companies and that engage in a significant degree of consumer
lending.
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(A) The insurance is limited to ensuring repayment of the
outstanding balance on such extension of credit in the event of loss or
damage to any property used as collateral for the extension of credit;
and
(B) The extension of credit is not more than $10,000, or $25,000 if
it is to finance the purchase of a residential manufactured home
16 and the credit is secured by the home; and
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\16\ These limitations increase at the end of each calendar
year, beginning with 1982, by the percentage increase in the
Consumer Price Index for Urban Wage Earners and Clerical Workers
published by the Bureau of Labor Statistics.
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(C) The applicant commits to notify borrowers in writing that:
(1) They are not required to purchase such insurance from the
applicant;
(2) Such insurance does not insure any interest of the borrower in
the collateral; and
(3) The applicant will accept more comprehensive property insurance
in place of such single-interest insurance.
(iii) Insurance in small towns. Engaging in any insurance agency
activity in a place where the bank holding company or a subsidiary of
the bank holding company has a lending office and that:
(A) Has a population not exceeding 5,000 (as shown in the preceding
decennial census); or
(B) Has inadequate insurance agency facilities, as determined by
the Board, after notice and opportunity for hearing.
(iv) Insurance-agency activities conducted on May 1, 1982. Engaging
in any specific insurance-agency activity 17 if the bank holding
company, or subsidiary conducting the specific activity, conducted such
activity on May 1, 1982, or received Board approval to conduct such
activity on or before May 1, 1982.18 A bank holding company or
subsidiary engaging in a specific insurance agency activity under this
clause may:
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\17\ Nothing contained in this provision shall preclude a bank
holding company subsidiary that is authorized to engage in a
specific insurance-agency activity under this clause from continuing
to engage in the particular activity after merger with an affiliate,
if the merger is for legitimate business purposes and prior notice
has been provided to the Board.
\18\ For the purposes of this paragraph, activities engaged in
on May 1, 1982, include activities carried on subsequently as the
result of an application to engage in such activities pending before
the Board on May 1, 1982, and approved subsequently by the Board or
as the result of the acquisition by such company pursuant to a
binding written contract entered into on or before May 1, 1982, of
another company engaged in such activities at the time of the
acquisition.
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(A) Engage in such specific insurance agency activity only at
locations:
(1) In the state in which the bank holding company has its
principal place of business (as defined in 12 U.S.C. 1842(d));
(2) In any state or states immediately adjacent to such state; and
(3) In any state in which the specific insurance-agency activity
was conducted (or was approved to be conducted) by such bank holding
company or subsidiary thereof or by any other subsidiary of such bank
holding company on May 1, 1982; and
(B) Provide other insurance coverages that may become available
after May 1, 1982, so long as those coverages insure against the types
of risks as (or are otherwise functionally equivalent to) coverages
sold or approved to be sold on May 1, 1982, by the bank holding company
or subsidiary.
(v) Supervision of retail insurance agents. Supervising on behalf
of insurance underwriters the activities of retail insurance agents who
sell:
(A) Fidelity insurance and property and casualty insurance on the
real and personal property used in the operations of the bank holding
company or its subsidiaries; and
(B) Group insurance that protects the employees of the bank holding
company or its subsidiaries.
[[Page 9338]]
(vi) Small bank holding companies. Engaging in any insurance-agency
activity if the bank holding company has total consolidated assets of
$50 million or less. A bank holding company performing insurance-agency
activities under this paragraph may not engage in the sale of life
insurance or annuities except as provided in paragraphs (b)(11) (i) and
(iii) of this section, and it may not continue to engage in insurance-
agency activities pursuant to this provision more than 90 days after
the end of the quarterly reporting period in which total assets of the
holding company and its subsidiaries exceed $50 million.
(vii) Insurance-agency activities conducted before 1971. Engaging
in any insurance-agency activity performed at any location in the
United States directly or indirectly by a bank holding company that was
engaged in insurance-agency activities prior to January 1, 1971, as a
consequence of approval by the Board prior to January 1, 1971.
(12) Community development activities--(i) Financing and investment
activities. Making equity and debt investments in corporations or
projects designed primarily to promote community welfare, such as the
economic rehabilitation and development of low-income areas by
providing housing, services, or jobs for residents.
(ii) Advisory activities. Providing advisory and related services
for programs designed primarily to promote community welfare.
(13) Money orders, savings bonds, and traveler's checks. The
issuance and sale at retail of money orders and similar consumer-type
payment instruments; the sale of U.S. savings bonds; and the issuance
and sale of traveler's checks.
(14) Data processing. (i) Providing data processing and data
transmission services, facilities (including data processing and data
transmission hardware, software, documentation, or operating
personnel), data bases, advice, and access to such services,
facilities, or data bases by any technological means, if:
(A) The data to be processed or furnished are financial, banking,
or economic; and
(B) The hardware provided in connection therewith is offered only
in conjunction with software designed and marketed for the processing
and transmission of financial, banking, or economic data, and where the
general purpose hardware does not constitute more than 30 percent of
the cost of any packaged offering.
(ii) A company conducting data processing and data transmission
activities may conduct data processing and data transmission activities
not described in paragraph (b)(14)(i) of this section if the total
annual revenue derived from those activities does not exceed 30 percent
of the company's total annual revenues derived from data processing and
data transmission activities.
5. Subpart D is amended as follows:
Sec. 225.31 [Amended]
(A) Section 225.31, paragraph (d)(2)(ii), is amended by removing
the words ``as defined in 12 CFR 206.2(k)''; and
Sec. 225.32 [Removed]
(B) Section 225.32 is removed.
6. Subpart E is revised to read as follows:
Subpart E--Change in Bank Control
Sec.
225.41 Transactions requiring prior notice.
225.42 Transactions not requiring prior notice.
225.43 Procedures for filing, processing, publishing, and acting on
notices.
225.44 Reporting of stock loans.
Subpart E--Change in Bank Control
Sec. 225.41 Transactions requiring prior notice.
(a) Prior notice requirement. Any person acting directly or
indirectly, or through or in concert with one or more persons, shall
give the Board 60 days' written notice, as specified in Sec. 225.43 of
this subpart, before acquiring control of a state member bank or bank
holding company, unless the acquisition is exempt under Sec. 225.42.
(b) Definitions. For purposes of this subpart:
(1) Acquisition includes a purchase, assignment, transfer, or
pledge of voting securities, or an increase in percentage ownership of
a state member bank or a bank holding company resulting from a
redemption of voting securities.
(2) Acting in concert includes knowing participation in a joint
activity or parallel action towards a common goal of acquiring control
of a state member bank or bank holding company whether or not pursuant
to an express agreement.
(3) Immediate family includes a person's father, mother,
stepfather, stepmother, brother, sister, stepbrother, stepsister, son,
daughter, stepson, stepdaughter, grandparent, grandson, granddaughter,
father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-
law, daughter-in-law, the spouse of any of the foregoing, and the
person's spouse.
(c) Acquisitions requiring prior notice--(1) Acquisition of
control. The acquisition of voting securities of a state member bank or
bank holding company constitutes the acquisition of control under the
Bank Control Act, requiring prior notice to the Board, if, immediately
after the transaction, the acquiring person (or persons acting in
concert) will own, control, or hold with power to vote 25 percent or
more of any class of voting securities of the institution.
(2) Rebuttable presumption of control. The Board presumes that an
acquisition of voting securities of a state member bank or bank holding
company constitutes the acquisition of control under the Bank Control
Act, requiring prior notice to the Board, if, immediately after the
transaction, the acquiring person (or persons acting in concert) will
own, control, or hold with power to vote 10 percent or more of any
class of voting securities of the institution, and if:
(i) The institution has registered securities under section 12 of
the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
(ii) No other person will own, control, or hold the power to vote a
greater percentage of that class of voting securities immediately after
the transaction.1
---------------------------------------------------------------------------
\1\ If two or more persons, not acting in concert, each propose
to acquire simultaneously equal percentages of 10 percent or more of
a class of voting securities of the state member bank or bank
holding company, each person must file prior notice to the Board.
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(d) Rebuttable presumption of concerted action. The following
persons shall be presumed to be acting in concert for purposes of this
subpart:
(1) A company and any controlling shareholder, partner, trustee, or
management official of the company, if both the company and the person
own voting securities of the state member bank or bank holding company;
(2) An individual and the individual's immediate family;
(3) Companies under common control;
(4) Persons that are parties to any agreement, contract,
understanding, relationship, or other arrangement, whether written or
otherwise, regarding the acquisition, voting, or transfer of control of
voting securities of a state member bank or bank holding company, other
than through a revocable proxy as described in Sec. 225.42(a)(5) of
this subpart;
(5) Persons that have made, or propose to make, a joint filing
under sections 13 or 14 of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78n), and the rules promulgated
[[Page 9339]]
thereunder by the Securities and Exchange Commission; and
(6) A person and any trust for which the person serves as trustee.
(e) Acquisitions of loans in default. The Board presumes an
acquisition of a loan in default that is secured by voting securities
of a state member bank or bank holding company to be an acquisition of
the underlying securities for purposes of this section.
(f) Other transactions. Transactions other than those set forth in
paragraph (c) of this section resulting in a person's control of less
than 25 percent of a class of voting securities of a state member bank
or bank holding company are not deemed by the Board to constitute
control for purposes of the Bank Control Act.
(g) Rebuttal of presumptions. Prior notice to the Board is not
required for any acquisition of voting securities under the presumption
of control set forth in this section, if the Board finds that the
acquisition will not result in control. The Board shall afford any
person seeking to rebut a presumption in this section an opportunity to
present views in writing or, if appropriate, orally before its
designated representatives at an informal conference.
Sec. 225.42 Transactions not requiring prior notice.
(a) Exempt transactions. The following transactions do not require
notice to the Board under this subpart:
(1) Existing control relationships. The acquisition of additional
voting securities of a state member bank or bank holding company by a
person who:
(i) Continuously since March 9, 1979 (or since the institution
commenced business, if later), held power to vote 25 percent or more of
any class of voting securities of the institution; or
(ii) Is presumed, under Sec. 225.41(c)(2) of this subpart, to have
controlled the institution continuously since March 9, 1979, if the
aggregate amount of voting securities held does not exceed 25 percent
or more of any class of voting securities of the institution or, in
other cases, where the Board determines that the person has controlled
the bank continuously since March 9, 1979;
(2) Increase of previously authorized acquisitions. Unless the
Board or the Reserve Bank otherwise provides in writing, the
acquisition of additional shares of a class of voting securities of a
state member bank or bank holding company by any person (or persons
acting in concert) who has lawfully acquired and maintained control of
the institution (for purposes of Sec. 225.41(c) of this subpart), after
complying with the procedures and receiving approval to acquire voting
securities of the institution under this subpart, or in connection with
an application approved under section 3 of the BHC Act (12 U.S.C. 1842;
Sec. 225.11 of subpart B of this part) or section 18(c) of the Federal
Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
(3) Acquisitions subject to approval under BHC Act or Bank Merger
Act. Any acquisition of voting securities subject to approval under
section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of subpart B of
this part), or section 18(c) of the Federal Deposit Insurance Act (Bank
Merger Act, 12 U.S.C. 1828(c));
(4) Transactions exempt under BHC Act. Any transaction described in
sections 2(a)(5), 3(a)(A), or 3(a)(B) of the BHC Act (12 U.S.C.
1841(a)(5), 1842(a)(A), and 1842(a)(B)), by a person described in those
provisions;
(5) Proxy solicitation. The acquisition of the power to vote
securities of a state member bank or bank holding company through
receipt of a revocable proxy in connection with a proxy solicitation
for the purposes of conducting business at a regular or special meeting
of the institution, if the proxy terminates within a reasonable period
after the meeting;
(6) Stock dividends. The receipt of voting securities of a state
member bank or bank holding company through a stock dividend or stock
split if the proportional interest of the recipient in the institution
remains substantially the same; and
(7) Acquisition of foreign banking organization. The acquisition of
voting securities of a qualifying foreign banking organization. (This
exemption does not extend to the reports and information required under
paragraphs 9, 10, and 12 of the Bank Control Act (12 U.S.C. 1817(j)
(9), (10), and (12)) and Sec. 225.44 of this subpart.)
(b) Prior notice exemption. (1) The following acquisitions of
voting securities of a state member bank or bank holding company, which
would otherwise require prior notice under this subpart, are not
subject to the prior notice requirements if the acquiring person
notifies the appropriate Reserve Bank within 90 calendar days after the
acquisition and provides any relevant information requested by the
Reserve Bank:
(i) Acquisition of voting securities through inheritance;
(ii) Acquisition of voting securities as a bona fide gift; and
(iii) Acquisition of voting securities in satisfaction of a debt
previously contracted (DPC) in good faith.
(2) The following acquisitions of voting securities of a state
member bank or bank holding company, which would otherwise require
prior notice under this subpart, are not subject to the prior notice
requirements if the acquiring person does not reasonably have advance
knowledge of the transaction, and provides the written notice required
under section 225.43 to the appropriate Reserve Bank within 90 calendar
days after the transaction occurs:
(i) Acquisition of voting securities resulting from a redemption of
voting securities by the issuing bank or bank holding company; and
(ii) Acquisition of voting securities as a result of actions
(including the sale of securities) by any third party that is not
within the control of the acquiror.
(3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits
the authority of the Board to disapprove a notice pursuant to
Sec. 225.43(h) of this subpart.
Sec. 225.43 Procedures for filing, processing, publishing, and acting
on notices.
(a) Filing notice. (1) A notice required under this subpart shall
be filed with the appropriate Reserve Bank and shall contain all the
information required by paragraph 6 of the Bank Control Act (12 U.S.C.
1817(j)(6)), or prescribed in the designated Board form.
(2) The Board may waive any of the informational requirements of
the notice if the Board determines that it is in the public interest.
(3) A notificant shall notify the appropriate Reserve Bank or the
Board immediately of any material changes in a notice submitted to the
Reserve Bank, including changes in financial or other conditions.
(4) When the acquiring person is an individual, or group of
individuals acting in concert, the requirement to provide personal
financial data may be satisfied by a current statement of assets and
liabilities and an income summary, as required in the designated Board
form, together with a statement of any material changes since the date
of the statement or summary. The Reserve Bank or the Board,
nevertheless, may request additional information, if appropriate.
(b) Acceptance of notice. The 60-day notice period specified in
Sec. 225.41 of this subpart begins on the date of receipt of a complete
notice. The Reserve Bank shall notify the person or persons submitting
a notice under this subpart in writing of the date the notice is or was
complete and thereby accepted for processing. The Reserve Bank or the
Board may request additional relevant information at any time after the
date of acceptance.
[[Page 9340]]
(c) Publication--(1) Newspaper Announcement. Any person(s) filing a
notice under this subpart shall publish, in a form prescribed by the
Board, an announcement soliciting public comment on the proposed
acquisition. The announcement shall be published in a newspaper of
general circulation in the community in which the head office of the
state member bank to be acquired is located or, in the case of a
proposed acquisition of a bank holding company, in the community in
which its head office is located and in the community in which the head
office of each of its subsidiary banks is located. The announcement
shall be published no earlier than 15 calendar days before the filing
of the notice with the appropriate Reserve Bank and no later than 10
calendar days after the filing date; and the publisher's affidavit of a
publication shall be provided to the appropriate Reserve Bank.
(2) Contents of newspaper announcement. The newspaper announcement
shall state:
(i) The name of each person identified in the notice as a proposed
acquiror of the bank or bank holding company;
(ii) The name of the bank or bank holding company to be acquired,
including the name of each of the bank holding company's subsidiary
banks; and
(iii) A statement that interested persons may submit comments on
the notice to the Board or the appropriate Reserve Bank for a period of
20 days, or such shorter period as may be provided, pursuant to
paragraph (c)(5) of this section.
(3) Federal Register announcement. The Board shall, upon filing of
a notice under this subpart, publish announcement in the Federal
Register of receipt of the notice. The Federal Register announcement
shall contain the information required under paragraphs (c)(2)(i) and
(c)(2)(ii) of this section and a statement that interested persons may
submit comments on the proposed acquisition for a period of 15 calendar
days, or such shorter period as may be provided, pursuant to paragraph
(c)(5) of this section. The Board may waive publication in the Federal
Register, if the Board determines that such action is appropriate.
(4) Delay of publication. The Board may permit delay in the
publication required under paragraphs (c)(1) and (c)(3) of this section
if the Board determines, for good cause shown, that it is in the public
interest to grant such delay. Requests for delay of publication may be
submitted to the appropriate Reserve Bank.
(5) Shortening or waiving notice. The Board may shorten or waive
the public comment or newspaper publication requirements of this
paragraph, or act on a notice before the expiration of a public comment
period, if it determines in writing that an emergency exists, or that
disclosure of the notice, solicitation of public comment, or delay
until expiration of the public comment period would seriously threaten
the safety or soundness of the bank or bank holding company to be
acquired.
(6) Consideration of public comments. In acting upon a notice filed
under this subpart, the Board shall consider all public comments
received in writing within the period specified in the newspaper or
Federal Register announcement, whichever is later. At the Board's
option, comments received after this period may, but need not, be
considered.
(7) Standing. No person (other than the acquiring person) who
submits comments or information on a notice filed under this subpart
shall thereby become a party to the proceeding or acquire any standing
or right to participate in the Board's consideration of the notice or
to appeal or otherwise contest the notice or the Board's action
regarding the notice.
(d) Time period for Board action--(1) Consummation of acquisition
--(i) The notificant(s) may consummate the proposed acquisition 60 days
after submission to the Reserve Bank of a complete notice under
paragraph (a) of this section, unless within that period the Board
disapproves the proposed acquisition or extends the 60-day period, as
provided under paragraph (d)(2) of this section.
(ii) The notificant(s) may consummate the proposed transaction
before the expiration of the 60-day period if the Board notifies the
notificant(s) in writing of the Board's intention not to disapprove the
acquisition.
(2) Extensions of time period. (i) The Board may extend the 60-day
period in paragraph (d)(1) of this section for an additional 30 days by
notifying the acquiring person(s).
(ii) The Board may further extend the period during which it may
disapprove a notice for two additional periods of not more than 45 days
each, if the Board determines that:
(A) Any acquiring person has not furnished all the information
required under paragraph (a) of this section;
(B) Any material information submitted is substantially inaccurate;
(C) The Board is unable to complete the investigation of an
acquiring person because of inadequate cooperation or delay by that
person; or
(D) Additional time is needed to investigate and determine that no
acquiring person has a record of failing to comply with the
requirements of the Bank Secrecy Act, subchapter II of Chapter 53 of
Title 31, United States Code.
(iii) If the Board extends the time period under this paragraph, it
shall notify the acquiring person(s) of the reasons therefor and shall
include a statement of the information, if any, deemed incomplete or
inaccurate.
(e) Advice to bank supervisory agencies. (1) Upon accepting a
notice relating to acquisition of securities of a state member bank,
the Reserve Bank shall send a copy of the notice to the appropriate
state bank supervisor, which shall have 30 calendar days from the date
the notice is sent in which to submit its views and recommendations to
the Board. The Reserve Bank also shall send a copy of any notice to the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
and the Office of Thrift Supervision.
(2) If the Board finds that it must act immediately in order to
prevent the probable failure of the bank or bank holding company
involved, the Board may dispense with or modify the requirements for
notice to the state supervisor.
(f) Investigation and report. (1) After receiving a notice under
this subpart, the Board or the appropriate Reserve Bank shall conduct
an investigation of the competence, experience, integrity, and
financial ability of each person by and for whom an acquisition is to
be made. The Board shall also make an independent determination of the
accuracy and completeness of any information required to be contained
in a notice under paragraph (a) of this section. In investigating any
notice accepted under this subpart, the Board or Reserve Bank may
solicit information or views from any person, including any bank or
bank holding company involved in the notice, and any appropriate state,
federal, or foreign governmental authority.
(2) The Board or the appropriate Reserve Bank shall prepare a
written report of its investigation, which shall contain, at a minimum,
a summary of the results of the investigation.
(g) Factors considered in acting on notices. In reviewing a notice
filed under this subpart, the Board shall consider the information in
the record, the views and recommendations of the appropriate bank
supervisor, and any other relevant information obtained during any
investigation of the notice.
(h) Disapproval and hearing--(1) Disapproval of notice. The Board
may
[[Page 9341]]
disapprove an acquisition if it finds adverse effects with respect to
any of the factors set forth in paragraph 7 of the Bank Control Act (12
U.S.C. 1817(j)(7)) (i.e., competitive, financial, managerial, banking,
or incompleteness of information).
(2) Disapproval notification. Within three days after its decision
to issue a notice of intent to disapprove any proposed acquisition, the
Board shall notify the acquiring person in writing of the reasons for
the action.
(3) Hearing. Within 10 calendar days of receipt of the notice of
the Board's intent to disapprove, the acquiring person may submit a
written request for a hearing. Any hearing conducted under this
paragraph shall be in accordance with the Rules of Practice for Formal
Hearings (12 CFR part 263). At the conclusion of the hearing, the Board
shall, by order, approve or disapprove the proposed acquisition on the
basis of the record of the hearing. If the acquiring person does not
request a hearing, the notice of intent to disapprove becomes final and
unappealable.
Sec. 225.44 Reporting of stock loans.
(a) Requirements. (1) Any foreign bank or affiliate of a foreign
bank that has credit outstanding to any person or group of persons, in
the aggregate, which is secured, directly or indirectly, by 25 percent
or more of any class of voting securities of a state member bank, shall
file a consolidated report with the appropriate Reserve Bank for the
state member bank.
(2) The foreign bank or its affiliate also shall file a copy of the
report with its appropriate Federal banking agency.
(3) Any shares of the state member bank held by the foreign bank or
any affiliate of the foreign bank as principal must be included in the
calculation of the number of shares in which the foreign bank or its
affiliate has a security interest for purposes of paragraph (a) of this
section.
(b) Definitions. For purposes of paragraph (a) of this section:
(1) Foreign bank shall have the same meaning as in section 1(b) of
the International Banking Act of 1978 (12 U.S.C. 3101).
(2) Credit outstanding includes any loan or extension of credit;
the issuance of a guarantee, acceptance, or letter of credit, including
an endorsement or standby letter of credit; and any other type of
transaction that extends credit or financing to the person or group of
persons.
(3) Group of persons includes any number of persons that the
foreign bank or any affiliate of a foreign bank has reason to believe:
(i) Are acting together, in concert, or with one another to acquire
or control shares of the same insured depository institution, including
an acquisition of shares of the same depository institution at
approximately the same time under substantially the same terms; or
(ii) Have made, or propose to make, a joint filing under section 13
or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n),
and the rules promulgated thereunder by the Securities and Exchange
Commission regarding ownership of the shares of the same insured
depository institution.
(c) Exceptions. Compliance with paragraph (a) of this section is
not required if:
(1) The person or group of persons referred to in that paragraph
has disclosed the amount borrowed and the security interest therein to
the Board or appropriate Reserve Bank in connection with a notice filed
under Sec. 225.41 of this subpart, or another application filed with
the Board or Reserve Bank as a substitute for a notice under
Sec. 225.41 of this subpart, including an application filed under
section 3 of the BHC Act (12 U.S.C. 1842) or section 18(c) of the
Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)), or
an application for membership in the Federal Reserve System; or
(2) The transaction involves a person or group of persons that has
been the owner or owners of record of the stock for a period of one
year or more; or, if the transaction involves stock issued by a newly
chartered bank, before the bank is opened for business.
(d) Report requirements. (1) The consolidated report shall indicate
the number and percentage of shares securing each applicable extension
of credit, the identity of the borrower, and the number of shares held
as principal by the foreign bank and any affiliate thereof.
(2) A foreign bank, or any affiliate of a foreign bank, shall file
the consolidated report in writing within 30 days of the date on which
the foreign bank or affiliate first believes that the security for any
outstanding credit consists of 25 percent or more of any class of
voting securities of a state member bank.
(e) Other reporting requirements. A foreign bank, or any affiliate
thereof, that is supervised by the System and is required to report
credit outstanding that is secured by the shares of an insured
depository institution to another Federal banking agency also shall
file a copy of the report with the appropriate Reserve Bank.
Sec. 225.51 [Removed]
7. Subpart F is amended by removing Sec. 225.51.
8. Subpart G is amended by revising the heading to read as follows:
Subpart G--Appraisal Standards for Federally Related Transactions
9. Subpart H, consisting of Secs. 225.71 through 225.73, is revised
to read as follows:
Subpart H--Notice of Addition or Change of Directors and Senior
Executive Officers
Sec.
225.71 Definitions.
225.72 Director and officer appointments; prior notice requirement.
225.73 Procedures for filing, processing, and acting on notices;
standards for disapproval; waiver of notice.
Subpart H--Notice of Addition or Change of Directors and Senior
Executive Officers
Sec. 225.71 Definitions.
(a) Director means a person who serves on the board of directors of
a regulated institution, except that this term does not include an
advisory director who:
(1) Is not elected by the shareholders of the regulated
institution;
(2) Is not authorized to vote on any matters before the board of
directors or any committee thereof;
(3) Solely provides general policy advice to the board of directors
and any committee thereof; and
(4) Has not been identified by the Board or Reserve Bank as a
person who performs the functions of a director for purposes of this
subpart.
(b) Regulated institution means a state member bank or a bank
holding company.
(c) Senior executive officer means a person who holds the title or,
without regard to title, salary, or compensation, performs the function
of one or more of the following positions: president, chief executive
officer, chief operating officer, chief financial officer, chief
lending officer, or chief investment officer. Senior executive officer
also includes any other person identified by the Board or Reserve Bank,
whether or not hired as an employee, with significant influence over,
or who participates in, major policymaking decisions of the regulated
institution.
(d) Troubled condition for a regulated institution means an
institution that:
(1) Has a composite rating, as determined in its most recent report
of examination or inspection, of 4 or 5 under the Uniform Financial
Institutions Rating System or under the
[[Page 9342]]
Federal Reserve Bank Holding Company Rating System;
(2) Is subject to a cease-and-desist order or formal written
agreement that requires action to improve the financial condition of
the institution, unless otherwise informed in writing by the Board or
Reserve Bank; or
(3) Is informed in writing by the Board or Reserve Bank that it is
in troubled condition for purposes of the requirements of this subpart
on the basis of the institution's most recent report of condition or
report of examination or inspection, or other information available to
the Board or Reserve Bank.
Sec. 225.72 Director and officer appointments; prior notice
requirement.
(a) Prior notice by regulated institution. A regulated institution
shall give the Board 30 days' written notice, as specified in
Sec. 225.73, before adding or replacing any member of its board of
directors, employing any person as a senior executive officer of the
institution, or changing the responsibilities of any senior executive
officer so that the person would assume a different senior executive
officer position, if:
(1) The regulated institution is not in compliance with all minimum
capital requirements applicable to the institution as determined on the
basis of the institution's most recent report of condition or report of
examination or inspection;
(2) The regulated institution is in troubled condition; or
(3) The Board determines, in connection with its review of a
capital restoration plan required under section 38 of the Federal
Deposit Insurance Act or subpart B of the Board's Regulation H, or
otherwise, that such notice is appropriate.
(b) Prior notice by individual. The prior notice required by
paragraph (a) of this section may be provided by an individual seeking
election to the board of directors of a regulated institution.
Sec. 225.73 Procedures for filing, processing, and acting on notices;
standards for disapproval; waiver of notice.
(a) Filing notice--(1) Content. The notice required in Sec. 225.72
shall be filed with the appropriate Reserve Bank and shall contain:
(i) The information required by paragraph 6(A) of the Change in
Bank Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the
designated Board form;
(ii) Additional information consistent with the Federal Financial
Institutions Examination Council's Joint Statement of Guidelines on
Conducting Background Checks and Change in Control Investigations, as
set forth in the designated Board form; and
(iii) Such other information as may be required by the Board or
Reserve Bank.
(2) Modification. The Reserve Bank may modify or accept other
information in place of the requirements of Sec. 225.73(a)(1) for a
notice filed under this subpart.
(3) Acceptance and processing of notice. The 30-day notice period
specified in Sec. 225.72 shall begin on the date all information
required to be submitted by the notificant pursuant to
Sec. 225.73(a)(1) is received by the appropriate Reserve Bank. The
Reserve Bank shall notify the regulated institution or individual
submitting the notice of the date on which all required information is
received and the notice is accepted for processing, and of the date on
which the 30-day notice period will expire. The Board or Reserve Bank
may extend the 30-day notice period for an additional period of not
more than 60 days by notifying the regulated institution or individual
filing the notice that the period has been extended and stating the
reason for not processing the notice within the 30-day notice period.
(b) Commencement of service--(1) At expiration of period. A
proposed director or senior executive officer may begin service after
the end of the 30-day period and any extension as provided under
paragraph (a)(3) of this section, unless the Board or Reserve Bank
disapproves the notice before the end of the period.
(2) Prior to expiration of period. A proposed director or senior
executive officer may begin service before the end of the 30-day period
and any extension as provided under paragraph (a)(3) of this section,
if the Board or the Reserve Bank notifies in writing the regulated
institution or individual submitting the notice of the Board's or
Reserve Bank's intention not to disapprove the notice.
(c) Notice of disapproval. The Board or Reserve Bank shall
disapprove a notice under Sec. 225.72 if the Board or Reserve Bank
finds that the competence, experience, character, or integrity of the
individual with respect to whom the notice is submitted indicates that
it would not be in the best interests of the depositors of the
regulated institution or in the best interests of the public to permit
the individual to be employed by, or associated with, the regulated
institution. The notice of disapproval shall contain a statement of the
basis for disapproval and shall be sent to the regulated institution
and the disapproved individual.
(d) Appeal of a notice of disapproval. (1) A disapproved individual
or a regulated institution that has submitted a notice that is
disapproved under this section may appeal the disapproval to the Board
within 15 days of the effective date of the notice of disapproval. An
appeal shall be in writing and explain the reasons for the appeal and
include all facts, documents, and arguments that the appealing party
wishes to be considered in the appeal, and state whether the appealing
party is requesting an informal hearing.
(2) Written notice of the final decision of the Board shall be sent
to the appealing party within 60 days of the receipt of an appeal,
unless the appealing party's request for an informal hearing is
granted.
(3) The disapproved individual may not serve as a director or
senior executive officer of the state member bank or bank holding
company while the appeal is pending.
(e) Informal hearing. (1) An individual or regulated institution
whose notice under this section has been disapproved may request an
informal hearing on the notice. A request for an informal hearing shall
be in writing and shall be submitted within 15 days of a notice of
disapproval. The Board may, in its sole discretion, order an informal
hearing if the Board finds that oral argument is appropriate or
necessary to resolve disputes regarding material issues of fact.
(2) An informal hearing shall be held within 30 days of a request,
if granted, unless the requesting party agrees to a later date.
(3) Written notice of the final decision of the Board shall be
given to the individual and the regulated institution within 60 days of
the conclusion of any informal hearing ordered by the Board, unless the
requesting party agrees to a later date.
(f) Waiver of notice--(1) Waiver requests. The Board or Reserve
Bank may permit an individual to serve as a senior executive officer or
director before the notice required under this subpart is provided, if
the Board or Reserve Bank finds that:
(i) Delay would threaten the safety or soundness of the regulated
institution or a bank controlled by a bank holding company;
(ii) Delay would not be in the public interest; or
(iii) Other extraordinary circumstances exist that justify waiver
of prior notice.
(2) Automatic waiver. An individual may serve as a director upon
election to the board of directors of a regulated institution before
the notice required
[[Page 9343]]
under this subpart is provided if the individual:
(i) Is not proposed by the management of the regulated institution;
(ii) Is elected as a new member of the board of directors at a
meeting of the regulated institution; and
(iii) Provides to the appropriate Reserve Bank all the information
required in Sec. 225.73(a) within two (2) business days after the
individual's election.
(3) Effect on disapproval authority. A waiver shall not affect the
authority of the Board or Reserve Bank to disapprove a notice within 30
days after a waiver is granted under paragraph (f)(1) of this section
or the election of an individual who has filed a notice and is serving
pursuant to an automatic waiver under paragraph (f)(2) of this section.
* * * * *
10. Section 225.125 is amended by revising paragraphs (f) and (g)
to read as follows:
Sec. 225.125 Investment adviser activities
* * * * *
(f) In the Board's opinion, the Glass-Steagall Act provisions, as
interpreted by the U.S. Supreme Court, forbid a bank holding company to
sponsor, organize, or control a mutual fund. However, the Board does
not believe that such restrictions apply to closed-end investment
companies as long as such companies are not primarily or frequently
engaged in the issuance, sale, and distribution of securities. A bank
holding company should not act as investment adviser to an investment
company that has a name similar to the name of the holding company or
any of its subsidiary banks, unless the prospectus of the investment
company contains the disclosures required in paragraph (h) of this
section. In no case should a bank holding company act as investment
adviser to an investment company that has either the same name as the
name of the holding company or any of its subsidiary banks, or a name
that contains the word ``bank.''
(g) In view of the potential conflicts of interests that may exist,
a bank holding company and its bank and nonbank subsidiaries should not
purchase in their sole discretion, in a fiduciary capacity (including
as managing agent), securities of any investment company for which the
bank holding company acts as investment adviser unless, the purchase is
specifically authorized by the terms of the instrument creating the
fiduciary relationship, by court order, or by the law of the
jurisdiction under which the trust is administered.
* * * * *
Sec. 225.145 [Amended]
11. Section 225.145, paragraph (a) the fifth sentence is amended by
removing the words ``increasing their assets at an annual rate
exceeding 7 percent during any 12-month period after August 10, 1988,''
and the last sentence by removing ``225.51 and''.
12. Appendix C is revised to read as follows:
Appendix C to Part 225--Small Bank Holding Company Policy Statement
Policy Statement on Assessment of Financial and Managerial Factors
In acting on applications filed under the Bank Holding Company
Act, the Board has adopted, and continues to follow, the principle
that bank holding companies should serve as a source of strength for
their subsidiary banks. When bank holding companies incur debt and
rely upon the earnings of their subsidiary banks as the means of
repaying such debt, a question arises as to the probable effect upon
the financial condition of the holding company and its subsidiary
bank or banks.
The Board believes that a high level of debt at the parent
holding company impairs the ability of a bank holding company to
provide financial assistance to its subsidiary bank(s) and, in some
cases, the servicing requirements on such debt may be a significant
drain on the resources of the bank(s). For these reasons, the Board
has not favored the use of acquisition debt in the formation of bank
holding companies or in the acquisition of additional banks.
Nevertheless, the Board has recognized that the transfer of
ownership of small banks often requires the use of acquisition debt.
The Board, therefore, has permitted the formation and expansion of
small bank holding companies with debt levels higher than would be
permitted for larger holding companies. Approval of these
applications has been given on the condition that small bank holding
companies demonstrate the ability to service acquisition debt
without straining the capital of their subsidiary banks and,
further, that such companies restore their ability to serve as a
source of strength for their subsidiary banks within a relatively
short period of time.
In the interest of continuing its policy of facilitating the
transfer of ownership in banks without compromising bank safety and
soundness, the Board has, as described below, adopted the following
procedures and standards for the formation and expansion of small
bank holding companies subject to this policy statement.
1. Applicability of Policy Statement
This policy statement applies only to bank holding companies
with pro forma consolidated assets of less than $150 million that:
(i) are not engaged in any nonbanking activities involving
significant leverage 1 and (ii) do not have a significant
amount of outstanding debt that is held by the general public.
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\1\ A parent company that is engaged in significant off-balance
sheet activities would generally be deemed to be engaged in
activities that involve significant leverage.
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While this policy statement primarily applies to the formation
of small bank holding companies, it also applies to existing small
bank holding companies that wish to acquire an additional bank or
company and to transactions involving changes in control, stock
redemptions, or other shareholder transactions. 2
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\2\ The appropriate Reserve Bank should be contacted to
determine the manner in which a specific situation may qualify for
treatment under this policy statement.
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2. Ongoing Requirements
The following guidelines must be followed on an ongoing basis
for all organizations operating under this policy statement.
A. Reduction in parent company leverage: Small bank holding
companies are to reduce their parent company debt consistent with
the requirement that all debt be retired within 25 years of being
incurred. The Board also expects that these bank holding companies
reach a debt to equity ratio of .30:1 or less within 12 years of the
incurrence of the debt. 3 The bank holding company must also
comply with debt servicing and other requirements imposed by its
creditors.
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\3\ The term debt, as used in the ratio of debt to equity, means
any borrowed funds (exclusive of short-term borrowings that arise
out of current transactions, the proceeds of which are used for
current transactions), and any securities issued by, or obligations
of, the holding company that are the functional equivalent of
borrowed funds.
The term equity, as used in the ratio of debt to equity, means
the total stockholders' equity of the bank holding company as
defined in accordance with generally accepted accounting principles.
In determining the total amount of stockholders' equity, the bank
holding company should account for its investments in the common
stock of subsidiaries by the equity method of accounting.
Ordinarily the Board does not view redeemable preferred stock as
a substitute for common stock in a small bank holding company.
Nevertheless, to a limited degree and under certain circumstances,
the Board will consider redeemable preferred stock as equity in the
capital accounts of the holding company if the following conditions
are met: (1) The preferred stock is redeemable only at the option of
the issuer and (2) the debt to equity ratio of the holding company
would be at or remain below .30:1 following the redemption or
retirement of any preferred stock. Preferred stock that is
convertible into common stock of the holding company may be treated
as equity.
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B. Capital adequacy: Each insured depository subsidiary of a
small bank holding company is expected to be well-capitalized. Any
institution that is not well-capitalized is expected to become well-
capitalized within a brief period of time.
C. Dividend restrictions: A small bank holding company whose
debt to equity ratio is greater than 1.0:1 is not expected to pay
corporate dividends until such time as it reduces its debt to equity
ratio to 1.0:1 or less and otherwise meets the criteria set forth in
Secs. 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of Regulation
Y. 4
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\4\ Dividends may be paid by small bank holding companies with
debt to equity at or below 1.0:1 and otherwise meeting the
requirements of Sec. Sec. 225.14(c)(1)(ii), 225.14(c)(2), and
225.14(c)(7) if the dividends are reasonable in amount, do not
adversely affect the ability of the bank holding company to service
its debt in an orderly manner, and do not adversely affect the
ability of the subsidiary banks to be well-capitalized. It is
expected that dividends will be eliminated if the holding company is
(1) not reducing its debt consistent with the requirement that the
debt to equity ratio be reduced to .30:1 within 12 years of
consummation of the proposal or (2) not meeting the requirements of
its loan agreement(s).
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[[Page 9344]]
Small bank holding companies formed before the effective date of
this policy statement may switch to a plan that adheres to the
intent of this statement provided they comply with the requirements
set forth above.
3. Core Requirements for All Applicants
In assessing applications or notices by organizations subject to
this policy statement, the Board will continue to take into account
a full range of financial and other information about the applicant,
and its current and proposed subsidiaries, including the recent
trend and stability of earnings, past and prospective growth, asset
quality, the ability to meet debt servicing requirements without
placing an undue strain on the resources of the bank(s), and the
record and competency of management. In addition, the Board will
require applicants to meet the following requirements:
A. Minimum down payment: The amount of acquisition debt should
not exceed 75 percent of the purchase price of the bank(s) or
company to be acquired. When the owner(s) of the holding company
incurs debt to finance the purchase of the bank(s) or company, such
debt will be considered acquisition debt even though it does not
represent an obligation of the bank holding company, unless the
owner(s) can demonstrate that such debt can be serviced without
reliance on the resources of the bank(s) or bank holding company.
B. Ability to reduce parent company leverage: The bank holding
company must clearly be able to reduce its debt to equity ratio and
comply with its loan agreement(s) as set forth in paragraph 2A
above.
Failure to meet the criteria in this section would normally
result in denial of an application.
4. Additional Application Requirements for Expedited/Waived Processing
A. Expedited notices under Secs. 225.14 and 225.23 of Regulation
Y: A small bank holding company proposal will be eligible for the
expedited processing procedures set forth in Secs. 225.14 and 225.23
of Regulation Y if the bank holding company is in compliance with
the ongoing requirements of this policy statement, the bank holding
company meets the core requirements for all applicants noted above,
and the following requirements are met:
i. The parent bank holding company has a pro forma debt to
equity ratio of 1.0:1 or less.
ii. The bank holding company meets all of the criteria for
expedited action set forth in Secs. 225.14 or 225.23 of Regulation
Y.
B. Waiver of stock redemption filing: A small bank holding
company will be eligible for the stock redemption filing exception
for well-capitalized bank holding companies contained in
Sec. 225.4(b)(6) if the following requirements are met:
i. The parent bank holding company has a pro forma debt to
equity ratio of 1.0:1 or less.
ii. The bank holding company is in compliance with the ongoing
require- ments of this policy statement and meets the requirements
of Secs. 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of
Regulation Y.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-4906 Filed 2-27-97; 8:45 am]
BILLING CODE 6210-01-P
