[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Rules and Regulations]
[Pages 37630-37659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18274]
[[Page 37629]]
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Part II
Federal Reserve System
_______________________________________________________________________
12 CFR Part 208, et al.
Membership of State Banking Institutions in the Federal Reserve System;
Miscellaneous Interpretations; Issue and Cancellation of Federal
Reserve Bank Capital Stock; Security Procedures; Final Rules
Federal Register / Vol. 63, No. 133 / Monday, July 13, 1998 / Rules
and Regulations
[[Page 37630]]
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 250
[Regulation H; Docket No. R-0964]
Membership of State Banking Institutions in the Federal Reserve
System; Miscellaneous Interpretations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board of Governors of the Federal Reserve System is
amending Subpart A of Regulation H, regarding the general provisions
for membership in the Federal Reserve System, and Subpart E of
Regulation H, regarding Interpretations, in order to reduce regulatory
burden, simplify and update requirements, and eliminate several
obsolete interpretations. As part of the final rule the Board is
reissuing prior Subparts B and C. Prior Subparts B and C have not been
significantly amended but have been relettered (as Subparts D and E,
respectively) to reflect the fact that prior Subpart A was broken into
four new Subparts (Subparts A, B, C and F). Prior Subpart D, regarding
safety and soundness standards, has been incorporated into new Subpart
A. The final rule does not amend in any way Appendices A through E to
Part 208. This final rule to modernize Subpart A of Regulation H is in
accordance with the Board's policy of reviewing its regulations as well
as the Board's review of regulations under section 303 of the Riegle
Community Development and Regulatory Improvement Act of 1994.
EFFECTIVE DATE: October 1, 1998.
FOR FURTHER INFORMATION CONTACT: Rick Heyke, Staff Attorney, Legal
Division (202/452-3688), or Jean Anderson, Staff Attorney, Legal
Division (202/452-3707). For the hearing impaired only,
Telecommunications Device for the Deaf (TDD), Diane Jenkins (202/452-
3544).
SUPPLEMENTARY INFORMATION:
Background
The Board is adopting amendments to its Regulation H (12 CFR part
208), regarding the general provisions for state bank membership in the
Federal Reserve System, as part of its policy of reviewing its
regulations, and consistent with section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994 (Riegle Act), Pub.
L. 103-328. Section 303 of the Riegle Act requires each Federal banking
agency to review and streamline its regulations and written policies to
improve efficiency, reduce unnecessary costs, and remove
inconsistencies and outmoded and duplicative requirements. The
amendments are designed to reduce regulatory burden and simplify and
update the regulation.
The principal amendments are described below. In general, the
amendments serve to reorganize, clarify, and reduce the burden of
compliance with Subpart A of Regulation H. The amendments modify the
procedures for membership and branch applications, incorporate a new
section designed to provide guidance to banks regarding permissible
investments in securities, expand the circumstances under which the
Board will consider waivers of conditions of membership, eliminate
existing requirements regarding disclosure of financial condition,
eliminate the requirement that banks obtain deposit insurance in order
to become State member banks, and generally provide a definition of
branch that is consistent with OCC regulations and decisions. The
amendments also serve to eliminate a number of interpretations
elsewhere; specifically, interpretations: 12 CFR 250.120, 250.121,
250.122, 250.123, 250.140, 250.161, 250.162, 250.300, 250.301 and
250.302. The amended Regulation H replaces the existing Regulation H in
its entirety, except for the Appendices to Regulation H, which remain
unchanged.
A red-lined version of the amendments to the regulation and
commentary is available from the Board's Freedom of Information Office
or by calling 202-452-3684.
The Board published Regulation H for comment in the Federal
Register on March 31, 1997 (62 FR 15272). The Board received 14
comments to the proposed amendments from the following types of
institutions:
Banks/thrifts--1
Community groups--1
Trade associations--4
Federal Reserve Banks--7
Clearinghouses--1
Twelve of the 14 comments generally supported the proposed
amendments as serving to reduce regulatory burden on banks and as
clarifying membership requirements. In addition, the comments addressed
specific issues raised by the proposed amendments. These comments and
issues are discussed below in the section-by-section analysis. Any
sections of the regulation which are not discussed in the section-by-
section analysis were adopted as originally proposed by the Board.
Section-by-Section Analysis
Subpart A--General Membership and Branching Requirements
Section 208.2 Definitions
Definition of Branch. The Board proposed to define a branch as any
branch bank, branch office, branch agency, additional office, or any
branch place of business that receives deposits, pays checks, or lends
money. The proposed rule also stated that a branch may include a
temporary, seasonal, or mobile facility. In addition to defining what
constitutes a branch, the proposed rule specified certain arrangements
that do not constitute a branch. The Board proposed that a branch not
include a loan origination facility where the proceeds of loans are not
disbursed, automated teller machines, remote service units, offices of
an affiliated depository institution that provide services to customers
of a State member bank on behalf of the State member bank, or a
facility that would otherwise qualify as a branch because it engages in
one or more branching functions (receipt of deposits, payment of
withdrawals, or making loans) but which prohibits access to members of
the public for purposes of conducting one or more branching functions.
In this regard the proposed rule requested comment on whether a
branch should include offices of an unaffiliated depository institution
that provide services to customers of a State member bank on behalf of
the State member bank. Six commenters, the Federal Reserve Banks of
Minneapolis, Atlanta, Philadelphia and San Francisco, the America's
Community Bankers, and the American Bankers Association, supported
excluding unaffiliated depository institutions that provide services to
a State member bank from the definition of a branch. In light of these
comments, and in light of current case law and consistent with Office
of the Comptroller of the Currency (OCC) decisions,1 the
Board is excluding from the definition of branch arrangements where
either affiliated or unaffiliated institutions provide services to
customers of a State member bank. The final rule provides that a branch
does not include an office of an affiliated or unaffiliated institution
that provides services to customers of the member bank on behalf of the
member
[[Page 37631]]
bank so long as the bank does not ``establish or operate'' the office
providing the services. For example, a bank could contract with an
unaffiliated or affiliated institution to receive deposits, cash and
issue checks, drafts, and money orders, change money and receive
payments of existing indebtedness without becoming a branch of that
bank so long as that bank: (a) has no ownership or leasehold interest
in the institution's offices; (b) has no employees who work for the
institution; and (c) exercises no authority or control over the
institution's employees or methods of operation.2
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\1\ See Cades versus H & R Block, Inc., 43 F.3d 869, 874 (4th
Cir. 1994) and OCC letter of October 5, 1993 from William P. Bowden,
Jr., Chief Counsel at page 4, which state that institutions that are
not affiliated with a bank, but provide services to customers of the
bank, do not constitute branches so long as the bank does not
``establish or operate'' the institution providing the services.
\2\ See, e.g., Cades, 43 F.3d at 874. Although the bank would be
permitted, in contracting with the institution, to control the terms
of the services provided by the institution. For example, the bank's
contractual relationship with the institution could include such
issues as which institution would bear the risk of loss for items in
transit or when accounts would be credited with deposits or charged
with withdrawals.
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With respect to the statement in the proposed rule that a branch
does not include a ``remote service unit,'' one commenter requested
that the Board define the term ``remote service unit.'' The Board is
adopting the term ``remote service unit'' as proposed and without
further definition. The Board believes that ``remote service units''
may take a variety of forms, and that defining the term at this time
would be premature. The Board notes that the OCC has determined that a
``remote service unit'' includes an automated loan machine and believes
that ``remote service units'' may include automated loan machines as
well as other arrangements.
Definition of Capital Stock and Surplus. The Board proposed to
define capital stock and surplus in Regulation H to mean Tier 1 and
Tier 2 capital, as calculated under the risk-based capital guidelines,
plus any allowance for loan and lease losses not already included in
Tier 2 capital. The Board proposed applying this definition to all
references to capital stock and surplus in the Federal Reserve Act and
Regulation H, unless otherwise noted. The Board received one comment
that Regulation H should incorporate the term ``capital'' rather than
capital stock and surplus because it would help to reduce the
historical reference to the more narrow meaning of capital stock and
surplus, which related only to part of shareholders' equity accounts.
Use of the term capital stock and surplus is appropriate and consistent
with the terms of the Federal Reserve Act. Use of the term capital
stock and surplus should make it easier for banks to comply with the
Board's regulations since the term capital stock and surplus, as
defined in the proposal, has been adopted for purposes of section 23A
of the Federal Reserve Act (12 U.S.C. 371c) which governs transactions
between insured depository institutions) and Regulation O (12 CFR 215)
(which governs insider lending). All other commenters supported the
proposed definition of capital stock and surplus, as well as the use of
the term itself, and the Board is adopting the definition and term as
proposed.
Definition of Eligible Bank. The Board proposed a new definition,
eligible bank, to serve as the qualification for expedited treatment of
membership and branch applications. The Board proposed that eligible
bank be defined as a bank that: (a) is well capitalized; (b) has a
Uniform Financial Institutions Rating System (CAMELS) rating of 1 or 2
(copies are available at the address specified in Sec. 216.6 of this
chapter); (c) has a Community Reinvestment Act (CRA) rating of
``Outstanding'' or ``Satisfactory;'' (d) has a compliance rating of 1
or 2; and (e) has no major unresolved supervisory issues outstanding as
determined by the Board or the appropriate Federal Reserve Bank.
The Board received one comment that the definition should require a
CRA rating of ``Outstanding'' rather than a rating of ``Outstanding''
or ``Satisfactory.'' The commenter opposed allowing banks with
``Satisfactory'' ratings to receive eligible bank status because the
commenter stated most banks receive ``Satisfactory'' ratings and
because CRA ratings are not a reliable indicator of the bank's CRA
performance. The remainder of the commenters supported the definition
of eligible bank with one commenter requesting clarification as to
whether the Board intended to preclude banks with a compliance rating
of three from qualifying as an eligible bank.
The Board is adopting the definition of eligible bank as proposed.
Allowing membership or branch applications from banks with
``Satisfactory'' CRA ratings to qualify for expedited treatment
continues prior Board policies and provides for consistency with the
OCC's standards for determining whether membership or branch
applications should receive expedited treatment. The Board has modified
its previous standard for receiving expedited treatment by requiring a
compliance rating of 1 or 2 rather than 1, 2, or 3. This change
provides consistency with the OCC's definition of eligible bank and is
being adopted as proposed.
If a bank has not yet received compliance or CRA ratings from a
bank regulatory authority, which would be necessary for determining
whether it is an eligible bank, the Board will look to the bank's
holding company for purposes of determining whether the bank's
application should receive expedited processing. If the bank's holding
company meets the criteria for expedited processing under
Sec. 225.14(c) of Regulation Y (12 CFR 225.14(c)), the bank's
membership or branch application will be eligible for expedited
processing.
Banks that have not yet received compliance or CRA ratings and that
either are not owned by a bank holding company or are owned by a bank
holding company that does not meet the criteria for expedited
processing under Sec. 225.14(c) of Regulation Y, are not eligible for
expedited treatment.
Definition of Mutual Savings Bank. The Board proposed deleting the
definition of mutual savings bank as unnecessary. One commenter opposed
deletion of the definition on the basis that deletion ``indirectly
suggest[s] that companies should abandon the traditional mutual
charter.'' The Board does not believe that removal of the definition
carries this implication and is adopting the proposal. The status of
mutual savings banks continues to be addressed in Sec. 208.3(a) of
Regulation H, concerning applications for membership and stock, as well
as in the Board's Regulation I (12 CFR 209), published elsewhere in
today's Federal Register, for purposes of determining the amount of
Reserve Bank stock mutual savings banks are required to purchase (or in
certain special cases the amount of money they must deposit with a
Reserve Bank). See 12 CFR 209.4(c).
Section 208.3 Application and Conditions for Membership
Publication of Membership Applications. The proposal stated that
public comment on membership applications (including conversions) is
not expressly required by statute but that publication might allow the
Board to obtain additional information or views relevant to a
membership application. The Board requested comment as to whether it
should require publication for membership applications.
The Board received comments both supporting and opposing
eliminating the publication requirement for membership applications.
The majority of commenters favored eliminating the requirement. These
commenters stated that no significant information is gained through
publication that would
[[Page 37632]]
outweigh the burden it places on banks. Those opposing eliminating the
requirement stated that comments may provide useful information in the
context of de novo membership applications or that the burden it places
on banks is minimal in light of the fact that many banks seek FDIC
insurance, which requires a public comment period. The Board is
eliminating the requirement that banks seeking to become members of the
Federal Reserve System publish notice of membership applications.
Because membership applications no longer confer deposit insurance,
the requirement currently contained in the Board's Rules of Procedure
(12 CFR 262.3), which states that banks must publish notice of their
membership applications, no longer applies. The Board's Rules of
Procedure (12 CFR 262.3) will be amended in the future to reflect the
fact that membership no longer automatically confers deposit insurance
and to reflect the change that banks no longer need to publish notice
of membership applications.
Processing Time Frames for Expedited Membership Applications. The
proposed rule provided that if public comment on membership
applications were eliminated, expedited membership applications would
be acted on 30 days after receipt of the application. One commenter
requested that the Board act on expedited membership applications
within 15 days because, under existing guidelines, non-expedited
membership applications are acted on within 30 days and expedited
membership applications should be acted on sooner than non-expedited
membership applications. The Board is adopting a rule under which
expedited membership applications will be acted on within 15 days of
receipt of the application. Non-expedited membership applications will
be acted on promptly, however, in limited situations processing times
may be longer if the application involves unusual facts or raises novel
policy issues.
Membership Exams. The proposed rule did not include information
concerning the time frame or conditions under which the Federal Reserve
will examine banks seeking membership in the Federal Reserve System.
One commenter requested that guidance be provided in Regulation H
regarding the time frames for, and necessity of, pre-membership
examinations of banks. Another commenter requested that the exam
guidelines in SR 95-30 be updated. The Board has decided not to
incorporate pre-membership examination guidelines into Regulation H
because the necessity for, and duration of, examinations depends on the
individual circumstances of each bank.
Conditions of Membership. The proposed rule incorporated a new
Sec. 208.3(d) which combined and condensed former Secs. 208.6 and 208.7
concerning the general conditions and requirements of membership. The
former requirement that the capital and surplus of a State member bank
be adequate in relation to its existing and prospective deposit
liabilities was modified and placed in proposed Sec. 208.4. Proposed
Sec. 208.3(d) also incorporated the provisions of existing Subpart D,
``Standards for Safety and Soundness.''
In addition, the Board proposed to eliminate existing
Sec. 208.6(a), which points out that State member banks retain all
charter and statutory rights under state law not preempted by Federal
law, and Sec. 208.6(b), which states that State member banks are
entitled to all the privileges of membership afforded them under the
Federal Reserve Act and other acts of Congress, and must observe all
requirements of Federal law. One commenter stated that eliminating
existing Sec. 208.6(a) and (b) would create confusion because the
sections state important concepts. The Board continues to believe,
however, that these propositions are self-evident and do not need to be
explicitly stated. Therefore, existing Sec. 208.6(a) and (b) are not
included in the final Regulation H.
Another commenter requested that the term ``general character of a
bank's business'' (Sec. 208.3(d)(2)) be defined. The Board believes
that providing a definition of the term could result in an unduly
restrictive or inflexible definition and, therefore, has not
incorporated such a definition in Regulation H.
Section 208.5 Dividends and Other Distributions
Proposed Sec. 208.5 revised the existing provisions concerning
payment of dividends and withdrawal of capital, previously located at
Sec. 208.19. Proposed Sec. 208.5 also incorporated interpretations
previously located at Sec. 208.125 through Sec. 208.127. The final rule
retains Sec. 208.5 as proposed, however, in the case of dividends in
excess of net income for the year, the final rule clarifies that banks
generally are not required to carry forward negative amounts resulting
from such excess.3 The final rule also contains a cross
reference to Sec. 208.45 of Subpart D for purposes of determining
restrictions on the payment of capital distributions.
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\3\ This clarification addresses only earnings deficits that
result from dividends declared in excess of net income for the year
and does not apply to other types of current earnings deficits. It
is consistent with the OCC's letter dated December 22, 1997, and
published as Interpretive Letter #816.
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Section 208.6 Establishment and Maintenance of Branches
Duration of Comment Period. The Board's proposal requested comment
on whether it should shorten the public comment period applicable to
branch applications from the 30 days that is currently required to 15
days. Those commenters favoring shortening the comment period stated
that comments on branch applications rarely raise substantive issues
and that shortening the period would serve to reduce regulatory burden
on banks. Commenters opposing shortening the comment period stated that
shortening the comment period to 15 days would make it difficult for
commenters to provide substantive comments to the Board on branch
applications. The Board is reducing the public comment period on branch
applications from 30 to 15 days but will allow, in its discretion, an
extension of the comment period for an additional 15 days.\4\ Sections
208.6(a)(3) and (a)(4) describe the new procedural rules for public
comment on branch applications, including the new 15 day comment period
and the potential 15 day extension. The Board's Rules of Procedure (12
CFR 262.3) will continue to describe the form and location for public
notices and will be amended in the future to reflect the 15 day comment
period applicable to branch applications.
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\4\ The OCC, in revising its branch application procedures,
retained a 30 day comment period for all branch applications other
than those involving ``short-distance'' relocations (which
relocations, if within the same neighborhood, would not require a
branch application under the Board's final rule).
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Processing Time Frames for Expedited Branch Applications. The
proposed rule provided procedures for processing expedited branch
applications that were modified slightly from the Board's existing
procedures, located in Administrative Letter 92-82 (November 5, 1992).
The proposed rule provided that a branch application by an eligible
bank would be deemed approved by the Board or the appropriate Reserve
Bank five business days after the close of the public comment period,
unless the Board or the appropriate Reserve Bank notifies the bank that
the application is approved prior to that date or that the bank is not
eligible for expedited processing because: (a) it is not an eligible
bank; (b) the application contains a material error or is otherwise
deficient; or (c) the application or notice
[[Page 37633]]
required under the Board's Rules of Procedure (12 CFR 262.3), raises
significant supervisory, Community Reinvestment Act, compliance, policy
or legal issues that have not been resolved, or a timely substantive
adverse comment is submitted. In addition, the preamble to the proposed
rule stated that in no case would an expedited branch application be
approved prior to the third day after the close of the public comment
period.
In the final rule, the Board is including in the text of the
regulation an express statement that expedited branch applications will
not be approved prior to the third day after the close of the public
comment period. Waiting until the third day enables the Board, or
appropriate Reserve Bank, to determine whether it has received any
public comments on the application. In all other respects the
processing time frames for expedited branch applications remain the
same as proposed. The Board will be amending its Rules of Procedure to
incorporate the changes adopted in the final rule.
Non-expedited branch applications will be processed in accordance
with the Board's Applications Procedures Manual.
Processing Procedures. The proposed rule required branch
applications to be filed in accordance with the Board's Rules of
Procedure (12 CFR 262.3). One commenter raised a question as to whether
eligible banks must file a ``full'' branch application. Both eligible
and non-eligible banks must comply with the Board's Rules of Procedure.
More in-depth review is expected in non-eligible bank branch
applications. Accordingly, the Board may require more extensive
information regarding non-eligible bank branch applications than
eligible bank branch applications. In particular, the Board pays close
attention to areas that have caused the bank to become non-eligible.
Notification of Branch Opening. Section 208.6(d) of the proposed
rule explicitly authorized a single consolidated application for
branches that a State member bank plans to establish in a one-year
period, provided the bank meets the existing requirement that it notify
the appropriate Reserve Bank one week prior to opening any branch
covered by the approval. One commenter raised a question as to whether
it was necessary for banks to provide prior notification of opening a
branch. The Board has reviewed this policy further and concurs with the
commenter that prior approval is unnecessary, therefore, Sec. 208.6(d)
of the final rule provides for a more flexible time for notification,
merely requiring notice within 30 days after opening the branch.
Branch Closings. The proposed rule established a new Sec. 208.6(e)
regarding branch closings, which requires branch closings to comply
with section 42 of the FDI Act (12 U.S.C. 1831r-1). Section 42(e)
requires notice to both customers and, in the case of insured State
member banks, the Board, of proposed branch closings. The proposed rule
also clarified that a branch relocation is not a closing for purposes
of section 42(e) of the FDI Act. Under section 42(e) of the FDI Act, a
branch relocation is a movement that occurs within the immediate
neighborhood and that does not substantially affect the nature of the
business or customers served.
One commenter requested that Sec. 208.6(e) refer to the Interagency
Policy Statement on Branch Closings. The Board believes that referring
to the policy statement in Sec. 208.6(e) would reduce the flexibility
inherent in policy statements and, therefore, is not referring to it in
Regulation H.
Section 208.7 Prohibition Against Use of Interstate Branches Primarily
for Deposit Production
The final rule includes the text of existing Sec. 208.28, as issued
in final by the Board on September 10, 1997 (62 FR 47727) with an
effective date of October 10, 1997. Existing Sec. 208.28 remains
unchanged except that it is being renumbered from Sec. 208.28 to
Sec. 208.7.
Subpart B--Investments and Loans
Section 208.21 Investments in Premises and Securities
Investments in Premises. Section 208.21(a) of the proposed rule
provided new investment limitations on banks' investments in premises.
These new limitations were incorporated into Regulation H as a result
of amendments to section 24A of the Federal Reserve Act made by the
Economic Growth and Regulatory Paperwork Reduction Act of 1996, Pub. L.
104-208, 110 Stat. 3009, (Economic Growth Act). The Economic Growth Act
provides that banks may make investments in bank premises if they
either: (a) obtain prior approval from the Board; (b) invest less than
or equal to the bank's capital stock; or (c) invest less than or equal
to 150 percent of the bank's capital and surplus so long as the bank is
well-rated and well capitalized and provides the Board with notice no
later than 30 days after making the investment. The Economic Growth Act
creates investment in premises limits based on banks' ``capital stock''
or ``capital and surplus.'' The proposed rule based the investment
limits on the basis of banks' capital stock and surplus, as defined by
Sec. 208.2(d) of Regulation H. One commenter stated that limitations on
investments in premises for non-well rated and non-well capitalized
banks should be based on banks' ``capital stock'' rather than the
banks' capital stock and surplus as defined by Regulation H. The
commenter stated that liberalizing the investment limit for non-well
rated and non-well capitalized banks could result in supervisory
concerns, particularly with respect to problem banks.
The Board believes that basing investment in premises limits on
capital stock and surplus could present supervisory problems,
therefore, the Board is basing the investment in premises limits on a
bank's perpetual preferred stock and related surplus plus common stock
plus surplus, as those terms are defined in the FFIEC Consolidated
Reports of Condition and Income. If a well rated and well capitalized
bank chooses to invest an amount above 150% of its perpetual preferred
stock and related surplus plus common stock plus surplus (or, for a
non-well-rated and well-capitalized bank, 100% of its perpetual
preferred stock and related surplus plus common stock plus surplus) the
bank may do so as long as it provides the appropriate Reserve Bank at
least 15 days notice prior to making such investments and has not
received notice that the investment is subject to further review by the
end of the fifteen day notice period.
Another commenter raised a question as to whether it was necessary
for the Board to receive after-the-fact notice of investments in
premises that are less than or equal to 150% of banks' perpetual
preferred stock and related surplus plus common stock plus surplus as
required by Sec. 208.21(a)(3)(ii)(C). The commenter questioned the
usefulness of after-the-fact notice of such investments. The Board has
concluded that such after-the-fact notice is unnecessary. The Economic
Growth Act provides that banks with a CAMELS rating of 1 or 2, as of
the most recent examination of the bank, and that are, and continue to
be, well capitalized, may make investments in bank premises of less
than or equal to 150 percent of the bank's capital and surplus so long
as they provide the Board with after-the-fact notice of such
investments. Under section 24A the Board also has the authority to
grant banks prior approval to make investments in premises. Pursuant to
this authority the Board is granting prior approval for state member
banks with a CAMELS rating of 1 or 2, as of the most
[[Page 37634]]
recent examination of the bank, and that are, and continue to be, well
capitalized, to make investments in bank premises of less than or equal
to 150 percent of the bank's perpetual preferred stock and related
surplus plus common stock plus surplus without providing the Board with
after-the-fact notice of such investments.
Investments in Securities. The proposal incorporated a new
Sec. 208.21(b) which provided guidance to banks regarding permissible
investments in securities. For the reasons outlined below under the
discussion of the Board's interpretation on Investments in Shares of an
Investment Company, the Board is amending Sec. 208.21(b) to clarify
generally that, with respect to certain investment company shares and
investment securities, a State member bank may look to the OCC's Part 1
rules and interpretations to determine whether a security qualifies as
an investment security for the purpose of section 24, paragraph 7th,
and for the calculations of the limitations applicable to such
investments. Section 208.21(b) is also being amended to clarify that a
State member bank should consult the Board for determinations with
respect to issues concerning investment securities that have not been
addressed by the OCC rules and interpretations.
Voting Stock in a Fiduciary Capacity. The proposed rule contained a
footnote, footnote four, which several commenters stated would prevent
banks from voting shares of stock in a fiduciary capacity. Footnote
four was derived from, and was intended to update, a Board
interpretation located at 12 CFR 250.220, which was to be removed. The
Board is not including footnote four in the final rule and is retaining
the Board interpretation found at 12 CFR 250.220 which states that
banks may vote shares of stock if they are acting in a fiduciary
capacity.
Subpart C--Bank Securities and Securities-Related Activities
Section 208.34 Recordkeeping and Confirmation of Certain Securities
Transactions
Effected by State Member Banks. The final rule includes the text of
existing Sec. 208.24, as issued in final by the Board on March 5, 1997
(62 FR 9909), with an effective date of April 1, 1997. Existing
Sec. 208.24 remains unchanged except that it is being renumbered from
Sec. 208.24 to Sec. 208.34.
Section 208.35 Qualification Requirements for the Recommendation or
Sale of Certain Securities
The final rule includes a place holder for proposed new
Sec. 208.35. The Board is seeking public comment on proposed
Sec. 208.35 separately.
Section 208.37 Government Securities Sales Practices
The final rule includes the text of existing Sec. 208.25, as issued
in final by the Board on March 19, 1997 (62 FR 13275) with an effective
date of July 1, 1997. Existing Sec. 208.25 remains unchanged except
that it is being renumbered from Sec. 208.25 to Sec. 208.37.
Subpart D--Prompt Corrective Action
The proposed rule did not significantly amend the terms of prior
Subpart B other than to redesignate it as Subpart D and to amend
Sec. 208.41 to provide the Federal Reserve with the option of using
period-end total assets rather than average total assets for purposes
of defining total assets. The Board received two comments regarding
Subpart D. The first commenter inquired as to whether other
governmental agencies allow the option of using period-end total assets
rather than average total assets for purposes of defining total assets.
In this regard the Board notes that the OCC's definition of total
assets, for purposes of its prompt corrective action rule, is the same
as the Board's.5
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\5\ 12 CFR 6.2(j).
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The second commenter stated that Sec. 208.43(c)(2) should be
updated to reflect all applicable CAMELS components. The Board has
added ``sensitivity to market risk'' as the final CAMELS component.
Subpart F--Miscellaneous Requirements
Section 208.61 Bank Security Procedures
Regulation P (12 CFR part 216), as amended by the Board on May 1,
1991, is being incorporated into Regulation H at Sec. 208.61. A final
rule removing 12 CFR part 216 is found elsewhere in today's Federal
Register.
Section 208.64 Frequency of Examination
The final rule includes the text of existing Sec. 208.26, as issued
in final by the Board on April 2, 1998 (63 FR 16378), also effective on
April 2, 1998). Existing Sec. 208.26 remains unchanged except that it
is being renumbered from Sec. 208.26 to Sec. 208.64.
Subpart G--Interpretations
Proposed Sec. 208.101 Investments in Federal Agricultural Mortgage
Corporation (Farmer Mac) Stock
This proposed interpretation restated an existing staff opinion
6 regarding the permissibility of banks investing in the
stock of the Federal Agricultural Mortgage Corporation (Farmer Mac),
which is a government agency. One commenter stated that the Board
should either provide a complete list of permissible investments in
stocks of governmental agencies or provide no list.
---------------------------------------------------------------------------
\6\ F.R.R.S. 3-447.13 (July 26, 1988).
---------------------------------------------------------------------------
In general, banks are prohibited from owning stock pursuant to
paragraph seventh of section 5136 of the Revised Statutes (12 U.S.C. 24
para. 7th), which was made applicable to State member banks under
paragraph 20 of Sec. 9 of the Federal Reserve Act (12 U.S.C. 335).
Although State member banks are generally prohibited from owning stock,
the Board has, in the past, allowed banks to own the stock of certain
governmental agencies where Congress has evidenced a clear intention
that banks be allowed to hold such stock in order to achieve a
legislative purpose. Since decisions regarding permissible stock
investments in governmental agencies must be made on a case-by-case
basis, the Board has decided not to include proposed Sec. 208.101 in
the final rule. However, the Board will retain the existing staff
opinion regarding investments in Farmer Mac stock in the Federal
Reserve Regulatory Service.
Proposed Section 208.102 Investments in Shares of an Investment
Company
The Board proposed to retain its existing interpretation, entitled
``Purchase of investment company stock by a State member bank,'' and
rename it ``Investments in Shares of an Investment Company,'' and
renumber it from Sec. 208.124 to Sec. 208.102. In addition, the Board
requested comment as to whether the existing interpretation should be
amended to provide an alternative limit for certain diversified
investment companies. Under the alternative limit, a bank could elect
not to combine its pro rata interest in a particular security held by
an investment company with the bank's direct holdings of the security
where: (a) the investment company's holdings of the securities of any
one issuer do not exceed 5 percent of its total portfolio; and (b) the
bank's total holdings of the investment company's shares do not exceed
the most stringent limit applicable to any of the securities in the
[[Page 37635]]
company's portfolio if those securities were purchased directly by the
bank. This alternative limit is currently available to national banks
under OCC rules.
Several commenters pointed to conflicts between the Board's
interpretation and the provisions of the OCC's Part 1 concerning
investment company shares and recommended that the Board withdraw its
interpretation in order to avoid a conflict with the OCC rules.
Alternatively, these commenters supported efforts to conform the
Board's interpretation to the OCC's current provisions concerning
investment companies, including adoption of the alternative limit and
other conforming amendments.
In addition to differences concerning calculation of limits, the
commenters pointed out that the Board's interpretation generally
permits investment only in investment companies that are registered
with the Securities and Exchange Commission under the Investment
Company Act of 1940 and the Securities Act of 1933, while the OCC rule
provides for case-by-case consideration of investment companies that
are exempt from registration where the portfolio of the investment
companies consist entirely of assets that a national bank may purchase
and sell for its own account. Commenters also pointed out that the
OCC's rule requires only that the portfolio of the investment company
consist exclusively of assets that a national bank could purchase
directly. The Board's interpretation, on the other hand, requires that
limits on the investment company's authority be included in the
investment company's prospectus, which one commenter argued prevented
State member banks from being able to ``seed'' start-up investment
companies where funds were initially invested only in bank eligible
securities. The Board's interpretation also differs from the OCC rule
in other technical respects and includes requirements that relate to
safety and soundness, rather than investment authority.
The Board believes that State member banks should be permitted to
use the alternative method of calculating investment limits available
under the OCC's rules for diversified investment companies.
Additionally, although the circumstances under which a State member
bank may provide funds to ``seed'' an investment company are limited,
the Board believes that State member banks should be permitted to do so
where the activity is consistent with the Glass-Steagall Act. The Board
also notes that its interpretation was not intended to preclude the
consideration on a case-by-case basis of investments not covered by its
interpretation, including unregistered investment companies.
With respect to the provisions of the interpretation concerning
internal procedures for approval and management of investments in
investment companies, guidance issued by Board staff concerning risk
management practices related to investment and end-user activities
provides more thorough guidance concerning appropriate risk management
practices than was available at the time the interpretation was
adopted.7 Further, internal procedures and practices
discussed in current guidance cover the bank's investment activities
generally and are not limited to a particular area. The Board therefore
believes that the specific internal procedures required under the
Board's interpretation are no longer necessary.
---------------------------------------------------------------------------
\7\ See SR 95-17 (SUP), March 28, 1995.
---------------------------------------------------------------------------
Based on the above considerations, the Board has concluded that its
existing interpretation, Sec. 208.124 (proposed Sec. 208.102), no
longer serves a useful purpose and is rescinding it. The Board is
adding language to the Sec. 208.21(b) on investments in securities to
clarify generally that, with respect to certain investment company
shares and investment securities, a State member bank may look to the
OCC's Part 1 rules and interpretations to determine whether a security
qualifies as an investment security for the purpose of section 24,
paragraph 7th, and for the calculations of the limitations applicable
to such investments. Regulation H also is being amended to clarify that
a State member bank should consult the Board for determinations with
respect to issues concerning investment securities that have not been
addressed by the OCC rules and interpretations.
Section 208.101 Obligations Concerning Institutional Customers
The final rule includes the text of existing Sec. 208.129, as
issued in final by the Board on March 19, 1997 (62 FR 13275). Existing
Sec. 208.129 remains unchanged except that it is being renumbered from
Sec. 208.129 to Sec. 208.101.
Investments in operating subsidiaries. Several commenters
recommended that the Board rescind its 1968 interpretation concerning
``operations subsidiaries,'' published at 12 CFR 250.141, noting that
this interpretation was obsolete. The interpretation states that a
State member bank may invest in the shares of a wholly owned
``operations subsidiary'' without violating the provisions of the
Glass-Steagall Act concerning the purchase of stock by member banks. At
the present time the Board is retaining the existing interpretation
regarding ``operations subsidiaries.''
Miscellaneous. Financial Condition. The Board proposed eliminating
existing Sec. 208.17, entitled Disclosure of Financial Information by
State member banks, from the proposed Regulation H on the basis that
call report information for banks is now available through the
internet. In response to this proposal the Board received three
comments from Federal Reserve Banks which stated that it was premature
to eliminate Sec. 208.17 because a large segment of the public does not
have access to the internet. The Board has decided to rescind
Sec. 208.17 despite these objections. The Board believes that
Sec. 208.17 places a burden on banks by requiring them to make
available a potentially unlimited number of copies of statements
regarding their financial condition to the public. This burden has been
justified in the past because it was the only effective means for the
public to obtain information concerning a bank's financial condition.
However, now that many private institutions, as well as many public
institutions, such as public libraries, offer access to the internet,
where such financial information concerning banks can be obtained, the
Board does not believe the burden on banks of providing such
information continues to be justified, and therefore, is removing
existing Sec. 208.17 from the final rule.
Final Regulatory Flexibility Analysis
Two of the three requirements of a final regulatory flexibility
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and
the objectives of the rule and (2) a summary of the issues raised by
the public comments, the agency's assessment of the issues, and a
statement of the changes made in the final rule in response to the
comments, are discussed above. The third requirement of a final
regulatory flexibility analysis is a description of significant
alternatives to the rule that would minimize the rule's economic impact
on small entities and reasons why the alternatives were rejected.
The final amendments will apply to all State member banks, which
numbered approximately 997 as of February 1998, regardless of size, and
represent changes to the existing rules that should reduce burden for
those institutions by reducing regulatory filings, reducing the
paperwork burden
[[Page 37636]]
and processing time associated with regulatory filings, reducing the
costs associated with complying with regulation, and improving the
ability of banks to conduct business on a more cost-efficient basis.
For example, the rule is generally designed to reduce burden by
removing out-dated material and by re-organizing the remaining material
so it is easier to locate and to read.
The rule also seeks to reduce burden by incorporating expedited
procedures for membership and branch applications for certain banks and
by reducing the processing period for expedited applications from 5 to
3 days after the close of the public comment period. In addition, the
rule expands the circumstances under which the Board will consider
waivers of conditions of membership, eliminates existing requirements
regarding disclosure of financial condition, and eliminates the
requirement that banks obtain deposit insurance in order to become
State member banks. The rule also provides for an alternate definition
of total assets for institutions with rapidly declining asset bases.
The amendments should not have a negative economic effect on small
institutions, and, therefore, there were no significant alternatives
that would have minimized the economic impact on those institutions.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the final 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, these information
collections unless they display a currently valid OMB control number.
The OMB control numbers for the affected information collections are
7100-0097, 7100-0278, 7100-0046, and 7100-0139.
The sections of the regulation pertaining to the revised
information collections are found in 12 CFR 208.2, 208.3, 208.6,
208.21, and 208.22. This information is needed in order for the Federal
Reserve System to conduct its supervisory responsibility for state
member banks. The respondents and recordkeepers are state member banks.
Individual respondent data generally are not regarded as confidential.
No comments specifically addressing the burden estimate were
received. Four existing information collections covered by Regulation H
are affected by the changes to the regulation. Fewer Domestic Branch
Notifications (FR 4001; OMB No. 7100-0097), which are mandatory, will
be submitted resulting from the elimination of the notification
requirement for ATMs and certain other offices and from the broadening
of the interpretation of ``location.'' The proposed rule also had
provided that depository institutions be permitted to file a single
notification for prior approval of multiple branches to be established
within a year following the notification. The requirement for prior
approval was eliminated in the final rule, which only requires
notification within thirty days after each branch is opened. Further
study, based on an analysis of the types of notifications received in
the past, has led the Federal Reserve to increase its initial estimate
of the effect of these changes on the annual burden from a decrease of
20 percent to more than 50 percent, from 415 to 201 hours.
The revisions to Regulation H are expected to affect the relative
distribution of two of the types of Reports Related to Public Welfare
Investments of State Member Banks (OMB No. 7100-0278) that are
submitted to the Federal Reserve. The Board is eliminating the
requirement that, to avoid applying for Board approval, the investment
must be smaller than 2 percent of capital and surplus. This should
result in fewer applications and more notices of investments not
requiring Board approval. A requirement has been added to the
applications for Board approval: if the bank is not permitted to make
the investment without Board approval, the institution must explain the
reason or reasons why the investment is ineligible. This is expected to
increase the burden per response from two and one-half hours to two and
three-quarters hours. The estimated burden per response for a notice of
investment not requiring Board approval is two hours. There were twenty
notices and fourteen applications received during 1997. It is estimated
that following the revision there will be twenty-seven notices and
seven applications submitted annually. There is estimated to be no
effect on the divestiture notice requirements, one of which is expected
to be submitted annually. The burden per response for the divestiture
notice is estimated to be five hours. Altogether the total amount of
annual burden is estimated to be reduced 3 percent from eighty hours to
seventy-eight. There is estimated to be no annual cost burden over the
annual hour burden and no capital or start-up costs associated with the
changes.
The burden for the Membership Application (FR 2083; OMB No. 7100-
0046) will experience a minimal reduction in the current annual burden
of 3,450 hours, resulting from the elimination of the publication
requirement, the broadened authority of the Board to waive the
application, and the reduction in the processing time for expedited
applications from thirty to fifteen days.
The final rule contains changes that affect another existing
information collection. The proposed rule provided that the Investment
in Bank Premises Notification (FR 4014; OMB No. 7100-0139) must be
filed by a state member bank whenever it proposes to make an investment
in bank premises that results in its total bank premises investment
exceeding its capital stock and surplus, or if the bank is well
capitalized and in good condition, exceeding 150 percent of its capital
stock and surplus. In the final rule, the Board decided to base its
analysis on the bank's perpetual preferred stock and related surplus
plus common stock plus surplus, which is a more conservative measure
than the capital stock and surplus proposed initially. In addition,
after-the-fact notification is no longer required from banks for
investments within the limits. The net effect of these changes is
expected to have a minimal effect on the annual respondent burden for
this information collection of eight hours.
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 these collections
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, N.W., Washington, DC 20551; and to the Office of
Management and Budget, Paperwork Reduction Project (7100-0097, 7100-
0278, 7100-0046, or 7100-0139), Washington, DC 20503.
Derivation Table
This table directs readers to the provision(s) of existing
Regulation H, if any, upon which the proposed provision is based.
------------------------------------------------------------------------
Revised provision Original provision
------------------------------------------------------------------------
208.1............................... None
208.2............................... 208.1
208.3(a)............................ 208.2
208.3(b)............................ 208.4, 208.5
208.3(c)............................ 208.5
208.3(d)............................ added
208.3(e)............................ 208.7
208.3(f)............................ 208.10
208.3(g)............................ 208.11
208.4............................... 208.13
208.5............................... 208.19
[[Page 37637]]
208.6(a)............................ 208.9
208.6(b)............................ None
208.6(c)............................ None
208.6(d)............................ None
208.6(e)............................ 208.9(b)(7)
208.6(f)............................ None
208.7............................... 208.28
208.20.............................. None
208.21.............................. None
208.22.............................. 208.21
208.23.............................. 208.15
208.24.............................. 208.8(d)
208.25.............................. 208.23
208.30.............................. None
208.31.............................. 208.8(f)
208.32.............................. 208.8(h), 208.8(i)
208.33.............................. 208.8(g)
208.34.............................. 208.24
208.35.............................. None
208.36.............................. 208.16
208.37.............................. 208.25
208.40.............................. 208.30
208.41.............................. 208.31
208.42.............................. 208.32
208.43.............................. 208.33
208.44.............................. 208.34
208.45.............................. 208.35
208.50.............................. 208.51
208.51.............................. 208.52
208.60.............................. None
208.61.............................. None
208.62.............................. 208.20
208.63.............................. 208.14
208.64.............................. 208.26
208.100............................. 208.116
208.101............................. 208.129
------------------------------------------------------------------------
List of Subjects
12 CFR Part 208
Accounting, Agriculture, Banks, Banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 250
Federal Reserve System.
For the reasons set forth in the preamble, the Board is amending
chapter II of title 12 of the Code of Federal Regulations as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 is revised to read as
follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1823(j), 1828(o),
1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 3310, 3331-
3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o-
4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42 U.S.C. 4012a,
4104a, 4104b, 4106 and 4128.
2. The table of contents to part 208 is revised to read as follows:
Subpart A--General Membership and Branching Requirements
Sec.
208.1 Authority, purpose, and scope.
208.2 Definitions.
208.3 Application and conditions for membership in the Federal
Reserve System.
208.4 Capital adequacy.
208.5 Dividends and other distributions.
208.6 Establishment and maintenance of branches.
208.7 Prohibition against use of interstate branches primarily for
deposit production.
Subpart B--Investments and Loans
208.20 Authority, purpose, and scope.
208.21 Investments in premises and securities.
208.22 Community development and public welfare investments.
208.23 Agricultural loan loss amortization.
208.24 Letters of credit and acceptances.
208.25 Loans in areas having special flood hazards.
Subpart C--Bank Securities and Securities-Related Activities
208.30 Authority, purpose, and scope.
208.31 State member banks as transfer agents.
208.32 Notice of disciplinary sanctions imposed by registered
clearing agency.
208.33 Application for stay or review of disciplinary sanctions
imposed by registered clearing agency.
208.34 Recordkeeping and confirmation of certain securities
transactions effected by State member banks.
208.35 Qualification requirements for transactions in certain
securities. [Reserved]
208.36 Reporting requirements for State member banks subject to the
Securities Exchange Act of 1934.
208.37 Government securities sales practices.
Subpart D--Prompt Corrective Action
208.40 Authority, purpose, scope, other supervisory authority, and
disclosure of capital categories.
208.41 Definitions for purposes of this subpart.
208.42 Notice of capital category.
208.43 Capital measures and capital category definitions.
208.44 Capital restoration plans.
208.45 Mandatory and discretionary supervisory actions under
section 38.
Subpart E--Real Estate Lending and Appraisal Standards
208.50 Authority, purpose, and scope.
208.51 Real estate lending standards.
Subpart F--Miscellaneous Requirements
208.60 Authority, purpose, and scope.
208.61 Bank security procedures.
208.62 Suspicious activity reports.
208.63 Procedures for monitoring Bank Secrecy Act compliance.
208.64 Frequency of examination.
Subpart G--Interpretations
208.100 Sale of bank's money orders off premises as establishment
of branch office.
208.101 Obligations concerning institutional customers.
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
Appendix B to Part 208--Capital Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
Appendix C to Part 208--Interagency Guidelines for Real Estate Lending
Policies
Appendix D to Part 208--Interagency Guidelines Establishing Standards
for Safety and Soundness
Appendix E to Part 208--Capital Adequacy Guidelines for State Member
Banks: Market Risk Measure
3. Subparts A through E are revised and Subparts F and G are added
to read as follows:
Subpart A--General Membership and Branching Requirements
Sec. 208.1 Authority, purpose, and scope.
(a) Authority. Subpart A of Regulation H (12 CFR part 208, Subpart
A) is issued by the Board of Governors of the Federal Reserve System
(Board) under 12 U.S.C. 24, 36; sections 9, 11, 21, 25 and 25A of the
Federal Reserve Act (12 U.S.C. 321-338a, 248(a), 248(c), 481-486, 601
and 611); sections 1814, 1816, 1818, 1831o, 1831p-1, 1831r-1 and 1835a
of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1814, 1816,
1818, 1831o, 1831p-1, 1831r-1, and 1835); and 12 U.S.C. 3906-3909.
(b) Purpose and scope of Part 208. The requirements of this part
208 govern State member banks and state banks applying for admission to
membership in the Federal Reserve System (System) under section 9 of
the Federal Reserve Act (Act), except for Sec. 208.7, which also
applies to certain foreign banks licensed by a State. This part 208
does not govern banks eligible for membership under section 2 or 19 of
the Act.1 Any bank desiring to be admitted to the System
under the provisions of section 2 or 19 should communicate with the
Federal Reserve
[[Page 37638]]
Bank with which it would like to become a member.
---------------------------------------------------------------------------
\1\ Under section 2 of the Federal Reserve Act, every national
bank in any state shall, upon commencing business, or within 90 days
after admission into the Union of the State in which it is located,
become a member of the System. Under section 19 of the Federal
Reserve Act, national banks and banks organized under local laws,
located in a dependency or insular possession or any part of the
United States outside of the States of the United States and the
District of Columbia, are not required to become members of the
System but may, with the consent of the board, become members of the
System.
---------------------------------------------------------------------------
(c) Purpose and scope of Subpart A. This Subpart A describes the
eligibility requirements for membership of state-chartered banking
institutions in the System, the general conditions imposed upon
members, including capital and dividend requirements, as well as the
requirements for establishing and maintaining branches.
Sec. 208.2 Definitions.
For the purposes of this part:
(a) Board of Directors means the governing board of any institution
performing the usual functions of a board of directors.
(b) Board means the Board of Governors of the Federal Reserve
System.
(c) Branch. (1) Branch means any branch bank, branch office, branch
agency, additional office, or any branch place of business that
receives deposits, pays checks, or lends money. A branch may include a
temporary, seasonal, or mobile facility that meets these criteria.
(2) Branch does not include:
(i) A loan origination facility where the proceeds of loans are not
disbursed;
(ii) An office of an affiliated or unaffiliated institution that
provides services to customers of the member bank on behalf of the
member bank so long as the institution is not established or operated
by the bank;
(iii) An automated teller machine;
(iv) A remote service unit;
(v) A facility to which the bank does not permit members of the
public to have physical access for purposes of making deposits, paying
checks, or borrowing money (such as an office established by the bank
that receives deposits only through the mail); or
(vi) A facility that is located at the site of, or is an extension
of, an approved main office or branch. The Board determines whether a
facility is an extension of an existing main or branch office on a
case-by-case basis.
(d) Capital stock and surplus means, unless otherwise provided in
this part, or by statute, Tier 1 and Tier 2 capital included in a
member bank's risk-based capital (under the guidelines in appendix A of
this part) and the balance of a member bank's allowance for loan and
lease losses not included in its Tier 2 capital for calculation of
risk-based capital, based on the bank's most recent consolidated Report
of Condition and Income filed under 12 U.S.C. 324.
(e) Eligible bank means a member bank that:
(1) Is well capitalized as defined in subpart D of this part;
(2) Has a composite Uniform Financial Institutions Rating System
(CAMELS) rating of 1 or 2;
(3) Has a Community Reinvestment Act (CRA) (12 U.S.C. 2906) rating
of ``Outstanding'' or ``Satisfactory;''
(4) Has a compliance rating of 1 or 2; and
(5) Has no major unresolved supervisory issues outstanding (as
determined by the Board or appropriate Federal Reserve Bank in its
discretion).
(f) State bank means any bank incorporated by special law of any
State, or organized under the general laws of any State, or of the
United States, including a Morris Plan bank, or other incorporated
banking institution engaged in a similar business.
(g) State member bank or member bank means a state bank that is a
member of the Federal Reserve System.
Sec. 208.3 Application and conditions for membership in the Federal
Reserve System.
(a) Applications for membership and stock. (1) State banks applying
for membership in the Federal Reserve System shall file with the
appropriate Federal Reserve Bank an application for membership in the
Federal Reserve System and for stock in the Reserve Bank,2
in accordance with this part and Sec. 262.3 of the Rules of Procedure,
located at 12 CFR 262.3.
---------------------------------------------------------------------------
\2\ A mutual savings bank not authorized to purchase Federal
Reserve Bank stock may apply for membership evidenced initially by a
deposit, but if the laws under which the bank is organized are not
amended at the first session of the legislature after its admission
to authorize the purchase, or if the bank fails to purchase the
stock within six months of the amendment, its membership shall be
terminated.
---------------------------------------------------------------------------
(2) Board approval. If an applying bank conforms to all the
requirements of the Federal Reserve Act and this section, and is
otherwise qualified for membership, the Board may approve its
application subject to such conditions as the Board may prescribe.
(3) Effective date of membership. A State bank becomes a member of
the Federal Reserve System on the date its Federal Reserve Bank stock
is credited to its account (or its deposit is accepted, if it is a
mutual savings bank not authorized to purchase Reserve Bank stock) in
accordance with the Board's Regulation I (12 CFR part 209).
(b) Factors considered in approving applications for membership.
Factors given special consideration by the Board in passing upon an
application are:
(1) Financial condition and management. The financial history and
condition of the applying bank and the general character of its
management.
(2) Capital. The adequacy of the bank's capital in accordance with
Sec. 208.4, and its future earnings prospects.
(3) Convenience and needs. The convenience and needs of the
community.
(4) Corporate powers. Whether the bank's corporate powers are
consistent with the purposes of the Federal Reserve Act.
(c) Expedited approval for eligible banks and bank holding
companies. (1) Availability of expedited treatment. The expedited
membership procedures described in paragraph (c)(2) of this section are
available to:
(i) An eligible bank; and
(ii) A bank that cannot be determined to be an eligible bank
because it has not received compliance or CRA ratings from a bank
regulatory authority, if it is controlled by a bank holding company
that meets the criteria for expedited processing under Sec. 225.14(c)
of Regulation Y (12 CFR 225.14(c)).
(2) Expedited procedures. A completed membership application filed
with the appropriate Reserve Bank will be deemed approved on the
fifteenth day after receipt of the complete application by the Board or
appropriate Reserve Bank, unless the Board or the appropriate Reserve
Bank notifies the bank that the application is approved prior to that
date or the Board or the appropriate Federal Reserve Bank notifies the
bank that the application is not eligible for expedited review for any
reason, including, without limitation, that:
(i) The bank will offer banking services that are materially
different from those currently offered by the bank, or by the
affiliates of the proposed bank;
(ii) The bank or bank holding company does not meet the criteria
under Sec. 208.3(c)(1);
(iii) The application contains a material error or is otherwise
deficient; or
(iv) The application raises significant supervisory, compliance,
policy or legal issues that have not been resolved, or a timely
substantive adverse comment is submitted. A comment will be considered
substantive unless it involves individual complaints, or raises
frivolous, previously considered, or wholly unsubstantiated claims or
irrelevant issues.
(d) Conditions of membership. (1) Safety and soundness. Each member
bank shall at all times conduct its business and exercise its powers
with due regard to safety and soundness. (The Interagency Guidelines
Establishing Standards for Safety and Soundness prescribed pursuant to
section 39 of the FDI Act (12 U.S.C.
[[Page 37639]]
1831p-1), as set forth as appendix D to this part apply to all member
banks.)
(2) General character of bank's business. A member bank may not,
without the permission of the Board, cause or permit any change in the
general character of its business or in the scope of the corporate
powers it exercises at the time of admission to membership.
(3) Compliance with conditions of membership. Each member bank
shall comply at all times with this Regulation H (12 CFR part 208) and
any other conditions of membership prescribed by the Board.
(e) Waivers. (1) Conditions of membership. A member bank may
petition the Board to waive a condition of membership. The Board may
grant a waiver of a condition of membership upon a showing of good
cause and, in its discretion, may limit, among other items, the scope,
duration, and timing of the waiver.
(2) Reports of affiliates. Pursuant to section 21 of the Federal
Reserve Act (12 U.S.C. 486), the Board waives the requirement for the
submission of reports of affiliates of member banks, unless such
reports are specifically requested by the Board.
(f) Voluntary withdrawal from membership. Voluntary withdrawal from
membership becomes effective upon cancellation of the Federal Reserve
Bank stock held by the member bank, and after the bank has made due
provision to pay any indebtedness due or to become due to the Federal
Reserve Bank in accordance with the Board's Regulation I (12 CFR part
209).
Sec. 208.4 Capital adequacy.
(a) Adequacy. A member bank's capital, as defined in appendix A to
this part, shall be at all times adequate in relation to the character
and condition of its assets and to its existing and prospective
liabilities and other corporate responsibilities. If at any time, in
light of all the circumstances, the bank's capital appears inadequate
in relation to its assets, liabilities, and responsibilities, the bank
shall increase the amount of its capital, within such period as the
Board deems reasonable, to an amount which, in the judgment of the
Board, shall be adequate.
(b) Standards for evaluating capital adequacy. Standards and
guidelines by which the Board evaluates the capital adequacy of member
banks include those in appendices A and E to this part for risk-based
capital purposes and appendix B to this part for leverage measurement
purposes.
Sec. 208.5 Dividends and other distributions.
(a) Definitions. For the purposes of this section:
(1) Capital surplus means the total of surplus as reportable in the
bank's Reports of Condition and Income and surplus on perpetual
preferred stock.
(2) Permanent capital means the total of the bank's perpetual
preferred stock and related surplus, common stock and surplus, and
minority interest in consolidated subsidiaries, as reportable in the
Reports of Condition and Income.
(b) Limitations. The limitations in this section on the payment of
dividends and withdrawal of capital apply to all cash and property
dividends or distributions on common or preferred stock. The
limitations do not apply to dividends paid in the form of common stock.
(c) Earnings limitations on payment of dividends. (1) A member bank
may not declare or pay a dividend if the total of all dividends
declared during the calendar year, including the proposed dividend,
exceeds the sum of the bank's net income (as reportable in its Reports
of Condition and Income) during the current calendar year and the
retained net income of the prior two calendar years, unless the
dividend has been approved by the Board.
(2) ``Retained net income'' in a calendar year is equal to the
bank's net income (as reported in its Report of Condition and Income
for such year), less any dividends declared during such
year.3 The bank's net income during the current year and its
retained net income from the prior two calendar years is reduced by any
net losses incurred in the current or prior two years and any required
transfers to surplus or to a fund for the retirement of preferred
stock.4
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\3\ In the case of dividends in excess of net income for the
year, a bank generally is not required to carry forward negative
amounts resulting from such excess. Instead, the bank may attribute
the excess to the prior two years, attributing the excess first to
the earlier year and then to the immediately preceding year. If the
excess is greater than the bank's previously undistributed net
income for the preceding two years, prior Board approval of the
dividend is required and a negative amount would be carried forward
in future dividend calculations. However, in determining any such
request for approval, the Board could consider any request for
different treatment of such negative amount, including advance
waivers for future periods. This applies only to earnings deficits
that result from dividends declared in excess of net income for the
year and does not apply to other types of current earnings deficits.
\4\ State member banks are required to comply with state law
provisions concerning the maintenance of surplus funds in addition
to common capital. Where the surplus of a State member bank is less
than what applicable state law requires the bank to maintain
relative to its capital stock account, the bank may be required to
transfer amounts from its undivided profits account to surplus.
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(d) Limitation on withdrawal of capital by dividend or otherwise.
(1) A member bank may not declare or pay a dividend if the dividend
would exceed the bank's undivided profits as reportable on its Reports
of Condition and Income, unless the bank has received the prior
approval of the Board and of at least two-thirds of the shareholders of
each class of stock outstanding.
(2) A member bank may not permit any portion of its permanent
capital to be withdrawn unless the withdrawal has been approved by the
Board and by at least two-thirds of the shareholders of each class of
stock outstanding.
(3) If a member bank has capital surplus in excess of that required
by law, the excess amount may be transferred to the bank's undivided
profits account and be available for the payment of dividends if:
(i) The amount transferred came from the earnings of prior periods,
excluding earnings transferred as a result of stock dividends;
(ii) The bank's board of directors approves the transfer of funds;
and
(iii) The transfer has been approved by the Board.
(e) Payment of capital distributions. All member banks also are
subject to the restrictions on payment of capital distributions
contained in Sec. 208.45 of subpart D of this part implementing section
38 of the FDI Act (12 U.S.C. 1831o).
(f) Compliance. A member bank shall use the date a dividend is
declared to determine compliance with this section.
Sec. 208.6 Establishment and maintenance of branches.
(a) Branching. (1) To the extent authorized by state law, a member
bank may establish and maintain branches (including interstate
branches) subject to the same limitations and restrictions that apply
to the establishment and maintenance of national bank branches (12
U.S.C. 36 and 1831u), except that approval of such branches shall be
obtained from the Board rather than from the Comptroller of the
Currency.
(2) Branch applications. A State member bank wishing to establish a
branch in the United States or its territories must file an application
in accordance with the Board's Rules of Procedure, located at 12 CFR
262.3, and must comply with the public notice and comment rules
contained in paragraphs (a)(3) and (a)(4) of this section. Branches of
member banks located in foreign nations, in the overseas territories,
dependencies, and insular possessions of those nations and of the
United States, and in the Commonwealth of
[[Page 37640]]
Puerto Rico, are subject to the Board's Regulation K (12 CFR part 211).
(3) Public notice of branch applications. (i) Location of
publication. A State member bank wishing to establish a branch in the
United States or its territories must publish notice in a newspaper of
general circulation in the form and at the locations specified in
Sec. 262.3 of the Rules of Procedure (12 CFR 262.3).
(ii) Contents of notice. The newspaper notice referred to in
paragraph (a)(3) of this section shall provide an opportunity for
interested persons to comment on the application for a period of at
least 15 days.
(iii) Timing of publication. Each newspaper notice shall be
published no more than 7 calendar days before and no later than the
calendar day on which an application is filed with the appropriate
Reserve Bank.
(4) Public comment. (i) Timely comments. Interested persons may
submit information and comments regarding a branch application under
Sec. 208.6. 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
(12 CFR 262.3) and received by the Board or the appropriate Reserve
Bank prior to the expiration of the public comment period provided in
paragraph (a)(3)(ii) of this section.
(ii) Extension of comment period. The Board may, in its discretion,
extend the public comment period regarding any application under
Sec. 208.6. In the event that an interested person requests a copy of
an application submitted under Sec. 208.6, 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.
(b) Factors considered in approving domestic branch applications.
Factors given special consideration by the Board in passing upon a
branch application are:
(1) Financial condition and management. The financial history and
condition of the applying bank and the general character of its
management;
(2) Capital. The adequacy of the bank's capital in accordance with
Sec. 208.4, and its future earnings prospects;
(3) Convenience and needs. The convenience and needs of the
community to be served by the branch;
(4) CRA performance. In the case of branches with deposit-taking
capability, the bank's performance under the Community Reinvestment Act
(12 U.S.C. 2901 et seq.) and Regulation BB (12 CFR part 228); and
(5) Investment in bank premises. Whether the bank's investment in
bank premises in establishing the branch is consistent with
Sec. 208.21.
(c) Expedited approval for eligible banks and bank holding
companies. (1) Availability of expedited treatment. The expedited
branch application procedures described in paragraph (c)(2) of this
section are available to:
(i) An eligible bank; and
(ii) A bank that cannot be determined to be an eligible bank
because it has not received compliance or CRA ratings from a bank
regulatory authority, if it is controlled by a bank holding company
that meets the criteria for expedited processing under Sec. 225.14(c)
of Regulation Y (12 CFR 225.14(c)).
(2) Expedited procedures. A completed domestic branch application
filed with the appropriate Reserve Bank will be deemed approved on the
fifth day after the close of the comment period, unless the Board or
the appropriate Reserve Bank notifies the bank that the application is
approved prior to that date (but in no case will an application be
approved before the third day after the close of the public comment
period) or the Board or the appropriate Federal Reserve Bank notifies
the bank that the application is not eligible for expedited review for
any reason, including, without limitation, that:
(i) The bank or bank holding company does not meet the criteria
under Sec. 208.6(c)(1);
(ii) The application contains a material error or is otherwise
deficient; or
(iii) The application or the notice required under paragraph (a)(3)
of this section, raises significant supervisory, Community Reinvestment
Act, compliance, policy or legal issues that have not been resolved, or
a timely substantive adverse comment is submitted. A comment will be
considered substantive unless it involves individual complaints, or
raises frivolous, previously considered, or wholly unsubstantiated
claims or irrelevant issues.
(d) Consolidated Applications. (1) Proposed branches; notice of
branch opening. A member bank may seek approval in a single application
or notice for any branches that it proposes to establish within one
year after the approval date. The bank shall, unless notification is
waived, notify the appropriate Reserve Bank not later than 30 days
after opening any branch approved under a consolidated application. A
bank is not required to open a branch approved under either a
consolidated or single branch application.
(2) Duration of branch approval. Branch approvals remain valid for
one year unless the Board or the appropriate Reserve Bank notifies the
bank that in its judgment, based on reports of condition, examinations,
or other information, there has been a change in the bank's condition,
financial or otherwise, that warrants reconsideration of the approval.
(e) Branch closings. A member bank shall comply with section 42 of
the FDI Act (FDI Act), 12 U.S.C. 1831r-1, with regard to branch
closings.
(f) Branch relocations. A relocation of an existing branch does not
require filing a branch application. A relocation of an existing
branch, for purposes of determining whether to file a branch
application, is a movement that does not substantially affect the
nature of the branch's business or customers served.
Sec. 208.7 Prohibition against use of interstate branches primarily
for deposit production.
(a) Purpose and scope--(1) Purpose. The purpose of this section is
to implement section 109 (12 U.S.C. 1835a) of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (Interstate
Act).
(2) Scope. (i) This section applies to any State member bank that
has operated a covered interstate branch for a period of at least one
year, and any foreign bank that has operated a covered interstate
branch licensed by a State for a period of at least one year.
(ii) This section describes the requirements imposed under 12
U.S.C. 1835a, which requires the appropriate Federal banking agencies
(the Board, the Office of the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation) to prescribe uniform rules that
prohibit a bank from using any authority to engage in interstate
branching pursuant to the Interstate Act, or any amendment made by the
Interstate Act to any other provision of law, primarily for the purpose
of deposit production.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Bank means, unless the context indicates otherwise:
(i) A State member bank as that term is defined in 12 U.S.C.
1813(d)(2); and
(ii) A foreign bank as that term is defined in 12 U.S.C. 3101(7)
and 12 CFR 211.21.
(2) Covered interstate branch means any branch of a State member
bank, and any uninsured branch of a foreign bank licensed by a State,
that:
[[Page 37641]]
(i) Is established or acquired outside the bank's home state
pursuant to the interstate branching authority granted by the
Interstate Act or by any amendment made by the Interstate Act to any
other provision of law; or
(ii) Could not have been established or acquired outside of the
bank's home state but for the establishment or acquisition of a branch
described in paragraph (b)(2)(i) of this section.
(3) Home state means:
(i) With respect to a state bank, the state that chartered the
bank;
(ii) With respect to a national bank, the state in which the main
office of the bank is located; and
(iii) With respect to a foreign bank, the home state of the foreign
bank as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR
211.22.
(4) Host state means a state in which a bank establishes or
acquires a covered interstate branch.
(5) Host state loan-to-deposit ratio generally means, with respect
to a particular host state, the ratio of total loans in the host state
relative to total deposits from the host state for all banks (including
institutions covered under the definition of ``bank'' in 12 U.S.C.
1813(a)(1)) that have that state as their home state, as determined and
updated periodically by the appropriate Federal banking agencies and
made available to the public.
(6) State means state as that term is defined in 12 U.S.C.
1813(a)(3).
(7) Statewide loan-to-deposit ratio means, with respect to a bank,
the ratio of the bank's loans to its deposits in a state in which the
bank has one or more covered interstate branches, as determined by the
Board.
(c) Loan-to-deposit ratio screen--(1) Application of screen.
Beginning no earlier than one year after a bank establishes or acquires
a covered interstate branch, the Board will consider whether the bank's
statewide loan-to-deposit ratio is less than 50 percent of the relevant
host state loan-to-deposit ratio.
(2) Results of screen. (i) If the Board determines that the bank's
statewide loan-to-deposit ratio is 50 percent or more of the host state
loan-to-deposit ratio, no further consideration under this section is
required.
(ii) If the Board determines that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit
ratio, or if reasonably available data are insufficient to calculate
the bank's statewide loan-to-deposit ratio, the Board will make a
credit needs determination for the bank as provided in paragraph (d) of
this section.
(d) Credit needs determination--(1) In general. The Board will
review the loan portfolio of the bank and determine whether the bank is
reasonably helping to meet the credit needs of the communities in the
host state that are served by the bank.
(2) Guidelines. The Board will use the following considerations as
guidelines when making the determination pursuant to paragraph (d)(1)
of this section:
(i) Whether covered interstate branches were formerly part of a
failed or failing depository institution;
(ii) Whether covered interstate branches were acquired under
circumstances where there was a low loan-to-deposit ratio because of
the nature of the acquired institution's business or loan portfolio;
(iii) Whether covered interstate branches have a high concentration
of commercial or credit card lending, trust services, or other
specialized activities, including the extent to which the covered
interstate branches accept deposits in the host state;
(iv) The Community Reinvestment Act ratings received by the bank,
if any, under 12 U.S.C. 2901 et seq.;
(v) Economic conditions, including the level of loan demand, within
the communities served by the covered interstate branches;
(vi) The safe and sound operation and condition of the bank; and
(vii) The Board's Regulation BB--Community Reinvestment (12 CFR
part 228) and interpretations of that regulation.
(e) Sanctions--(1) In general. If the Board determines that a bank
is not reasonably helping to meet the credit needs of the communities
served by the bank in the host state, and that the bank's statewide
loan-to-deposit ratio is less than 50 percent of the host state loan-
to-deposit ratio, the Board:
(i) May order that a bank's covered interstate branch or branches
be closed unless the bank provides reasonable assurances to the
satisfaction of the Board, after an opportunity for public comment,
that the bank has an acceptable plan under which the bank will
reasonably help to meet the credit needs of the communities served by
the bank in the host state; and
(ii) Will not permit the bank to open a new branch in the host
state that would be considered to be a covered interstate branch unless
the bank provides reasonable assurances to the satisfaction of the
Board, after an opportunity for public comment, that the bank will
reasonably help to meet the credit needs of the community that the new
branch will serve.
(2) Notice prior to closure of a covered interstate branch. Before
exercising the Board's authority to order the bank to close a covered
interstate branch, the Board will issue to the bank a notice of the
Board's intent to order the closure and will schedule a hearing within
60 days of issuing the notice.
(3) Hearing. The Board will conduct a hearing scheduled under
paragraph (e)(2) of this section in accordance with the provisions of
12 U.S.C. 1818(h) and 12 CFR part 263.
Subpart B--Investments and Loans
Sec. 208.20 Authority, purpose, and scope.
(a) Authority. Subpart B of Regulation H (12 CFR part 208, subpart
B) is issued by the Board of Governors of the Federal Reserve System
under 12 U.S.C. 24; sections 9, 11 and 21 of the Federal Reserve Act
(12 U.S.C. 321-338a, 248(a), 248(c), and 481-486); sections 1814, 1816,
1818, 1823(j), 1831o, 1831p-1 and 1831r-1 of the FDI Act (12 U.S.C.
1814, 1816, 1818, 1823(j), 1831o, 1831p-1 and 1831r-1); and the
National Flood Insurance Act of 1968 and the Flood Disaster Protection
Act of 1973, as amended (42 U.S.C. 4001-4129).
(b) Purpose and scope. This subpart B describes certain investment
limitations on member banks, statutory requirements for amortizing
losses on agricultural loans and extending credit in areas having
special flood hazards, as well as the requirements for issuing letters
of credit and acceptances.
Sec. 208.21 Investments in premises and securities.
(a) Investment in bank premises. No state member bank shall invest
in bank premises, or in the stock, bonds, debentures, or other such
obligations of any corporation holding the premises of such bank, or
make loans to or upon the security of any such corporation unless:
(1) The bank notifies the appropriate Reserve Bank at least fifteen
days prior to such investment and has not received notice that the
investment is subject to further review by the end of the fifteen day
notice period;
(2) The aggregate of all such investments and loans, together with
the amount of any indebtedness incurred by any such corporation that is
an affiliate of the bank (as defined in section 2 of the Banking Act of
1933, as amended, 12 U.S.C. 221a), is less than or equal to the bank's
perpetual preferred stock and related surplus plus common stock plus
surplus, as those terms are defined in the FFIEC Consolidated Reports
of Condition and Income; or
(3)(i) The aggregate of all such investments and loans, together
with the
[[Page 37642]]
amount of any indebtedness incurred by any such corporation that is an
affiliate of the bank, is less than or equal to 150 percent of the
bank's perpetual preferred stock and related surplus plus common stock
plus surplus, as those terms are defined in the FFIEC Consolidated
Reports of Condition and Income; and
(ii) The bank:
(A) Has a CAMELS composite rating of 1 or 2 under the Uniform
Interagency Bank Rating System 5 (or an equivalent rating
under a comparable rating system) as of the most recent examination of
the bank; and
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\5\ See FRRS 3-1575 for an explanation of the Uniform
Interagency Bank Rating System. (For availability, see 12 CFR
261.10(f).)
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(B) Is well capitalized and will continue to be well capitalized,
in accordance with subpart D of this part, after the investment or
loan.
(b) Investments in securities. Member banks are subject to the same
limitations and conditions with respect to purchasing, selling,
underwriting, and holding investment securities and stocks as are
national banks under 12 U.S.C. 24, para. 7th. To determine whether an
obligation qualifies as an investment security for the purposes of 12
U.S.C. 24, para. 7th, and to calculate the limits with respect to the
purchase of such obligations, a state member bank may look to part 1 of
the rules of the Comptroller of the Currency (12 CFR part 1) and
interpretations thereunder. A state member bank may consult the Board
for a determination with respect to the application of 12 U.S.C. 24,
para. 7th, with respect to issues not addressed in 12 CFR part 1. The
provisions of 12 CFR part 1 do not provide authority for a state member
bank to purchase securities of a type or amount that the bank is not
authorized to purchase under applicable state law.
Sec. 208.22 Community development and public welfare investments.
(a) Definitions. For purposes of this section:
(1) Low- or moderate-income area means:
(i) One or more census tracts in a Metropolitan Statistical Area
where the median family income adjusted for family size in each census
tract is less than 80 percent of the median family income adjusted for
family size of the Metropolitan Statistical Area; or
(ii) If not in a Metropolitan Statistical Area, one or more census
tracts or block-numbered areas where the median family income adjusted
for family size in each census tract or block-numbered area is less
than 80 percent of the median family income adjusted for family size of
the State.
(2) Low- and moderate-income persons has the same meaning as low-
and moderate-income persons as defined in 42 U.S.C. 5302(a)(20)(A).
(3) Small business means a business that meets the size-eligibility
standards of 13 CFR 121.802(a)(2).
(b) Investments not requiring prior Board approval. Notwithstanding
the provisions of section 5136 of the Revised Statutes (12 U.S.C. 24,
para. 7th) made applicable to member banks by paragraph 20 of section 9
of the Federal Reserve Act (12 U.S.C. 335), a member bank may make an
investment, without prior Board approval, if the following conditions
are met:
(1) The investment is in a corporation, limited partnership, or
other entity, and:
(i) The Board has determined that an investment in that entity or
class of entities is a public welfare investment under paragraph 23 of
section 9 of the Federal Reserve Act (12 U.S.C. 338a), or a community
development investment under Regulation Y (12 CFR 225.25(b)(6)); or
(ii) The Comptroller of the Currency has determined, by order or
regulation, that an investment in that entity by a national bank is a
public welfare investment under section 5136 of the Revised Statutes
(12 U.S.C. 24 (Eleventh)); or
(iii) The entity is a community development financial institution
as defined in section 103(5) of the Community Development Banking and
Financial Institutions Act of 1994 (12 U.S.C. 4702(5)); or
(iv) The entity, directly or indirectly, engages solely in or makes
loans solely for the purposes of one or more of the following community
development activities:
(A) Investing in, developing, rehabilitating, managing, selling, or
renting residential property if a majority of the units will be
occupied by low- and moderate-income persons, or if the property is a
``qualified low-income building'' as defined in section 42(c)(2) of the
Internal Revenue Code (26 U.S.C. 42(c)(2));
(B) Investing in, developing, rehabilitating, managing, selling, or
renting nonresidential real property or other assets located in a low-
or moderate-income area and targeted towards low- and moderate-income
persons;
(C) Investing in one or more small businesses located in a low- or
moderate-income area to stimulate economic development;
(D) Investing in, developing, or otherwise assisting job training
or placement facilities or programs that will be targeted towards low-
and moderate-income persons;
(E) Investing in an entity located in a low- or moderate-income
area if the entity creates long-term employment opportunities, a
majority of which (based on full-time equivalent positions) will be
held by low- and moderate-income persons; and
(F) Providing technical assistance, credit counseling, research,
and program development assistance to low- and moderate-income persons,
small businesses, or nonprofit corporations to help achieve community
development;
(2) The investment is permitted by state law;
(3) The investment will not expose the member bank to liability
beyond the amount of the investment;
(4) The aggregate of all such investments of the member bank does
not exceed the sum of five percent of its capital stock and surplus;
(5) The member bank is well capitalized or adequately capitalized
under Secs. 208.43(b) (1) and (2);
(6) The member bank received a composite CAMELS rating of ``1'' or
``2'' under the Uniform Financial Institutions Rating System as of its
most recent examination and an overall rating of ``1'' or ``2'' as of
its most recent consumer compliance examination; and
(7) The member bank is not subject to any written agreement, cease-
and-desist order, capital directive, prompt-corrective-action
directive, or memorandum of understanding issued by the Board or a
Federal Reserve Bank.
(c) Notice to Federal Reserve Bank. Not more than 30 days after
making an investment under paragraph (b) of this section, the member
bank shall advise its Federal Reserve Bank of the investment, including
the amount of the investment and the identity of the entity in which
the investment is made.
(d) Investments requiring Board approval. (1) With prior Board
approval, a member bank may make public welfare investments under
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a),
other than those specified in paragraph (b) of this section.
(2) Requests for Board approval under this paragraph (d) shall
include, at a minimum:
(i) The amount of the proposed investment;
(ii) A description of the entity in which the investment is to be
made;
(iii) An explanation of why the investment is a public welfare
investment under paragraph 23 of section 9 of the Federal Reserve Act
(12 U.S.C. 338a);
[[Page 37643]]
(iv) A description of the member bank's potential liability under
the proposed investment;
(v) The amount of the member bank's aggregate outstanding public
welfare investments under paragraph 23 of section 9 of the Federal
Reserve Act;
(vi) The amount of the member bank's capital stock and surplus; and
(vii) If the bank investment is not eligible under paragraph (b) of
this section, explain the reason or reasons why it is ineligible.
(3) The Board shall act on a request under this paragraph (d)
within 60 calendar days of receipt of a request that meets the
requirements of paragraph (d)(2) of this section, unless the Board
notifies the requesting member bank that a longer time period will be
required.
(e) Divestiture of investments. A member bank shall divest itself
of an investment made under paragraph (b) or (d) of this section to the
extent that the investment exceeds the scope of, or ceases to meet, the
requirements of paragraphs (b)(1) through (b)(4) or paragraph (d) of
this section. The divestiture shall be made in the manner specified in
12 CFR 225.140, Regulation Y, for interests acquired by a lending
subsidiary of a bank holding company or the bank holding company itself
in satisfaction of a debt previously contracted.
Sec. 208.23 Agricultural loan loss amortization.
(a) Definitions. For purposes of this section:
(1) Accepting official means:
(i) The Reserve Bank in whose district the bank is located; or
(ii) The Director of the Division of Banking Supervision and
Regulation in cases in which the Reserve Bank cannot determine that the
bank qualifies.
(2) Agriculturally related other property means any property, real
or personal, that the bank owned on January 1, 1983, and any additional
property that it acquired prior to January 1, 1992, in connection with
a qualified agricultural loan. For the purposes of paragraph (d) of
this section, the value of such property shall include the amount
previously charged off as a loss.
(3) Participating bank means an agricultural bank (as defined in 12
U.S.C. 1823(j)(4)(A)) that, as of January 1, 1992, had a proposal for a
capital restoration plan accepted by an accepting official and received
permission from the accepting official, subject to paragraphs (d) and
(e) of this section, to amortize losses in accordance with paragraphs
(b) and (c) of this section.
(4) Qualified agricultural loan means:
(i) Loans that finance agricultural production or are secured by
farm land for purposes of Schedule RC-C of the FFIEC Consolidated
Report of Condition or such other comparable schedule;
(ii) Loans secured by farm machinery;
(iii) Other loans that a bank proves to be sufficiently related to
agriculture for classification as an agricultural loan by the Board;
and
(iv) The remaining unpaid balance of any loans described in
paragraphs (a)(4) (i), (ii) and (iii) of this section that have been
charged off since January 1, 1984, and that qualify for deferral under
this section.
(b)(1) Provided there is no evidence that the loss resulted from
fraud or criminal abuse on the part of the bank, the officers,
directors, or principal shareholders, a participating bank may amortize
in its Reports of Condition and Income:
(i) Any loss on a qualified agricultural loan that the bank would
be required to reflect in its financial statements for any period
between and including 1984 and 1991; or
(ii) Any loss that the bank would be required to reflect in its
financial statements for any period between and including 1983 and 1991
resulting from a reappraisal or sale of agriculturally-related other
property.
(2) Amortization under this section shall be computed over a period
not to exceed seven years on a quarterly straight-line basis commencing
in the first quarter after the loan was or is charged off so as to be
fully amortized not later than December 31, 1998.
(c) Accounting for amortization. Any bank that is permitted to
amortize losses in accordance with paragraph (b) of this section may
restate its capital and other relevant accounts and account for future
authorized deferrals and authorizations in accordance with the
instructions to the FFIEC Consolidated Reports of Condition and Income.
Any resulting increase in the capital account shall be included in
qualifying capital pursuant to appendix A of this part.
(d) Conditions of participation. In order for a bank to maintain
its status as a participating bank, it shall:
(1) Adhere to the approved capital plan and obtain the prior
approval of the accepting official before making any modifications to
the plan;
(2) Maintain accounting records for each asset subject to loss
deferral under the program that document the amount and timing of the
deferrals, repayments, and authorizations;
(3) Maintain the financial condition of the bank so that it does
not deteriorate to the point where it is no longer a viable,
fundamentally sound institution;
(4) Make a reasonable effort, consistent with safe and sound
banking practices, to maintain in its loan portfolio a percentage of
agricultural loans, including agriculturally-related other property,
not less than the percentage of such loans in its loan portfolio on
January 1, 1986; and
(5) Provide the accepting official, upon request, with any
information the accepting official deems necessary to monitor the
bank's amortization, its compliance with the conditions of
participation, and its continued eligibility.
(e) Revocation of eligibility for loss amortization. The failure to
comply with any condition in an acceptance, with the capital
restoration plan, or with the conditions stated in paragraph (d) of
this section, is grounds for revocation of acceptance for loss
amortization and for an administrative action against the bank under 12
U.S.C. 1818(b). In addition, acceptance of a bank for loss amortization
shall not foreclose any administrative action against the bank that the
Board may deem appropriate.
(f) Expiration date. The terms of this section will no longer be in
effect as of January 1, 1999.
Sec. 208.24 Letters of credit and acceptances.
(a) Standby letters of credit. For the purpose of this section,
standby letters of credit include every letter of credit (or similar
arrangement however named or designated) that represents an obligation
to the beneficiary on the part of the issuer:
(1) To repay money borrowed by or advanced to or for the account of
the account party; or
(2) To make payment on account of any evidence of indebtedness
undertaken by the account party; or
(3) To make payment on account of any default by the party
procuring the issuance of the letter of credit in the performance of an
obligation.6
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\6\ A standby letter of credit does not include: (1) Commercial
letters of credit and similar instruments, where the issuing bank
expects the beneficiary to draw upon the issuer, and which do not
guaranty payment of a money obligation; or (2) a guaranty or similar
obligation issued by a foreign branch in accordance with and subject
to the limitations of 12 CFR part 211 (Regulation K).
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(b) Ineligible acceptance. An ineligible acceptance is a time draft
accepted by a bank, which does not meet the requirements for discount
with a Federal Reserve Bank.
(c) Bank's lending limits. Standby letters of credit and ineligible
[[Page 37644]]
acceptances count toward member banks' lending limits imposed by state
law.
(d) Exceptions. A standby letter of credit or ineligible acceptance
is not subject to the restrictions set forth in paragraph (c) of this
section if prior to or at the time of issuance of the credit:
(1) The issuing bank is paid an amount equal to the bank's maximum
liability under the standby letter of credit; or
(2) The party procuring the issuance of a letter of credit or
ineligible acceptance has set aside sufficient funds in a segregated,
clearly earmarked deposit account to cover the bank's maximum liability
under the standby letter of credit or ineligible acceptance.
Sec. 208.25 Loans in areas having special flood hazards.
(a) Purpose and scope. (1) Purpose. The purpose of this section is
to implement the requirements of the National Flood Insurance Act of
1968 and the Flood Disaster Protection Act of 1973, as amended (42
U.S.C. 4001-4129).
(2) Scope. This section, except for paragraphs (f) and (h) of this
section, applies to loans secured by buildings or mobile homes located
or to be located in areas determined by the Director of the Federal
Emergency Management Agency to have special flood hazards. Paragraphs
(f) and (h) of this section apply to loans secured by buildings or
mobile homes, regardless of location.
(b) Definitions. For purposes of this section:
(1) Act means the National Flood Insurance Act of 1968, as amended
(42 U.S.C. 4001-4129).
(2) Building means a walled and roofed structure, other than a gas
or liquid storage tank, that is principally above ground and affixed to
a permanent site, and a walled and roofed structure while in the course
of construction, alteration, or repair.
(3) Community means a State or a political subdivision of a State
that has zoning and building code jurisdiction over a particular area
having special flood hazards.
(4) Designated loan means a loan secured by a building or mobile
home that is located or to be located in a special flood hazard area in
which flood insurance is available under the Act.
(5) Director of FEMA means the Director of the Federal Emergency
Management Agency.
(6) Mobile home means a structure, transportable in one or more
sections, that is built on a permanent chassis and designed for use
with or without a permanent foundation when attached to the required
utilities. The term mobile home does not include a recreational
vehicle. For purposes of this section, the term mobile home means a
mobile home on a permanent foundation. The term mobile home includes a
manufactured home as that term is used in the National Flood Insurance
Program.
(7) NFIP means the National Flood Insurance Program authorized
under the Act.
(8) Residential improved real estate means real estate upon which a
home or other residential building is located or to be located.
(9) Servicer means the person responsible for:
(i) Receiving any scheduled, periodic payments from a borrower
under the terms of a loan, including amounts for taxes, insurance
premiums, and other charges with respect to the property securing the
loan; and
(ii) Making payments of principal and interest and any other
payments from the amounts received from the borrower as may be required
under the terms of the loan.
(10) Special flood hazard area means the land in the flood plain
within a community having at least a one percent chance of flooding in
any given year, as designated by the Director of FEMA.
(11) Table funding means a settlement at which a loan is funded by
a contemporaneous advance of loan funds and an assignment of the loan
to the person advancing the funds.
(c) Requirement to purchase flood insurance where available. (1) In
general. A member bank shall not make, increase, extend, or renew any
designated loan unless the building or mobile home and any personal
property securing the loan is covered by flood insurance for the term
of the loan. The amount of insurance must be at least equal to the
lesser of the outstanding principal balance of the designated loan or
the maximum limit of coverage available for the particular type of
property under the Act. Flood insurance coverage under the Act is
limited to the overall value of the property securing the designated
loan minus the value of the land on which the property is located.
(2) Table funded loans. A member bank that acquires a loan from a
mortgage broker or other entity through table funding shall be
considered to be making a loan for the purposes of this section.
(d) Exemptions. The flood insurance requirement prescribed by
paragraph (c) of this section does not apply with respect to:
(1) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and
periodically revises the list of States falling within this exemption;
or
(2) Property securing any loan with an original principal balance
of $5,000 or less and a repayment term of one year or less.
(e) Escrow requirement. If a member bank requires the escrow of
taxes, insurance premiums, fees, or any other charges for a loan
secured by residential improved real estate or a mobile home that is
made, increased, extended, or renewed after October 1, 1996, the member
bank shall also require the escrow of all premiums and fees for any
flood insurance required under paragraph (c) of this section. The
member bank, or a servicer acting on its behalf, shall deposit the
flood insurance premiums on behalf of the borrower in an escrow
account. This escrow account will be subject to escrow requirements
adopted pursuant to section 10 of the Real Estate Settlement Procedures
Act of 1974 (12 U.S.C. 2609) (RESPA), which generally limits the amount
that may be maintained in escrow accounts for certain types of loans
and requires escrow account statements for those accounts, only if the
loan is otherwise subject to RESPA. Following receipt of a notice from
the Director of FEMA or other provider of flood insurance that premiums
are due, the member bank, or a servicer acting on its behalf, shall pay
the amount owed to the insurance provider from the escrow account by
the date when such premiums are due.
(f) Required use of standard flood hazard determination form. (1)
Use of form. A member bank shall use the standard flood hazard
determination form developed by the Director of FEMA (as set forth in
appendix A of 44 CFR part 65) when determining whether the building or
mobile home offered as collateral security for a loan is or will be
located in a special flood hazard area in which flood insurance is
available under the Act. The standard flood hazard determination form
may be used in a printed, computerized, or electronic manner.
(2) Retention of form. A member bank shall retain a copy of the
completed standard flood hazard determination form, in either hard copy
or electronic form, for the period of time the bank owns the loan.
(g) Forced placement of flood insurance. If a member bank, or a
servicer acting on behalf of the bank, determines at any time during
the term of a designated loan that the building or mobile home and any
personal property securing the designated loan is not covered by flood
insurance or is covered
[[Page 37645]]
by flood insurance in an amount less than the amount required under
paragraph (c) of this section, then the bank or its servicer shall
notify the borrower that the borrower should obtain flood insurance, at
the borrower's expense, in an amount at least equal to the amount
required under paragraph (c) of this section, for the remaining term of
the loan. If the borrower fails to obtain flood insurance within 45
days after notification, then the member bank or its servicer shall
purchase insurance on the borrower's behalf. The member bank or its
servicer may charge the borrower for the cost of premiums and fees
incurred in purchasing the insurance.
(h) Determination fees. (1) General. Notwithstanding any Federal or
State law other than the Flood Disaster Protection Act of 1973, as
amended (42 U.S.C. 4001-4129), any member bank, or a servicer acting on
behalf of the bank, may charge a reasonable fee for determining whether
the building or mobile home securing the loan is located or will be
located in a special flood hazard area. A determination fee may also
include, but is not limited to, a fee for life-of-loan monitoring.
(2) Borrower fee. The determination fee authorized by paragraph
(h)(1) of this section may be charged to the borrower if the
determination:
(i) Is made in connection with a making, increasing, extending, or
renewing of the loan that is initiated by the borrower;
(ii) Reflects the Director of FEMA's revision or updating of flood
plain areas or flood-risk zones;
(iii) Reflects the Director of FEMA's publication of a notice or
compendium that:
(A) Affects the area in which the building or mobile home securing
the loan is located; or
(B) By determination of the Director of FEMA, may reasonably
require a determination whether the building or mobile home securing
the loan is located in a special flood hazard area;
(iv) Results in the purchase of flood insurance coverage by the
lender or its servicer on behalf of the borrower under paragraph (g) of
this section.
(3) Purchaser or transferee fee. The determination fee authorized
by paragraph (h)(1) of this section may be charged to the purchaser or
transferee of a loan in the case of the sale or transfer of the loan.
(i) Notice of special flood hazards and availability of Federal
disaster relief assistance. When a member bank makes, increases,
extends, or renews a loan secured by a building or a mobile home
located or to be located in a special flood hazard area, the bank shall
mail or deliver a written notice to the borrower and to the servicer in
all cases whether or not flood insurance is available under the Act for
the collateral securing the loan.
(1) Contents of notice. The written notice must include the
following information:
(i) A warning, in a form approved by the Director of FEMA, that the
building or the mobile home is or will be located in a special flood
hazard area;
(ii) A description of the flood insurance purchase requirements set
forth in section 102(b) of the Flood Disaster Protection Act of 1973,
as amended (42 U.S.C. 4012a(b));
(iii) A statement, where applicable, that flood insurance coverage
is available under the NFIP and may also be available from private
insurers; and
(iv) A statement whether Federal disaster relief assistance may be
available in the event of damage to the building or mobile home caused
by flooding in a Federally declared disaster.
(2) Timing of notice. The member bank shall provide the notice
required by paragraph (i)(1) of this section to the borrower within a
reasonable time before the completion of the transaction, and to the
servicer as promptly as practicable after the bank provides notice to
the borrower and in any event no later than the time the bank provides
other similar notices to the servicer concerning hazard insurance and
taxes. Notice to the servicer may be made electronically or may take
the form of a copy of the notice to the borrower.
(3) Record of receipt. The member bank shall retain a record of the
receipt of the notices by the borrower and the servicer for the period
of time the bank owns the loan.
(4) Alternate method of notice. Instead of providing the notice to
the borrower required by paragraph (i)(1) of this section, a member
bank may obtain satisfactory written assurance from a seller or lessor
that, within a reasonable time before the completion of the sale or
lease transaction, the seller or lessor has provided such notice to the
purchaser or lessee. The member bank shall retain a record of the
written assurance from the seller or lessor for the period of time the
bank owns the loan.
(5) Use of prescribed form of notice. A member bank will be
considered to be in compliance with the requirement for notice to the
borrower of this paragraph (i) by providing written notice to the
borrower containing the language presented in appendix A of this
section within a reasonable time before the completion of the
transaction. The notice presented in appendix A of this section
satisfies the borrower notice requirements of the Act.
(j) Notice of servicer's identity. (1) Notice requirement. When a
member bank makes, increases, extends, renews, sells, or transfers a
loan secured by a building or mobile home located or to be located in a
special flood hazard area, the bank shall notify the Director of FEMA
(or the Director's designee) in writing of the identity of the servicer
of the loan. The Director of FEMA has designated the insurance provider
to receive the member bank's notice of the servicer's identity. This
notice may be provided electronically if electronic transmission is
satisfactory to the Director of FEMA's designee.
(2) Transfer of servicing rights. The member bank shall notify the
Director of FEMA (or the Director's designee) of any change in the
servicer of a loan described in paragraph (j)(1) of this section within
60 days after the effective date of the change. This notice may be
provided electronically if electronic transmission is satisfactory to
the Director of FEMA's designee. Upon any change in the servicing of a
loan described in paragraph (j)(1) of this section, the duty to provide
notice under this paragraph (j)(2) shall transfer to the transferee
servicer.
Appendix A to Sec. 208.25 Sample Form of Notice
Notice of Special Flood Hazards and Availability of Federal Disaster
Relief Assistance
We are giving you this notice to inform you that:
The building or mobile home securing the loan for which you have
applied is or will be located in an area with special flood hazards.
The area has been identified by the Director of the Federal
Emergency Management Agency (FEMA) as a special flood hazard area
using FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary
Map for the following community: ____________________. This area has
a one percent (1%) chance of a flood equal to or exceeding the base
flood elevation (a 100-year flood) in any given year. During the
life of a 30-year mortgage loan, the risk of a 100-year flood in a
special flood hazard area is 26 percent (26%).
Federal law allows a lender and borrower jointly to request the
Director of FEMA to review the determination of whether the property
securing the loan is located in a special flood hazard area. If you
would like to make such a request, please contact us for further
information.
______ The community in which the property securing the loan is
located participates in the National Flood Insurance Program (NFIP).
Federal law will not allow us to make you the loan that you have
applied for if you do not purchase flood
[[Page 37646]]
insurance. The flood insurance must be maintained for the life of
the loan. If you fail to purchase or renew flood insurance on the
property, Federal law authorizes and requires us to purchase the
flood insurance for you at your expense.
Flood insurance coverage under the NFIP may be
purchased through an insurance agent who will obtain the policy
either directly through the NFIP or through an insurance company
that participates in the NFIP. Flood insurance also may be available
from private insurers that do not participate in the NFIP.
At a minimum, flood insurance purchased must cover the
lesser of:
(1) the outstanding principal balance of the loan; or
(2) the maximum amount of coverage allowed for the type of
property under the NFIP.
Flood insurance coverage under the NFIP is limited to the
overall value of the property securing the loan minus the value of
the land on which the property is located.
Federal disaster relief assistance (usually in the form
of a low-interest loan) may be available for damages incurred in
excess of your flood insurance if your community's participation in
the NFIP is in accordance with NFIP requirements.
______Flood insurance coverage under the NFIP is not available
for the property securing the loan because the community in which
the property is located does not participate in the NFIP. In
addition, if the non-participating community has been identified for
at least one year as containing a special flood hazard area,
properties located in the community will not be eligible for Federal
disaster relief assistance in the event of a Federally declared
flood disaster.
Subpart C--Bank Securities and Securities-Related Activities
Sec. 208.30 Authority, purpose, and scope.
(a) Authority. Subpart C of Regulation H (12 CFR part 208, subpart
C) is issued by the Board of Governors of the Federal Reserve System
under 12 U.S.C. 24, 92a, 93a; sections 1818 and 1831p-1(a)(2) of the
FDI Act (12 U.S.C. 1818, 1831p-1(a)(2)); and sections 78b, 78l(b),
78l(g), 78l(i), 78o-4(c)(5), 78o-5, 78q, 78q-1, and 78w of the
Securities Exchange Act of 1934 (15 U.S.C. 78b, 78l(b), 78l(g), 78l(i),
78o-4(c)(5), 78o-5, 78q, 78q-1, 78w).
(b) Purpose and scope. This subpart C describes the requirements
imposed upon member banks acting as transfer agents, registered
clearing agencies, or sellers of securities under the Securities
Exchange Act of 1934. This subpart C also describes the reporting
requirements imposed on member banks whose securities are subject to
registration under the Securities Exchange Act of 1934.
Sec. 208.31 State member banks as transfer agents.
(a) The rules adopted by the Securities and Exchange Commission
(SEC) pursuant to section 17A of the Securities Exchange Act of 1934
(15 U.S.C. 78q-l) prescribing procedures for registration of transfer
agents for which the SEC is the appropriate regulatory agency (17 CFR
240.17Ac2-1) apply to member bank transfer agents. References to the
``Commission'' are deemed to refer to the Board.
(b) The rules adopted by the SEC pursuant to section 17A
prescribing operational and reporting requirements for transfer agents
(17 CFR 240.17Ac2-2 and 240.17Ad-1 through 240.17Ad-16) apply to member
bank transfer agents.
Sec. 208.32 Notice of disciplinary sanctions imposed by registered
clearing agency.
(a) Notice requirement. Any member bank or any of its subsidiaries
that is a registered clearing agency pursuant to section 17A(b) of the
Securities Exchange Act of 1934 (the Act), and that:
(1) Imposes any final disciplinary sanction on any participant
therein;
(2) Denies participation to any applicant; or
(3) Prohibits or limits any person in respect to access to services
offered by the clearing agency, shall file with the Board (and the
appropriate regulatory agency, if other than the Board, for a
participant or applicant) notice thereof in the manner prescribed in
this section.
(b) Notice of final disciplinary actions. (1) Any registered
clearing agency for which the Board is the appropriate regulatory
agency that takes any final disciplinary action with respect to any
participant shall promptly file a notice thereof with the Board in
accordance with paragraph (c) of this section. For the purposes of this
paragraph (b), final disciplinary action means the imposition of any
disciplinary sanction pursuant to section 17A(b)(3)(G) of the Act, or
other action of a registered clearing agency which, after notice and
opportunity for hearing, results in final disposition of charges of:
(i) One or more violations of the rules of the registered clearing
agency; or
(ii) Acts or practices constituting a statutory disqualification of
a type defined in paragraph (iv) or (v) (except prior convictions) of
section 3(a)(39) of the Act.
(2) However, if a registered clearing agency fee schedule specifies
certain charges for errors made by its participants in giving
instructions to the registered clearing agency which are de minimis on
a per error basis, and whose purpose is, in part, to provide revenues
to the clearing agency to compensate it for effort expended in
beginning to process an erroneous instruction, such error charges shall
not be considered a final disciplinary action for purposes of this
paragraph (b).
(c) Contents of final disciplinary action notice. Any notice filed
pursuant to paragraph (b) of this section shall consist of the
following, as appropriate:
(1) The name of the respondent and the respondent's last known
address, as reflected on the records of the clearing agency, and the
name of the person, committee, or other organizational unit that
brought the charges. However, identifying information as to any
respondent found not to have violated a provision covered by a charge
may be deleted insofar as the notice reports the disposition of that
charge and, prior to the filing of the notice, the respondent does not
request that identifying information be included in the notice;
(2) A statement describing the investigative or other origin of the
action;
(3) As charged in the proceeding, the specific provision or
provisions of the rules of the clearing agency violated by the
respondent, or the statutory disqualification referred to in paragraph
(b)(2) of this section, and a statement describing the answer of the
respondent to the charges;
(4) A statement setting forth findings of fact with respect to any
act or practice in which the respondent was charged with having engaged
in or omitted; the conclusion of the clearing agency as to whether the
respondent violated any rule or was subject to a statutory
disqualification as charged; and a statement of the clearing agency in
support of its resolution of the principal issues raised in the
proceedings;
(5) A statement describing any sanction imposed, the reasons
therefor, and the date upon which the sanction became or will become
effective; and
(6) Such other matters as the clearing agency may deem relevant.
(d) Notice of final denial, prohibition, termination or limitation
based on qualification or administrative rules. (1) Any registered
clearing agency, for which the Board is the appropriate regulatory
agency, that takes any final action that denies or conditions the
participation of any person, or prohibits or limits access, to services
offered by the clearing agency, shall promptly file notice thereof with
the Board (and the appropriate regulatory agency, if other than the
Board, for the affected person) in accordance with paragraph (e) of
this section; but such action shall not be
[[Page 37647]]
considered a final disciplinary action for purposes of paragraph (b) of
this section where the action is based on an alleged failure of such
person to:
(i) Comply with the qualification standards prescribed by the rules
of the registered clearing agency pursuant to section 17A(b)(4)(B) of
the Act; or
(ii) Comply with any administrative requirements of the registered
clearing agency (including failure to pay entry or other dues or fees,
or to file prescribed forms or reports) not involving charges of
violations that may lead to a disciplinary sanction.
(2) However, no such action shall be considered final pursuant to
this paragraph (d) that results merely from a notice of such failure to
comply to the person affected, if such person has not sought an
adjudication of the matter, including a hearing, or otherwise exhausted
the administrative remedies within the registered clearing agency with
respect to such a matter.
(e) Contents of notice required by paragraph (d) of this section.
Any notice filed pursuant to paragraph (d) of this section shall
consist of the following, as appropriate:
(1) The name of each person concerned and each person's last known
address, as reflected in the records of the clearing agency;
(2) The specific grounds upon which the action of the clearing
agency was based, and a statement describing the answer of the person
concerned;
(3) A statement setting forth findings of fact and conclusions as
to each alleged failure of the person to comply with qualification
standards or administrative obligations, and a statement of the
clearing agency in support of its resolution of the principal issues
raised in the proceeding;
(4) The date upon which such action became or will become
effective; and
(5) Such other matters as the clearing agency deems relevant.
(f) Notice of final action based on prior adjudicated statutory
disqualifications. Any registered clearing agency for which the Board
is the appropriate regulatory agency that takes any final action shall
promptly file notice thereof with the Board (and the appropriate
regulatory agency, if other than the Board, for the affected person) in
accordance with paragraph (g) of this section, where the final action:
(1) Denies or conditions participation to any person, or prohibits
or limits access to services offered by the clearing agency; and
(2) Is based upon a statutory disqualification of a type defined in
paragraph (A), (B) or (C) of section 3(a)(39) of the Act, consisting of
a prior conviction, as described in subparagraph (E) of section
3(a)(39) of the Act. However, no such action shall be considered final
pursuant to this paragraph (f) that results merely from a notice of
such disqualification to the person affected, if such person has not
sought an adjudication of the matter, including a hearing, or otherwise
exhausted the administrative remedies within the clearing agency with
respect to such a matter.
(g) Contents of notice required by paragraph (f) of this section.
Any notice filed pursuant to paragraph (f) of this section shall
consist of the following, as appropriate:
(1) The name of each person concerned and each person's last known
address, as reflected in the records of the clearing agency;
(2) A statement setting forth the principal issues raised, the
answer of any person concerned, and a statement of the clearing agency
in support of its resolution of the principal issues raised in the
proceeding;
(3) Any description furnished by or on behalf of the person
concerned of the activities engaged in by the person since the
adjudication upon which the disqualification is based;
(4) A copy of the order or decision of the court, appropriate
regulatory agency, or self-regulatory organization that adjudicated the
matter giving rise to the statutory disqualification;
(5) The nature of the action taken and the date upon which such
action is to be made effective; and
(6) Such other matters as the clearing agency deems relevant.
(h) Notice of summary suspension of participation. Any registered
clearing agency for which the Board is the appropriate regulatory
agency that summarily suspends or closes the accounts of a participant
pursuant to the provisions of section 17A(b)(5)(C) of the Act shall,
within one business day after such action becomes effective, file
notice thereof with the Board and the appropriate regulatory agency for
the participant, if other than the Board, of such action in accordance
with paragraph (i) of this section.
(i) Contents of notice of summary suspension. Any notice pursuant
to paragraph (h) of this section shall contain at least the following
information, as appropriate:
(1) The name of the participant concerned and the participant's
last known address, as reflected in the records of the clearing agency;
(2) The date upon which the summary action became or will become
effective;
(3) If the summary action is based upon the provisions of section
17A(b)(5)(C)(i) of the Act, a copy of the relevant order or decision of
the self-regulatory organization, if available to the clearing agency;
(4) If the summary action is based upon the provisions of section
17A(b)(5)(C)(ii) of the Act, a statement describing the default of any
delivery of funds or securities to the clearing agency;
(5) If the summary action is based upon the provisions of section
17A(b)(5)(C)(iii) of the Act, a statement describing the financial or
operating difficulty of the participant based upon which the clearing
agency determined that the suspension and closing of accounts was
necessary for the protection of the clearing agency, its participants,
creditors, or investors;
(6) The nature and effective date of the suspension; and
(7) Such other matters as the clearing agency deems relevant.
Sec. 208.33 Application for stay or review of disciplinary sanctions
imposed by registered clearing agency.
(a) Stays. The rules adopted by the Securities and Exchange
Commission (SEC) pursuant to section 19 of the Securities Exchange Act
of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the
SEC is the appropriate regulatory agency for stays of disciplinary
sanctions or summary suspensions imposed by registered clearing
agencies (17 CFR 240.19d-2) apply to applications by member banks.
References to the ``Commission'' are deemed to refer to the Board.
(b) Reviews. The regulations adopted by the Securities and Exchange
Commission pursuant to section 19 of the Securities and Exchange Act of
1934 (15 U.S.C. 78s) regarding applications by persons for whom the SEC
is the appropriate regulatory agency for reviews of final disciplinary
sanctions, denials of participation, or prohibitions or limitations of
access to services imposed by registered clearing agencies (17 CFR
240.19d-3(a)-(f)) apply to applications by member banks. References to
the ``Commission'' are deemed to refer to the Board. The Board's
Uniform Rules of Practice and Procedure (12 CFR part 263) apply to
review proceedings under this Sec. 208.33 to the extent not
inconsistent with this Sec. 208.33.
Sec. 208.34 Recordkeeping and confirmation of certain securities
transactions effected by State member banks.
(a) Exceptions and safe and sound operations. (1) A State member
bank may be excepted from one or more of the requirements of this
section if it
[[Page 37648]]
meets one of the following conditions of paragraphs (a)(1)(i) through
(a)(1)(iv) of this section:
(i) De minimis transactions. The requirements of paragraphs (c)(2)
through (c)(4) and paragraphs (e)(1) through (e)(3) of this section
shall not apply to banks having an average of less than 200 securities
transactions per year for customers over the prior three calendar year
period, exclusive of transactions in government securities;
(ii) Government securities. The recordkeeping requirements of
paragraph (c) of this section shall not apply to banks effecting fewer
than 500 government securities brokerage transactions per year;
provided that this exception shall not apply to government securities
transactions by a State member bank that has filed a written notice, or
is required to file notice, with the Federal Reserve Board that it acts
as a government securities broker or a government securities dealer;
(iii) Municipal securities. The municipal securities activities of
a State member bank that are subject to regulations promulgated by the
Municipal Securities Rulemaking Board shall not be subject to the
requirements of this section; and
(iv) Foreign branches. The requirements of this section shall not
apply to the activities of foreign branches of a State member bank.
(2) Every State member bank qualifying for an exemption under
paragraph (a)(1) of this section that conducts securities transactions
for customers shall, to ensure safe and sound operations, maintain
effective systems of records and controls regarding its customer
securities transactions that clearly and accurately reflect appropriate
information and provide an adequate basis for an audit of the
information.
(b) Definitions. For purposes of this section:
(1) Asset-backed security shall mean a security that is serviced
primarily by the cash flows of a discrete pool of receivables or other
financial assets, either fixed or revolving, that by their terms
convert into cash within a finite time period plus any rights or other
assets designed to assure the servicing or timely distribution of
proceeds to the security holders.
(2) Collective investment fund shall mean funds held by a State
member bank as fiduciary and, consistent with local law, invested
collectively as follows:
(i) In a common trust fund maintained by such bank exclusively for
the collective investment and reinvestment of monies contributed
thereto by the bank in its capacity as trustee, executor,
administrator, guardian, or custodian under the Uniform Gifts to Minors
Act; or
(ii) In a fund consisting solely of assets of retirement, pension,
profit sharing, stock bonus or similar trusts which are exempt from
Federal income taxation under the Internal Revenue Code (26 U.S.C.).
(3) Completion of the transaction effected by or through a state
member bank shall mean:
(i) For purchase transactions, the time when the customer pays the
bank any part of the purchase price (or the time when the bank makes
the book-entry for any part of the purchase price if applicable);
however, if the customer pays for the security prior to the time
payment is requested or becomes due, then the transaction shall be
completed when the bank transfers the security into the account of the
customer; and
(ii) For sale transactions, the time when the bank transfers the
security out of the account of the customer or, if the security is not
in the bank's custody, then the time when the security is delivered to
the bank; however, if the customer delivers the security to the bank
prior to the time delivery is requested or becomes due then the
transaction shall be completed when the banks makes payment into the
account of the customer.
(4) Crossing of buy and sell orders shall mean a security
transaction in which the same bank acts as agent for both the buyer and
the seller.
(5) Customer shall mean any person or account, including any
agency, trust, estate, guardianship, or other fiduciary account, for
which a State member bank effects or participates in effecting the
purchase or sale of securities, but shall not include a broker, dealer,
bank acting as a broker or dealer, municipal securities broker or
dealer, or issuer of the securities which are the subject of the
transactions.
(6) Debt security as used in paragraph (c) of this section shall
mean any security, such as a bond, debenture, note or any other similar
instrument which evidences a liability of the issuer (including any
security of this type that is convertible into stock or similar
security) and fractional or participation interests in one or more of
any of the foregoing; provided, however, that securities issued by an
investment company registered under the Investment Company Act of 1940,
15 U.S.C. 80a-1 et seq., shall not be included in this definition.
(7) Government security shall mean:
(i) A security that is a direct obligation of, or obligation
guaranteed as to principal and interest by, the United States;
(ii) A security that is issued or guaranteed by a corporation in
which the United States has a direct or indirect interest and which is
designated by the Secretary of the Treasury for exemption as necessary
or appropriate in the public interest or for the protection of
investors;
(iii) A security issued or guaranteed as to principal and interest
by any corporation whose securities are designated, by statute
specifically naming the corporation, to constitute exempt securities
within the meaning of the laws administered by the Securities and
Exchange Commission; or
(iv) Any put, call, straddle, option, or privilege on a security as
described in paragraphs (b)(7) (i), (ii), or (iii) of this section
other than a put, call, straddle, option, or privilege that is traded
on one or more national securities exchanges, or for which quotations
are disseminated though an automated quotation system operated by a
registered securities association.
(8) Investment discretion with respect to an account shall mean if
the State member bank, directly or indirectly, is authorized to
determine what securities or other property shall be purchased or sold
by or for the account, or makes decisions as to what securities or
other property shall be purchased or sold by or for the account even
though some other person may have responsibility for such investment
decisions.
(9) Municipal security shall mean a security which is a direct
obligation of, or obligation guaranteed as to principal or interest by,
a State or any political subdivision thereof, or any agency or
instrumentality of a State or any political subdivision thereof, or any
municipal corporate instrumentality of one or more States, or any
security which is an industrial development bond (as defined in 26
U.S.C. 103(c)(2) the interest on which is excludable from gross income
under 26 U.S.C. 103(a)(1), by reason of the application of paragraph
(4) or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5)
and (7) were not included in 26 U.S.C. 103(c)), paragraph (1) of 26
U.S.C. 103(c) does not apply to such security.
(10) Periodic plan shall mean:
(i) A written authorization for a State member bank to act as agent
to purchase or sell for a customer a specific security or securities,
in a specific amount (calculated in security units or dollars) or to
the extent of dividends and funds available, at specific time
intervals, and setting forth the commission or charges to be paid by
the customer or the manner of calculating them (including
[[Page 37649]]
dividend reinvestment plans, automatic investment plans, and employee
stock purchase plans); or
(ii) Any prearranged, automatic transfer or sweep of funds from a
deposit account to purchase a security, or any prearranged, automatic
redemption or sale of a security with the funds being transferred into
a deposit account (including cash management sweep services).
(11) Security shall mean:
(i) Any note, stock, treasury stock, bond, debenture, certificate
of interest or participation in any profit-sharing agreement or in any
oil, gas, or other mineral royalty or lease, any collateral-trust
certificate, preorganization certificate or subscription, transferable
share, investment contract, voting-trust certificate, for a security,
any put, call, straddle, option, or privilege on any security, or group
or index of securities (including any interest therein or based on the
value thereof), any instrument commonly known as a ``security''; or any
certificate of interest or participation in, temporary or interim
certificate for, receipt for, or warrant or right to subscribe to or
purchase, any of the foregoing.
(ii) But does not include a deposit or share account in a federally
or state insured depository institution, a loan participation, a letter
of credit or other form of bank indebtedness incurred in the ordinary
course of business, currency, any note, draft, bill of exchange, or
bankers acceptance which has a maturity at the time of issuance of not
exceeding nine months, exclusive of days of grace, or any renewal
thereof the maturity of which is likewise limited, units of a
collective investment fund, interests in a variable amount (master)
note of a borrower of prime credit, or U.S. Savings Bonds.
(c) Recordkeeping. Except as provided in paragraph (a) of this
section, every State member bank effecting securities transactions for
customers, including transactions in government securities, and
municipal securities transactions by banks not subject to registration
as municipal securities dealers, shall maintain the following records
with respect to such transactions for at least three years. Nothing
contained in this section shall require a bank to maintain the records
required by this paragraph in any given manner, provided that the
information required to be shown is clearly and accurately reflected
and provides an adequate basis for the audit of such information.
Records may be maintained in hard copy, automated, or electronic form
provided the records are easily retrievable, readily available for
inspection, and capable of being reproduced in a hard copy. A bank may
contract with third party service providers, including broker/dealers,
to maintain records required under this part.
(1) Chronological records of original entry containing an itemized
daily record of all purchases and sales of securities. The records of
original entry shall show the account or customer for which each such
transaction was effected, the description of the securities, the unit
and aggregate purchase or sale price (if any), the trade date and the
name or other designation of the broker/dealer or other person from
whom purchased or to whom sold;
(2) Account records for each customer which shall reflect all
purchases and sales of securities, all receipts and deliveries of
securities, and all receipts and disbursements of cash with respect to
transactions in securities for such account and all other debits and
credits pertaining to transactions in securities;
(3) A separate memorandum (order ticket) of each order to purchase
or sell securities (whether executed or canceled), which shall include:
(i) The account(s) for which the transaction was effected;
(ii) Whether the transaction was a market order, limit order, or
subject to special instructions;
(iii) The time the order was received by the trader or other bank
employee responsible for effecting the transaction;
(iv) The time the order was placed with the broker/dealer, or if
there was no broker/dealer, the time the order was executed or
canceled;
(v) The price at which the order was executed; and
(vi) The broker/dealer utilized;
(4) A record of all broker/dealers selected by the bank to effect
securities transactions and the amount of commissions paid or allocated
to each such broker during the calendar year; and
(5) A copy of the written notification required by paragraphs (d)
and (e) of this section.
(d) Content and time of notification. Every State member bank
effecting a securities transaction for a customer shall give or send to
such customer either of the following types of notifications at or
before completion of the transaction or; if the bank uses a broker/
dealer's confirmation, within one business day from the bank's receipt
of the broker/dealer's confirmation:
(1) A copy of the confirmation of a broker/dealer relating to the
securities transaction; and if the bank is to receive remuneration from
the customer or any other source in connection with the transaction,
and the remuneration is not determined pursuant to a prior written
agreement between the bank and the customer, a statement of the source
and the amount of any remuneration to be received; or
(2) A written notification disclosing:
(i) The name of the bank;
(ii) The name of the customer;
(iii) Whether the bank is acting as agent for such customer, as
agent for both such customer and some other person, as principal for
its own account, or in any other capacity;
(iv) The date of execution and a statement that the time of
execution will be furnished within a reasonable time upon written
request of such customer specifying the identity, price and number of
shares or units (or principal amount in the case of debt securities) of
such security purchased or sold by such customer;
(v) The amount of any remuneration received or to be received,
directly or indirectly, by any broker/dealer from such customer in
connection with the transaction;
(vi) The amount of any remuneration received or to be received by
the bank from the customer and the source and amount of any other
remuneration to be received by the bank in connection with the
transaction, unless remuneration is determined pursuant to a written
agreement between the bank and the customer, provided, however, in the
case of Government securities and municipal securities, this paragraph
(d)(2)(vi) shall apply only with respect to remuneration received by
the bank in an agency transaction. If the bank elects not to disclose
the source and amount of remuneration it has or will receive from a
party other than the customer pursuant to this paragraph (d)(2)(vi),
the written notification must disclose whether the bank has received or
will receive remuneration from a party other than the customer, and
that the bank will furnish within a reasonable time the source and
amount of this remuneration upon written request of the customer. This
election is not available, however, if, with respect to a purchase, the
bank was participating in a distribution of that security; or with
respect to a sale, the bank was participating in a tender offer for
that security;
(vii) The name of the broker/dealer utilized; or, where there is no
broker/dealer, the name of the person from whom the security was
purchased or to whom it was sold, or the fact that such information
will be furnished within a reasonable time upon written request;
(viii) In the case of a transaction in a debt security subject to
redemption before maturity, a statement to the effect
[[Page 37650]]
that the debt security may be redeemed in whole or in part before
maturity, that the redemption could affect the yield represented and
that additional information is available on request;
(ix) In the case of a transaction in a debt security effected
exclusively on the basis of a dollar price:
(A) The dollar price at which the transaction was effected;
(B) The yield to maturity calculated from the dollar price;
provided, however, that this paragraph (c)(2)(ix)(B) shall not apply to
a transaction in a debt security that either has a maturity date that
may be extended by the issuer with a variable interest payable thereon,
or is an asset-backed security that represents an interest in or is
secured by a pool of receivables or other financial assets that are
subject to continuous prepayment;
(x) In the case of a transaction in a debt security effected on the
basis of yield:
(A) The yield at which the transaction was effected, including the
percentage amount and its characterization (e.g., current yield, yield
to maturity, or yield to call) and if effected at yield to call, the
type of call, the call date, and the call price; and
(B) The dollar price calculated from the yield at which the
transaction was effected; and
(C) If effected on a basis other than yield to maturity and the
yield to maturity is lower than the represented yield, the yield to
maturity as well as the represented yield; provided, however, that this
paragraph (c)(2)(x)(C) shall not apply to a transaction in a debt
security that either has a maturity date that may be extended by the
issuer with a variable interest rate payable thereon, or is an asset-
backed security that represents an interest in or is secured by a pool
of receivables or other financial assets that are subject to continuous
prepayment;
(xi) In the case of a transaction in a debt security that is an
asset-backed security which represents an interest in or is secured by
a pool of receivables or other financial assets that are subject
continuously to prepayment, a statement indicating that the actual
yield of such asset-backed security may vary according to the rate at
which the underlying receivables or other financial assets are prepaid
and a statement of the fact that information concerning the factors
that affect yield (including at a minimum, the estimated yield,
weighted average life, and the prepayment assumptions underlying yield)
will be furnished upon written request of such customer; and
(xii) In the case of a transaction in a debt security, other than a
government security, that the security is unrated by a nationally
recognized statistical rating organization, if that is the case.
(e) Notification by agreement; alternative forms and times of
notification. A State member bank may elect to use the following
alternative procedures if a transaction is effected for:
(1) Accounts (except periodic plans) where the bank does not
exercise investment discretion and the bank and the customer agree in
writing to a different arrangement as to the time and content of the
notification; provided, however, that such agreement makes clear the
customer's right to receive the written notification pursuant to
paragraph (c) of this section at no additional cost to the customer;
(2) Accounts (except collective investment funds) where the bank
exercises investment discretion in other than an agency capacity, in
which instance the bank shall, upon request of the person having the
power to terminate the account or, if there is no such person, upon the
request of any person holding a vested beneficial interest in such
account, give or send to such person the written notification within a
reasonable time. The bank may charge such person a reasonable fee for
providing this information;
(3) Accounts, where the bank exercises investment discretion in an
agency capacity, in which instance:
(i) The bank shall give or send to each customer not less
frequently than once every three months an itemized statement which
shall specify the funds and securities in the custody or possession of
the bank at the end of such period and all debits, credits and
transactions in the customer's accounts during such period; and
(ii) If requested by the customer, the bank shall give or send to
each customer within a reasonable time the written notification
described in paragraph (c) of this section. The bank may charge a
reasonable fee for providing the information described in paragraph (c)
of this section;
(4) A collective investment fund, in which instance the bank shall
at least annually furnish a copy of a financial report of the fund, or
provide notice that a copy of such report is available and will be
furnished upon request, to each person to whom a regular periodic
accounting would ordinarily be rendered with respect to each
participating account. This report shall be based upon an audit made by
independent public accountants or internal auditors responsible only to
the board of directors of the bank;
(5) A periodic plan, in which instance the bank:
(i) Shall (except for a cash management sweep service) give or send
to the customer a written statement not less than every three months if
there are no securities transactions in the account, showing the
customer's funds and securities in the custody or possession of the
bank; all service charges and commissions paid by the customer in
connection with the transaction; and all other debits and credits of
the customer's account involved in the transaction; or
(ii) Shall for a cash management sweep service or similar periodic
plan as defined in Sec. 208.34(b)(10)(ii) give or send its customer a
written statement in the same form as prescribed in paragraph (e)(3)
above for each month in which a purchase or sale of a security takes
place in a deposit account and not less than once every three months if
there are no securities transactions in the account subject to any
other applicable laws or regulations;
(6) Upon the written request of the customer the bank shall furnish
the information described in paragraph (d) of this section, except that
any such information relating to remuneration paid in connection with
the transaction need not be provided to the customer when paid by a
source other than the customer. The bank may charge a reasonable fee
for providing the information described in paragraph (d) of this
section.
(f) Settlement of securities transactions. All contracts for the
purchase or sale of a security shall provide for completion of the
transaction within the number of business days in the standard
settlement cycle for the security followed by registered broker dealers
in the United States unless otherwise agreed to by the parties at the
time of the transaction.
(g) Securities trading policies and procedures. Every State member
bank effecting securities transactions for customers shall establish
written policies and procedures providing:
(1) Assignment of responsibility for supervision of all officers or
employees who:
(i) Transmit orders to or place orders with broker/dealers;
(ii) Execute transactions in securities for customers; or
(iii) Process orders for notification and/or settlement purposes,
or perform other back office functions with respect to securities
transactions effected for customers; provided that procedures
established under this paragraph
[[Page 37651]]
(g)(1)(iii) should provide for supervision and reporting lines that are
separate from supervision of personnel under paragraphs (g)(1)(i) and
(g)(1)(ii) of this section;
(2) For the fair and equitable allocation of securities and prices
to accounts when orders for the same security are received at
approximately the same time and are placed for execution either
individually or in combination;
(3) Where applicable and where permissible under local law, for the
crossing of buy and sell orders on a fair and equitable basis to the
parties to the transaction; and
(4) That bank officers and employees who make investment
recommendations or decisions for the accounts of customers, who
participate in the determination of such recommendations or decisions,
or who, in connection with their duties, obtain information concerning
which securities are being purchased or sold or recommended for such
action, must report to the bank, within ten days after the end of the
calendar quarter, all transactions in securities made by them or on
their behalf, either at the bank or elsewhere in which they have a
beneficial interest. The report shall identify the securities purchased
or sold and indicate the dates of the transactions and whether the
transactions were purchases or sales. Excluded from this requirement
are transactions for the benefit of the officer or employee over which
the officer or employee has no direct or indirect influence or control,
transactions in mutual fund shares, and all transactions involving in
the aggregate $10,000 or less during the calendar quarter. For purposes
of this paragraph (g)(4), the term securities does not include
government securities.
Sec. 208.35 Qualification requirements for transactions in certain
securities. [Reserved]
Sec. 208.36 Reporting requirements for State member banks subject to
the Securities Exchange Act of 1934.
(a) Filing requirements. Except as otherwise provided in this
section, a member bank whose securities are subject to registration
pursuant to section 12(b) or section 12(g) of the Securities Exchange
Act of 1934 (the 1934 Act) (15 U.S.C. 78l (b) and (g)) shall comply
with the rules, regulations, and forms adopted by the Securities and
Exchange Commission (Commission) pursuant to sections 12, 13, 14(a),
14(c), 14(d), 14(f) and 16 of the 1934 Act (15 U.S.C. 78l, 78m, 78n(a),
(c), (d), (f) and 78p). The term ``Commission'' as used in those rules
and regulations shall with respect to securities issued by member banks
be deemed to refer to the Board unless the context otherwise requires.
(b) Elections permitted for member banks with total assets of $150
million or less. (1) Notwithstanding paragraph (a) of this section or
the rules and regulations promulgated by the Commission pursuant to the
1934 Act a member bank that has total assets of $150 million or less as
of the end of its most recent fiscal year, and no foreign offices, may
elect to substitute for the financial statements required by the
Commission's Form 10-Q, the balance sheet and income statement from the
quarterly report of condition required to be filed by the bank with the
Board under section 9 of the Federal Reserve Act (12 U.S.C. 324)
(Federal Financial Institutions Examination Council Form 033 or 034).
(2) A member bank qualifying for and electing to file financial
statements from its quarterly report of condition pursuant to paragraph
(b)(1) of this section in its form 10-Q shall include earnings per
share or net loss per share data prepared in accordance with GAAP and
disclose any material contingencies, as required by Article 10 of the
Commission's Regulation S-X (17 CFR 210.10-01), in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations section of Form 10-Q.
(c) Required filings. (1) Place and timing of filing. All papers
required to be filed with the Board, pursuant to the 1934 Act or
regulations thereunder, shall be submitted to the Division of Banking
Supervision and Regulation, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.
Material may be filed by delivery to the Board, through the mails, or
otherwise. The date on which papers are actually received by the Board
shall be the date of filing thereof if all of the requirements with
respect to the filing have been complied with.
(2) Filing fees. No filing fees specified by the Commission's rules
shall be paid to the Board.
(3) Public inspection. Copies of the registration statement,
definitive proxy solicitation materials, reports, and annual reports to
shareholders required by this section (exclusive of exhibits) shall be
available for public inspection at the Board's offices in Washington,
DC, as well as at the Federal Reserve Banks of New York, Chicago, and
San Francisco and at the Reserve Bank in the district in which the
reporting bank is located.
(d) Confidentiality of filing. Any person filing any statement,
report, or document under the 1934 Act may make written objection to
the public disclosure of any information contained therein in
accordance with the following procedure:
(1) The person shall omit from the statement, report, or document,
when it is filed, the portion thereof that the person desires to keep
undisclosed (hereinafter called the confidential portion). The person
shall indicate at the appropriate place in the statement, report, or
document that the confidential portion has been omitted and filed
separately with the Board.
(2) The person shall file the following with the copies of the
statement, report, or document filed with the Board:
(i) As many copies of the confidential portion, each clearly marked
``CONFIDENTIAL TREATMENT,'' as there are copies of the statement,
report, or document filed with the Board. Each copy of the confidential
portion shall contain the complete text of the item and,
notwithstanding that the confidential portion does not constitute the
whole of the answer, the entire answer thereto; except that in case the
confidential portion is part of a financial statement or schedule, only
the particular financial statement or schedule need be included. All
copies of the confidential portion shall be in the same form as the
remainder of the statement, report, or document; and
(ii) An application making objection to the disclosure of the
confidential portion. The application shall be on a sheet or sheets
separate from the confidential portion, and shall:
(A) Identify the portion of the statement, report, or document that
has been omitted;
(B) Include a statement of the grounds of objection; and
(C) Include the name of each exchange, if any, with which the
statement, report, or document is filed.
(3) The copies of the confidential portion and the application
filed in accordance with this paragraph shall be enclosed in a separate
envelope marked ``CONFIDENTIAL TREATMENT,'' and addressed to Secretary,
Board of Governors of the Federal Reserve System, Washington, DC 20551.
(4) Pending determination by the Board on the objection filed in
accordance with this paragraph, the confidential portion shall not be
disclosed by the Board.
(5) If the Board determines to sustain the objection, a notation to
that effect shall be made at the appropriate place in the statement,
report, or document.
(6) If the Board determines not to sustain the objection because
disclosure of the confidential portion is in the
[[Page 37652]]
public interest, a finding and determination to that effect shall be
entered and notice of the finding and determination sent by registered
or certified mail to the person.
(7) If the Board determines not to sustain the objection, pursuant
to paragraph (d)(6) of this section, the confidential portion shall be
made available to the public:
(i) 15 days after notice of the Board's determination not to
sustain the objection has been given, as required by paragraph (d)(6)
of this section, provided that the person filing the objection has not
previously filed with the Board a written statement that he intends, in
good faith, to seek judicial review of the finding and determination;
or
(ii) 60 days after notice of the Board's determination not to
sustain the objection has been given as required by paragraph (d)(6) of
this section and the person filing the objection has filed with the
Board a written statement of intent to seek judicial review of the
finding and determination, but has failed to file a petition for
judicial review of the Board's determination; or
(iii) Upon final judicial determination, if adverse to the party
filing the objection.
(8) If the confidential portion is made available to the public, a
copy thereof shall be attached to each copy of the statement, report,
or document filed with the Board.
Sec. 208.37 Government securities sales practices.
(a) Scope. This subpart is applicable to state member banks that
have filed notice as, or are required to file notice as, government
securities brokers or dealers pursuant to section 15C of the Securities
Exchange Act (15 U.S.C. 78o-5) and Department of the Treasury rules
under section 15C (17 CFR 400.1(d) and part 401).
(b) Definitions. For purposes of this section:
(1) Bank that is a government securities broker or dealer means a
state member bank that has filed notice, or is required to file notice,
as a government securities broker or dealer pursuant to section 15C of
the Securities Exchange Act (15 U.S.C. 78o-5) and Department of the
Treasury rules under section 15C (17 CFR 400.1(d) and Part 401).
(2) Customer does not include a broker or dealer or a government
securities broker or dealer.
(3) Government security has the same meaning as this term has in
section 3(a)(42) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(42)).
(4) Non-institutional customer means any customer other than:
(i) A bank, savings association, insurance company, or registered
investment company;
(ii) An investment adviser registered under section 203 of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-3); or
(iii) Any entity (whether a natural person, corporation,
partnership, trust, or otherwise) with total assets of at least $50
million.
(c) Business conduct. A bank that is a government securities broker
or dealer shall observe high standards of commercial honor and just and
equitable principles of trade in the conduct of its business as a
government securities broker or dealer.
(d) Recommendations to customers. In recommending to a customer the
purchase, sale or exchange of a government security, a bank that is a
government securities broker or dealer shall have reasonable grounds
for believing that the recommendation is suitable for the customer upon
the basis of the facts, if any, disclosed by the customer as to the
customer's other security holdings and as to the customer's financial
situation and needs.
(e) Customer information. Prior to the execution of a transaction
recommended to a non-institutional customer, a bank that is a
government securities broker or dealer shall make reasonable efforts to
obtain information concerning:
(1) The customer's financial status;
(2) The customer's tax status;
(3) The customer's investment objectives; and
(4) Such other information used or considered to be reasonable by
the bank in making recommendations to the customer.
Subpart D--Prompt Corrective Action
Sec. 208.40 Authority, purpose, scope, other supervisory authority,
and disclosure of capital categories.
(a) Authority. Subpart D of Regulation H (12 CFR part 208, Subpart
D) is issued by the Board of Governors of the Federal Reserve System
(Board) under section 38 (section 38) of the FDI Act as added by
section 131 of the Federal Deposit Insurance Corporation Improvement
Act of 1991 (Pub. L. 102-242, 105 Stat. 2236 (1991)) (12 U.S.C. 1831o).
(b) Purpose and scope. This subpart D defines the capital measures
and capital levels that are used for determining the supervisory
actions authorized under section 38 of the FDI Act. (Section 38 of the
FDI Act establishes a framework of supervisory actions for insured
depository institutions that are not adequately capitalized.) This
subpart also establishes procedures for submission and review of
capital restoration plans and for issuance and review of directives and
orders pursuant to section 38. Certain of the provisions of this
subpart apply to officers, directors, and employees of state member
banks. Other provisions apply to any company that controls a member
bank and to the affiliates of the member bank.
(c) Other supervisory authority. Neither section 38 nor this
subpart in any way limits the authority of the Board under any other
provision of law to take supervisory actions to address unsafe or
unsound practices or conditions, deficient capital levels, violations
of law, or other practices. Action under section 38 of the FDI Act and
this subpart may be taken independently of, in conjunction with, or in
addition to any other enforcement action available to the Board,
including issuance of cease and desist orders, capital directives,
approval or denial of applications or notices, assessment of civil
money penalties, or any other actions authorized by law.
(d) Disclosure of capital categories. The assignment of a bank
under this subpart within a particular capital category is for purposes
of implementing and applying the provisions of section 38. Unless
permitted by the Board or otherwise required by law, no bank may state
in any advertisement or promotional material its capital category under
this subpart or that the Board or any other Federal banking agency has
assigned the bank to a particular capital category.
Sec. 208.41 Definitions for purposes of this subpart.
For purposes of this subpart, except as modified in this section or
unless the context otherwise requires, the terms used have the same
meanings as set forth in section 38 and section 3 of the FDI Act.
(a) Control--(1) Control has the same meaning assigned to it in
section 2 of the Bank Holding Company Act (12 U.S.C. 1841), and the
term controlled shall be construed consistently with the term control.
(2) Exclusion for fiduciary ownership. No insured depository
institution or company controls another insured depository institution
or company by virtue of its ownership or control of shares in a
fiduciary capacity. Shares shall not be deemed to have been acquired in
a fiduciary capacity if the acquiring insured depository institution or
company has sole discretionary
[[Page 37653]]
authority to exercise voting rights with respect to the shares.
(3) Exclusion for debts previously contracted. No insured
depository institution or company controls another insured depository
institution or company by virtue of its ownership or control of shares
acquired in securing or collecting a debt previously contracted in good
faith, until two years after the date of acquisition. The two-year
period may be extended at the discretion of the appropriate Federal
banking agency for up to three one-year periods.
(b) Controlling person means any person having control of an
insured depository institution and any company controlled by that
person.
(c) Leverage ratio means the ratio of Tier 1 capital to average
total consolidated assets, as calculated in accordance with the Board's
Capital Adequacy Guidelines for State Member Banks: Tier 1 Leverage
Measure (Appendix B to this part).
(d) Management fee means any payment of money or provision of any
other thing of value to a company or individual for the provision of
management services or advice to the bank, or related overhead
expenses, including payments related to supervisory, executive,
managerial, or policy making functions, other than compensation to an
individual in the individual's capacity as an officer or employee of
the bank.
(e) Risk-weighted assets means total weighted risk assets, as
calculated in accordance with the Board's Capital Adequacy Guidelines
for State Member Banks: Risk-Based Measure (Appendix A to this part).
(f) Tangible equity means the amount of core capital elements in
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part), plus the amount of outstanding
cumulative perpetual preferred stock (including related surplus), minus
all intangible assets except mortgage servicing rights to the extent
that the Board determines that mortgage servicing rights may be
included in calculating the bank's Tier 1 capital.
(g) Tier 1 capital means the amount of Tier 1 capital as defined in
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).
(h) Tier 1 risk-based capital ratio means the ratio of Tier 1
capital to weighted risk assets, as calculated in accordance with the
Board's Capital Adequacy Guidelines for State Member Banks: Risk-Based
Measure (Appendix A to this part).
(i) Total assets means quarterly average total assets as reported
in a bank's Report of Condition and Income (Call Report), minus
intangible assets as provided in the definition of tangible equity. At
its discretion the Federal Reserve may calculate total assets using a
bank's period-end assets rather than quarterly average assets.
(j) Total risk-based capital ratio means the ratio of qualifying
total capital to weighted risk assets, as calculated in accordance with
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).
Sec. 208.42 Notice of capital category.
(a) Effective date of determination of capital category. A member
bank shall be deemed to be within a given capital category for purposes
of section 38 of the FDI Act and this subpart as of the date the bank
is notified of, or is deemed to have notice of, its capital category,
pursuant to paragraph (b) of this section.
(b) Notice of capital category. A member bank shall be deemed to
have been notified of its capital levels and its capital category as of
the most recent date:
(1) A Report of Condition and Income (Call Report) is required to
be filed with the Board;
(2) A final report of examination is delivered to the bank; or
(3) Written notice is provided by the Board to the bank of its
capital category for purposes of section 38 of the FDI Act and this
subpart or that the bank's capital category has changed as provided in
paragraph (c) of this section or Sec. 208.43(c).
(c) Adjustments to reported capital levels and capital category--
(1) Notice of adjustment by bank. A member bank shall provide the Board
with written notice that an adjustment to the bank's capital category
may have occurred no later than 15 calendar days following the date
that any material event occurred that would cause the bank to be placed
in a lower capital category from the category assigned to the bank for
purposes of section 38 and this subpart on the basis of the bank's most
recent Call Report or report of examination.
(2) Determination by Board to change capital category. After
receiving notice pursuant to paragraph (c)(1) of this section, the
Board shall determine whether to change the capital category of the
bank and shall notify the bank of the Board's determination.
Sec. 208.43 Capital measures and capital category definitions.
(a) Capital measures. For purposes of section 38 and this subpart,
the relevant capital measures are:
(1) The total risk-based capital ratio;
(2) The Tier 1 risk-based capital ratio; and
(3) The leverage ratio.
(b) Capital categories. For purposes of section 38 and this
subpart, a member bank is deemed to be:
(1) ``Well capitalized'' if the bank:
(i) Has a total risk-based capital ratio of 10.0 percent or
greater; and
(ii) Has a Tier 1 risk-based capital ratio of 6.0 percent or
greater; and
(iii) Has a leverage ratio of 5.0 percent or greater; and
(iv) Is not subject to any written agreement, order, capital
directive, or prompt corrective action directive issued by the Board
pursuant to section 8 of the FDI Act, the International Lending
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act,
or any regulation thereunder, to meet and maintain a specific capital
level for any capital measure.
(2) ``Adequately capitalized'' if the bank:
(i) Has a total risk-based capital ratio of 8.0 percent or greater;
and
(ii) Has a Tier 1 risk-based capital ratio of 4.0 percent or
greater; and
(iii) Has:
(A) A leverage ratio of 4.0 percent or greater; or
(B) A leverage ratio of 3.0 percent or greater if the bank is rated
composite 1 under the CAMELS rating system in the most recent
examination of the bank and is not experiencing or anticipating
significant growth; and
(iv) Does not meet the definition of a ``well capitalized'' bank.
(3) ``Undercapitalized'' if the bank has:
(i) A total risk-based capital ratio that is less than 8.0 percent;
or
(ii) A Tier 1 risk-based capital ratio that is less than 4.0
percent; or
(iii) Except as provided in paragraph (b)(2)(iii)(B) of this
section, has a leverage ratio that is less than 4.0 percent; or
(iv) A leverage ratio that is less than 3.0 percent, if the bank is
rated composite 1 under the CAMELS rating system in the most recent
examination of the bank and is not experiencing or anticipating
significant growth.
(4) ``Significantly undercapitalized'' if the bank has:
(i) A total risk-based capital ratio that is less than 6.0 percent;
or
(ii) A Tier 1 risk-based capital ratio that is less than 3.0
percent; or
(iii) A leverage ratio that is less than 3.0 percent.
[[Page 37654]]
(5) ``Critically undercapitalized'' if the bank has a ratio of
tangible equity to total assets that is equal to or less than 2.0
percent.
(c) Reclassification based on supervisory criteria other than
capital. The Board may reclassify a well capitalized member bank as
adequately capitalized and may require an adequately-capitalized or an
undercapitalized member bank to comply with certain mandatory or
discretionary supervisory actions as if the bank were in the next lower
capital category (except that the Board may not reclassify a
significantly undercapitalized bank as critically undercapitalized)
(each of these actions are hereinafter referred to generally as
``reclassifications'') in the following circumstances:
(1) Unsafe or unsound condition. The Board has determined, after
notice and opportunity for hearing pursuant to 12 CFR 263.203, that the
bank is in unsafe or unsound condition; or
(2) Unsafe or unsound practice. The Board has determined, after
notice and opportunity for hearing pursuant to 12 CFR 263.203, that, in
the most recent examination of the bank, the bank received and has not
corrected, a less-than-satisfactory rating for any of the categories of
asset quality, management, earnings, liquidity, or sensitivity to
market risk.
Sec. 208.44 Capital restoration plans.
(a) Schedule for filing plan. (1) In general. A member bank shall
file a written capital restoration plan with the appropriate Reserve
Bank within 45 days of the date that the bank receives notice or is
deemed to have notice that the bank is undercapitalized, significantly
undercapitalized, or critically undercapitalized, unless the Board
notifies the bank in writing that the plan is to be filed within a
different period. An adequately capitalized bank that has been
required, pursuant to Sec. 208.43(c), to comply with supervisory
actions as if the bank were undercapitalized is not required to submit
a capital restoration plan solely by virtue of the reclassification.
(2) Additional capital restoration plans. Notwithstanding paragraph
(a)(1) of this section, a bank that has already submitted and is
operating under a capital restoration plan approved under section 38
and this subpart is not required to submit an additional capital
restoration plan based on a revised calculation of its capital measures
or a reclassification of the institution under Sec. 208.43(c), unless
the Board notifies the bank that it must submit a new or revised
capital plan. A bank that is notified that it must submit a new or
revised capital restoration plan shall file the plan in writing with
the appropriate Reserve Bank within 45 days of receiving such notice,
unless the Board notifies the bank in writing that the plan is to be
filed within a different period.
(b) Contents of plan. All financial data submitted in connection
with a capital restoration plan shall be prepared in accordance with
the instructions provided on the Call Report, unless the Board
instructs otherwise. The capital restoration plan shall include all of
the information required to be filed under section 38(e)(2) of the FDI
Act. A bank that is required to submit a capital restoration plan as
the result of a reclassification of the bank pursuant to Sec. 208.43(c)
shall include a description of the steps the bank will take to correct
the unsafe or unsound condition or practice. No plan shall be accepted
unless it includes any performance guarantee described in section
38(e)(2)(C) of that Act by each company that controls the bank.
(c) Review of capital restoration plans. Within 60 days after
receiving a capital restoration plan under this subpart, the Board
shall provide written notice to the bank of whether the plan has been
approved. The Board may extend the time within which notice regarding
approval of a plan shall be provided.
(d) Disapproval of capital plan. If the Board does not approve a
capital restoration plan, the bank shall submit a revised capital
restoration plan within the time specified by the Board. Upon receiving
notice that its capital restoration plan has not been approved, any
undercapitalized member bank (as defined in Sec. 208.43(b)(3)) shall be
subject to all of the provisions of section 38 and this subpart
applicable to significantly undercapitalized institutions. These
provisions shall be applicable until such time as the Board approves a
new or revised capital restoration plan submitted by the bank.
(e) Failure to submit capital restoration plan. A member bank that
is undercapitalized (as defined in Sec. 208.43(b)(3)) and that fails to
submit a written capital restoration plan within the period provided in
this section shall, upon the expiration of that period, be subject to
all of the provisions of section 38 and this subpart applicable to
significantly undercapitalized institutions.
(f) Failure to implement capital restoration plan. Any
undercapitalized member bank that fails in any material respect to
implement a capital restoration plan shall be subject to all of the
provisions of section 38 and this subpart applicable to significantly
undercapitalized institutions.
(g) Amendment of capital plan. A bank that has filed an approved
capital restoration plan may, after prior written notice to and
approval by the Board, amend the plan to reflect a change in
circumstance. Until such time as a proposed amendment has been
approved, the bank shall implement the capital restoration plan as
approved prior to the proposed amendment.
(h) Notice to FDIC. Within 45 days of the effective date of Board
approval of a capital restoration plan, or any amendment to a capital
restoration plan, the Board shall provide a copy of the plan or
amendment to the Federal Deposit Insurance Corporation.
(i) Performance guarantee by companies that control a bank. (1)
Limitation on Liability. (i) Amount limitation. The aggregate liability
under the guarantee provided under section 38 and this subpart for all
companies that control a specific member bank that is required to
submit a capital restoration plan under this subpart shall be limited
to the lesser of:
(A) An amount equal to 5.0 percent of the bank's total assets at
the time the bank was notified or deemed to have notice that the bank
was undercapitalized; or
(B) The amount necessary to restore the relevant capital measures
of the bank to the levels required for the bank to be classified as
adequately capitalized, as those capital measures and levels are
defined at the time that the bank initially fails to comply with a
capital restoration plan under this subpart.
(ii) Limit on duration. The guarantee and limit of liability under
section 38 and this subpart shall expire after the Board notifies the
bank that it has remained adequately capitalized for each of four
consecutive calendar quarters. The expiration or fulfillment by a
company of a guarantee of a capital restoration plan shall not limit
the liability of the company under any guarantee required or provided
in connection with any capital restoration plan filed by the same bank
after expiration of the first guarantee.
(iii) Collection on guarantee. Each company that controls a bank
shall be jointly and severally liable for the guarantee for such bank
as required under section 38 and this subpart, and the Board may
require and collect payment of the full amount of that guarantee from
any or all of the companies issuing the guarantee.
(2) Failure to provide guarantee. In the event that a bank that is
controlled by a company submits a capital
[[Page 37655]]
restoration plan that does not contain the guarantee required under
section 38(e)(2) of the FDI Act, the bank shall, upon submission of the
plan, be subject to the provisions of section 38 and this subpart that
are applicable to banks that have not submitted an acceptable capital
restoration plan.
(3) Failure to perform guarantee. Failure by any company that
controls a bank to perform fully its guarantee of any capital plan
shall constitute a material failure to implement the plan for purposes
of section 38(f) of the FDI Act. Upon such failure, the bank shall be
subject to the provisions of section 38 and this subpart that are
applicable to banks that have failed in a material respect to implement
a capital restoration plan.
Sec. 208.45 Mandatory and discretionary supervisory actions under
section 38.
(a) Mandatory supervisory actions. (1) Provisions applicable to all
banks. All member banks are subject to the restrictions contained in
section 38(d) of the FDI Act on payment of capital distributions and
management fees.
(2) Provisions applicable to undercapitalized, significantly
undercapitalized, and critically undercapitalized banks. Immediately
upon receiving notice or being deemed to have notice, as provided in
Sec. 208.42 or Sec. 208.44, that the bank is undercapitalized,
significantly undercapitalized, or critically undercapitalized, the
bank shall become subject to the provisions of section 38 of the FDI
Act:
(i) Restricting payment of capital distributions and management
fees (section 38(d));
(ii) Requiring that the Board monitor the condition of the bank
(section 38(e)(1));
(iii) Requiring submission of a capital restoration plan within the
schedule established in this subpart (section 38(e)(2));
(iv) Restricting the growth of the bank's assets (section
38(e)(3)); and
(v) Requiring prior approval of certain expansion proposals
(section 3(e)(4)).
(3) Additional provisions applicable to significantly
undercapitalized, and critically undercapitalized banks. In addition to
the provisions of section 38 of the FDI Act described in paragraph
(a)(2) of this section, immediately upon receiving notice or being
deemed to have notice, as provided in Sec. 208.42 or Sec. 208.44, that
the bank is significantly undercapitalized, or critically
undercapitalized, or that the bank is subject to the provisions
applicable to institutions that are significantly undercapitalized
because the bank failed to submit or implement in any material respect
an acceptable capital restoration plan, the bank shall become subject
to the provisions of section 38 of the FDI Act that restrict
compensation paid to senior executive officers of the institution
(section 38(f)(4)).
(4) Additional provisions applicable to critically undercapitalized
banks. In addition to the provisions of section 38 of the FDI Act
described in paragraphs (a)(2) and (a)(3) of this section, immediately
upon receiving notice or being deemed to have notice, as provided in
Sec. 208.32, that the bank is critically undercapitalized, the bank
shall become subject to the provisions of section 38 of the FDI Act:
(i) Restricting the activities of the bank (section 38(h)(1)); and
(ii) Restricting payments on subordinated debt of the bank (section
38(h)(2)).
(b) Discretionary supervisory actions. In taking any action under
section 38 that is within the Board's discretion to take in connection
with: A member bank that is deemed to be undercapitalized,
significantly undercapitalized, or critically undercapitalized, or has
been reclassified as undercapitalized, or significantly
undercapitalized; an officer or director of such bank; or a company
that controls such bank, the Board shall follow the procedures for
issuing directives under 12 CFR 263.202 and 263.204, unless otherwise
provided in section 38 or this subpart.
Subpart E--Real Estate Lending and Appraisal Standards
Sec. 208.50 Authority, purpose, and scope.
(a) Authority. Subpart E of Regulation H (12 CFR part 208, subpart
E) is issued by the Board of Governors of the Federal Reserve System
under section 304 of the Federal Deposit Insurance Corporation
Improvement Act of 1991, 12 U.S.C. 1828(o) and Title 11 of the
Financial Institutions Reform, Recovery, and Enforcement Act (12 U.S.C.
3331-3351).
(b) Purpose and scope. This subpart E prescribes standards for real
estate lending to be used by member banks in adopting internal real
estate lending policies. The standards applicable to appraisals
rendered in connection with federally related transactions entered into
by member banks are set forth in 12 CFR part 225, subpart G (Regulation
Y).
Sec. 208.51 Real estate lending standards.
(a) Adoption of written policies. Each state bank that is a member
of the Federal Reserve System shall adopt and maintain written policies
that establish appropriate limits and standards for extensions of
credit that are secured by liens on or interests in real estate, or
that are made for the purpose of financing permanent improvements to
real estate.
(b) Requirements of lending policies. (1) Real estate lending
policies adopted pursuant to this section shall be:
(i) Consistent with safe and sound banking practices;
(ii) Appropriate to the size of the institution and the nature and
scope of its operations; and
(iii) Reviewed and approved by the bank's board of directors at
least annually.
(2) The lending policies shall establish:
(i) Loan portfolio diversification standards;
(ii) Prudent underwriting standards, including loan-to-value
limits, that are clear and measurable;
(iii) Loan administration procedures for the bank's real estate
portfolio; and
(iv) Documentation, approval, and reporting requirements to monitor
compliance with the bank's real estate lending policies.
(c) Monitoring conditions. Each member bank shall monitor
conditions in the real estate market in its lending area to ensure that
its real estate lending policies continue to be appropriate for current
market conditions.
(d) Interagency guidelines. The real estate lending policies
adopted pursuant to this section should reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies (contained in
appendix C of this part) established by the Federal bank and thrift
supervisory agencies.
Subpart F--Miscellaneous Requirements
Sec. 208.60 Authority, purpose, and scope.
(a) Authority. Subpart F of Regulation H (12 CFR part 208, subpart
F) is issued by the Board of Governors of the Federal Reserve System
under sections 9, 11, 21, 25 and 25A of the Federal Reserve Act (12
U.S.C. 321-338a, 248(a), 248(c), 481-486, 601 and 611), section 7 of
the International Banking Act (12 U.S.C. 3105), section 3 of the Bank
Protection Act of 1968 (12 U.S.C. 1882), sections 1814, 1816, 1818,
1831o, 1831p-1 and 1831r-1 of the FDI Act (12 U.S.C. 1814, 1816, 1818,
1831o, 1831p-1 and 1831r-1), and the Bank Secrecy Act (31 U.S.C. 5318).
(b) Purpose and scope. This subpart F describes a member bank's
obligation to implement security procedures to discourage certain
crimes, to file suspicious activity reports, and to comply with the
Bank Secrecy Act's
[[Page 37656]]
requirements for reporting and recordkeeping of currency and foreign
transactions. It also describes the examination schedule for certain
small insured member banks.
Sec. 208.61 Bank security procedures.
(a) Authority, purpose, and scope. Pursuant to section 3 of the
Bank Protection Act of 1968 (12 U.S.C. 1882), member banks are required
to adopt appropriate security procedures to discourage robberies,
burglaries, and larcenies, and to assist in the identification and
prosecution of persons who commit such acts. It is the responsibility
of the member bank's board of directors to comply with the provisions
of this section and ensure that a written security program for the
bank's main office and branches is developed and implemented.
(b) Designation of security officer. Upon becoming a member of the
Federal Reserve System, a member bank's board of directors shall
designate a security officer who shall have the authority, subject to
the approval of the board of directors, to develop, within a reasonable
time, but no later than 180 days, and to administer a written security
program for each banking office.
(c) Security program. (1) The security program shall:
(i) Establish procedures for opening and closing for business and
for the safekeeping of all currency, negotiable securities, and similar
valuables at all times;
(ii) Establish procedures that will assist in identifying persons
committing crimes against the institution and that will preserve
evidence that may aid in their identification and prosecution. Such
procedures may include, but are not limited to: maintaining a camera
that records activity in the banking office; using identification
devices, such as prerecorded serial-numbered bills, or chemical and
electronic devices; and retaining a record of any robbery, burglary, or
larceny committed against the bank;
(iii) Provide for initial and periodic training of officers and
employees in their responsibilities under the security program and in
proper employee conduct during and after a burglary, robbery, or
larceny; and
(iv) Provide for selecting, testing, operating, and maintaining
appropriate security devices, as specified in paragraph (c)(2) of this
section.
(2) Security devices. Each member bank shall have, at a minimum,
the following security devices:
(i) A means of protecting cash and other liquid assets, such as a
vault, safe, or other secure space;
(ii) A lighting system for illuminating, during the hours of
darkness, the area around the vault, if the vault is visible from
outside the banking office;
(iii) Tamper-resistant locks on exterior doors and exterior windows
that may be opened;
(iv) An alarm system or other appropriate device for promptly
notifying the nearest responsible law enforcement officers of an
attempted or perpetrated robbery or burglary; and
(v) Such other devices as the security officer determines to be
appropriate, taking into consideration: the incidence of crimes against
financial institutions in the area; the amount of currency and other
valuables exposed to robbery, burglary, or larceny; the distance of the
banking office from the nearest responsible law enforcement officers;
the cost of the security devices; other security measures in effect at
the banking office; and the physical characteristics of the structure
of the banking office and its surroundings.
(d) Annual reports. The security officer for each member bank shall
report at least annually to the bank's board of directors on the
implementation, administration, and effectiveness of the security
program.
(e) Reserve Banks. Each Reserve Bank shall develop and maintain a
written security program for its main office and branches subject to
review and approval of the Board.
Sec. 208.62 Suspicious activity reports.
(a) Purpose. This section ensures that a member bank files a
Suspicious Activity Report when it detects a known or suspected
violation of Federal law, or a suspicious transaction related to a
money laundering activity or a violation of the Bank Secrecy Act. This
section applies to all member banks.
(b) Definitions. For the purposes of this section:
(1) FinCEN means the Financial Crimes Enforcement Network of the
Department of the Treasury.
(2) Institution-affiliated party means any institution-affiliated
party as that term is defined in 12 U.S.C. 1786(r), or 1813(u) and
1818(b) (3), (4) or (5).
(3) SAR means a Suspicious Activity Report on the form prescribed
by the Board.
(c) SARs required. A member bank shall file a SAR with the
appropriate Federal law enforcement agencies and the Department of the
Treasury in accordance with the form's instructions by sending a
completed SAR to FinCEN in the following circumstances:
(1) Insider abuse involving any amount. Whenever the member bank
detects any known or suspected Federal criminal violation, or pattern
of criminal violations, committed or attempted against the bank or
involving a transaction or transactions conducted through the bank,
where the bank believes that it was either an actual or potential
victim of a criminal violation, or series of criminal violations, or
that the bank was used to facilitate a criminal transaction, and the
bank has a substantial basis for identifying one of its directors,
officers, employees, agents or other institution-affiliated parties as
having committed or aided in the commission of a criminal act
regardless of the amount involved in the violation.
(2) Violations aggregating $5,000 or more where a suspect can be
identified. Whenever the member bank detects any known or suspected
Federal criminal violation, or pattern of criminal violations,
committed or attempted against the bank or involving a transaction or
transactions conducted through the bank and involving or aggregating
$5,000 or more in funds or other assets, where the bank believes that
it was either an actual or potential victim of a criminal violation, or
series of criminal violations, or that the bank was used to facilitate
a criminal transaction, and the bank has a substantial basis for
identifying a possible suspect or group of suspects. If it is
determined prior to filing this report that the identified suspect or
group of suspects has used an ``alias,'' then information regarding the
true identity of the suspect or group of suspects, as well as alias
identifiers, such as drivers' licenses or social security numbers,
addresses and telephone numbers, must be reported.
(3) Violations aggregating $25,000 or more regardless of a
potential suspect. Whenever the member bank detects any known or
suspected Federal criminal violation, or pattern of criminal
violations, committed or attempted against the bank or involving a
transaction or transactions conducted through the bank and involving or
aggregating $25,000 or more in funds or other assets, where the bank
believes that it was either an actual or potential victim of a criminal
violation, or series of criminal violations, or that the bank was used
to facilitate a criminal transaction, even though there is no
substantial basis for identifying a possible suspect or group of
suspects.
(4) Transactions aggregating $5,000 or more that involve potential
money laundering or violations of the Bank Secrecy Act. Any transaction
(which for purposes of this paragraph (c)(4) means
[[Page 37657]]
a deposit, withdrawal, transfer between accounts, exchange of currency,
loan, extension of credit, purchase or sale of any stock, bond,
certificate of deposit, or other monetary instrument or investment
security, or any other payment, transfer, or delivery by, through, or
to a financial institution, by whatever means effected) conducted or
attempted by, at or through the member bank and involving or
aggregating $5,000 or more in funds or other assets, if the bank knows,
suspects, or has reason to suspect that:
(i) The transaction involves funds derived from illegal activities
or is intended or conducted in order to hide or disguise funds or
assets derived from illegal activities (including, without limitation,
the ownership, nature, source, location, or control of such funds or
assets) as part of a plan to violate or evade any law or regulation or
to avoid any transaction reporting requirement under federal law;
(ii) The transaction is designed to evade any regulations
promulgated under the Bank Secrecy Act; or
(iii) The transaction has no business or apparent lawful purpose or
is not the sort in which the particular customer would normally be
expected to engage, and the bank knows of no reasonable explanation for
the transaction after examining the available facts, including the
background and possible purpose of the transaction.
(d) Time for reporting. A member bank is required to file a SAR no
later than 30 calendar days after the date of initial detection of
facts that may constitute a basis for filing a SAR. If no suspect was
identified on the date of detection of the incident requiring the
filing, a member bank may delay filing a SAR for an additional 30
calendar days to identify a suspect. In no case shall reporting be
delayed more than 60 calendar days after the date of initial detection
of a reportable transaction. In situations involving violations
requiring immediate attention, such as when a reportable violation is
on-going, the financial institution shall immediately notify, by
telephone, an appropriate law enforcement authority and the Board in
addition to filing a timely SAR.
(e) Reports to state and local authorities. Member banks are
encouraged to file a copy of the SAR with state and local law
enforcement agencies where appropriate.
(f) Exceptions. (1) A member bank need not file a SAR for a robbery
or burglary committed or attempted that is reported to appropriate law
enforcement authorities.
(2) A member bank need not file a SAR for lost, missing,
counterfeit, or stolen securities if it files a report pursuant to the
reporting requirements of 17 CFR 240.17f-1.
(g) Retention of records. A member bank shall maintain a copy of
any SAR filed and the original or business record equivalent of any
supporting documentation for a period of five years from the date of
the filing of the SAR. Supporting documentation shall be identified and
maintained by the bank as such, and shall be deemed to have been filed
with the SAR. A member bank must make all supporting documentation
available to appropriate law enforcement agencies upon request.
(h) Notification to board of directors. The management of a member
bank shall promptly notify its board of directors, or a committee
thereof, of any report filed pursuant to this section.
(i) Compliance. Failure to file a SAR in accordance with this
section and the instructions may subject the member bank, its
directors, officers, employees, agents, or other institution affiliated
parties to supervisory action.
(j) Confidentiality of SARs. SARs are confidential. Any member bank
subpoenaed or otherwise requested to disclose a SAR or the information
contained in a SAR shall decline to produce the SAR or to provide any
information that would disclose that a SAR has been prepared or filed
citing this section, applicable law (e.g., 31 U.S.C. 5318(g)), or both,
and notify the Board.
(k) Safe harbor. The safe harbor provisions of 31 U.S.C. 5318(g),
which exempts any member bank that makes a disclosure of any possible
violation of law or regulation from liability under any law or
regulation of the United States, or any constitution, law or regulation
of any state or political subdivision, covers all reports of suspected
or known criminal violations and suspicious activities to law
enforcement and financial institution supervisory authorities,
including supporting documentation, regardless of whether such reports
are filed pursuant to this section or are filed on a voluntary basis.
Sec. 208.63 Procedures for monitoring Bank Secrecy Act compliance.
(a) Purpose. This section is issued to assure that all state member
banks establish and maintain procedures reasonably designed to assure
and monitor their compliance with the provisions of the Bank Secrecy
Act (31 U.S.C. 5311, et seq.) and the implementing regulations
promulgated thereunder by the Department of Treasury at 31 CFR part
103, requiring recordkeeping and reporting of currency transactions.
(b) Establishment of compliance program. On or before April 27,
1987, each bank shall develop and provide for the continued
administration of a program reasonably designed to assure and monitor
compliance with the recordkeeping and reporting requirements set forth
in the Bank Secrecy Act (31 U.S.C. 5311, et seq.) and the implementing
regulations promulgated thereunder by the Department of Treasury at 31
CFR part 103. The compliance program shall be reduced to writing,
approved by the board of directors, and noted in the minutes.
(c) Contents of compliance program. The compliance program shall,
at a minimum:
(1) Provide for a system of internal controls to assure ongoing
compliance;
(2) Provide for independent testing for compliance to be conducted
by bank personnel or by an outside party;
(3) Designate an individual or individuals responsible for
coordinating and monitoring day-to-day compliance; and
(4) Provide training for appropriate personnel.
Sec. 208.64 Frequency of examination.
(a) General. The Federal Reserve examines insured member banks
pursuant to authority conferred by 12 U.S.C. 325 and the requirements
of 12 U.S.C. 1820(d). The Federal Reserve is required to conduct a
full-scope, on-site examination of every insured member bank at least
once during each 12-month period.
(b) 18-month rule for certain small institutions. The Federal
Reserve may conduct a full-scope, on-site examination of an insured
member bank at least once during each 18-month period, rather than each
12-month period as provided in paragraph (a) of this section, if the
following conditions are satisfied:
(1) The bank has total assets of $250 million or less;
(2) The bank is well capitalized as defined in subpart D of this
part (Sec. 208.43);
(3) At the most recent examination conducted by either the Federal
Reserve or applicable State banking agency, the Federal Reserve found
the bank to be well managed;
(4) At the most recent examination conducted by either the Federal
Reserve or applicable State banking agency, the Federal Reserve
assigned the bank a CAMELS rating of 1 or 2;
(5) The bank currently is not subject to a formal enforcement
proceeding or
[[Page 37658]]
order by the FDIC, OCC, or Federal Reserve System; and
(6) No person acquired control of the bank during the preceding 12-
month period in which a full-scope, on-site examination would have been
required but for this section.
(c) Authority to conduct more frequent examinations. This section
does not limit the authority of the Federal Reserve to examine any
member bank as frequently as the agency deems necessary.
Subpart G--Interpretations
Sec. 208.100 Sale of bank's money orders off premises as establishment
of branch office.
(a) The Board of Governors has been asked to consider whether the
appointment by a member bank of an agent to sell the bank's money
orders, at a location other than the premises of the bank, constitutes
the establishment of a branch office.
(b) Section 5155 of the Revised Statutes (12 U.S.C. 36), which is
also applicable to member banks, defines the term branch as including
``any branch bank, branch office, branch agency, additional office, or
any branch place of business * * * at which deposits are received, or
checks paid, or money lent.'' The basic question is whether the sale of
a bank's money orders by an agent amounts to the receipt of deposits at
a branch place of business within the meaning of this statute.
(c) Money orders are classified as deposits for certain purposes.
However, they bear a strong resemblance to traveler's checks that are
issued by banks and sold off premises. In both cases, the purchaser
does not intend to establish a deposit account in the bank, although a
liability on the bank's part is created. Even though they result in a
deposit liability, the Board is of the opinion that the issuance of a
bank's money orders by an authorized agent does not involve the receipt
of deposits at a ``branch place of business'' and accordingly does not
require the Board's permission to establish a branch.
Sec. 208.101 Obligations concerning institutional customers.
(a) As a result of broadened authority provided by the Government
Securities Act Amendments of 1993 (15 U.S.C. 78o-3 and 78o-5), the
Board is adopting sales practice rules for the government securities
market, a market with a particularly broad institutional component.
Accordingly, the Board believes it is appropriate to provide further
guidance to banks on their suitability obligations when making
recommendations to institutional customers.
(b) The Board's Suitability Rule, Sec. 208.37(d), is fundamental to
fair dealing and is intended to promote ethical sales practices and
high standards of professional conduct. Banks' responsibilities include
having a reasonable basis for recommending a particular security or
strategy, as well as having reasonable grounds for believing the
recommendation is suitable for the customer to whom it is made. Banks
are expected to meet the same high standards of competence,
professionalism, and good faith regardless of the financial
circumstances of the customer.
(c) In recommending to a customer the purchase, sale, or exchange
of any government security, the bank shall have reasonable grounds for
believing that the recommendation is suitable for the customer upon the
basis of the facts, if any, disclosed by the customer as to the
customer's other security holdings and financial situation and needs.
(d) The interpretation in this section concerns only the manner in
which a bank determines that a recommendation is suitable for a
particular institutional customer. The manner in which a bank fulfills
this suitability obligation will vary, depending on the nature of the
customer and the specific transaction. Accordingly, the interpretation
in this section deals only with guidance regarding how a bank may
fulfill customer-specific suitability obligations under
Sec. 208.37(d).7
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\7\ The interpretation in this section does not address the
obligation related to suitability that requires that a bank have''*
* * a `reasonable basis' to believe that the recommendation could be
suitable for at least some customers.'' In the Matter of the
Application of F.J. Kaufman and Company of Virginia and Frederick J.
Kaufman, Jr., 50 SEC 164 (1989).
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(e) While it is difficult to define in advance the scope of a
bank's suitability obligation with respect to a specific institutional
customer transaction recommended by a bank, the Board has identified
certain factors that may be relevant when considering compliance with
Sec. 208.37(d). These factors are not intended to be requirements or
the only factors to be considered but are offered merely as guidance in
determining the scope of a bank's suitability obligations.
(f) The two most important considerations in determining the scope
of a bank's suitability obligations in making recommendations to an
institutional customer are the customer's capability to evaluate
investment risk independently and the extent to which the customer is
exercising independent judgement in evaluating a bank's recommendation.
A bank must determine, based on the information available to it, the
customer's capability to evaluate investment risk. In some cases, the
bank may conclude that the customer is not capable of making
independent investment decisions in general. In other cases, the
institutional customer may have general capability, but may not be able
to understand a particular type of instrument or its risk. This is more
likely to arise with relatively new types of instruments, or those with
significantly different risk or volatility characteristics than other
investments generally made by the institution. If a customer is either
generally not capable of evaluating investment risk or lacks sufficient
capability to evaluate the particular product, the scope of a bank's
customer-specific obligations under Sec. 208.37(d) would not be
diminished by the fact that the bank was dealing with an institutional
customer. On the other hand, the fact that a customer initially needed
help understanding a potential investment need not necessarily imply
that the customer did not ultimately develop an understanding and make
an independent investment decision.
(g) A bank may conclude that a customer is exercising independent
judgement if the customer's investment decision will be based on its
own independent assessment of the opportunities and risks presented by
a potential investment, market factors and other investment
considerations. Where the bank has reasonable grounds for concluding
that the institutional customer is making independent investment
decisions and is capable of independently evaluating investment risk,
then a bank's obligations under Sec. 208.25(d) for a particular
customer are fulfilled.8 Where a customer has delegated
decision-making authority to an agent, such as an investment advisor or
a bank trust department, the interpretation in this section shall be
applied to the agent.
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\8\ See footnote 7 in paragraph (d) of this section.
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(h) A determination of capability to evaluate investment risk
independently will depend on an examination of the customer's
capability to make its own investment decisions, including the
resources available to the customer to make informed decisions.
Relevant considerations could include:
(1) The use of one or more consultants, investment advisers, or
bank trust departments;
(2) The general level of experience of the institutional customer
in financial markets and specific experience with the type of
instruments under consideration;
[[Page 37659]]
(3) The customer's ability to understand the economic features of
the security involved;
(4) The customer's ability to independently evaluate how market
developments would affect the security; and
(5) The complexity of the security or securities involved.
(i) A determination that a customer is making independent
investment decisions will depend on the nature of the relationship that
exists between the bank and the customer. Relevant considerations could
include:
(1) Any written or oral understanding that exists between the bank
and the customer regarding the nature of the relationship between the
bank and the customer and the services to be rendered by the bank;
(2) The presence or absence of a pattern of acceptance of the
bank's recommendations;
(3) The use by the customer of ideas, suggestions, market views and
information obtained from other government securities brokers or
dealers or market professionals, particularly those relating to the
same type of securities; and
(4) The extent to which the bank has received from the customer
current comprehensive portfolio information in connection with
discussing recommended transactions or has not been provided important
information regarding its portfolio or investment objectives.
(j) Banks are reminded that these factors are merely guidelines
that will be utilized to determine whether a bank has fulfilled its
suitability obligation with respect to a specific institutional
customer transaction and that the inclusion or absence of any of these
factors is not dispositive of the determination of suitability. Such a
determination can only be made on a case-by-case basis taking into
consideration all the facts and circumstances of a particular bank/
customer relationship, assessed in the context of a particular
transaction.
(k) For purposes of the interpretation in this section, an
institutional customer shall be any entity other than a natural person.
In determining the applicability of the interpretation in this section
to an institutional customer, the Board will consider the dollar value
of the securities that the institutional customer has in its portfolio
and/or under management. While the interpretation in this section is
potentially applicable to any institutional customer, the guidance
contained in this section is more appropriately applied to an
institutional customer with at least $10 million invested in securities
in the aggregate in its portfolio and/or under management.
PART 250--MISCELLANEOUS INTERPRETATIONS
1. The authority citation for part 250 continues to read as
follows:
Authority: 12 U.S.C. 78, 248(i) and 371c(e).
Secs. 250.120 through 250.123, 250.140, 250.161, 250.162 [Removed]
2. Sections 250.120, 250.121, 250.122, 250.123, 250.140, 250.161,
250.162 are removed.
Secs. 250.300 through 250.302 [Removed]
3. The undesignated center heading preceding Sec. 250.300 and
Secs. 250.300 through 250.302 are removed.
By order of the Board of Governors of the Federal Reserve
System, July 6, 1998
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-18274 Filed 7-10-98; 8:45 am]
BILLING CODE 6210-01-P
