98-31152. Activities of Insured State Banks and Insured Savings Associations  

  • [Federal Register Volume 63, Number 230 (Tuesday, December 1, 1998)]
    [Rules and Regulations]
    [Pages 66276-66338]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 98-31152]
    
    
    
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    Part III
    
    
    
    
    
    Federal Deposit Insurance Corporation
    
    
    
    
    
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    12 CFR Parts 303, 337, and 362
    
    
    
    Activities of Insured State Banks and Insured Savings Associations; 
    Proposed and Final Rules
    
    Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 / 
    Rules and Regulations
    
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    FEDERAL DEPOSIT INSURANCE CORPORATION
    
    12 CFR Parts 303, 337 and 362
    
    RIN 3064-AC12
    
    
    Activities of Insured State Banks and Insured Savings 
    Associations
    
    AGENCY: Federal Deposit Insurance Corporation (FDIC).
    
    ACTION: Final rule.
    
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    SUMMARY: As part of the FDIC's systematic review of its regulations and 
    written policies under section 303(a) of the Riegle Community 
    Development and Regulatory Improvement Act of 1994 (CDRI), the FDIC has 
    revised and consolidated its rules and regulations governing activities 
    and investments of insured state banks and insured savings 
    associations. The rule implements sections 24, 28, and 18(m) of the 
    Federal Deposit Insurance Act, and also establishes certain safety and 
    soundness standards pursuant to the FDIC's authority under section 8. 
    The FDIC's final rule establishes a number of new exceptions and allows 
    institutions to conduct certain activities after providing the FDIC 
    with notice rather than filing an application. Subject to appropriate 
    separations and limitations, the activities that may be conducted 
    through a majority-owned subsidiary under these expedited notice 
    processing criteria are real estate investment and securities 
    underwriting. The FDIC combined its regulations governing the 
    activities and investments of insured state banks with those governing 
    insured savings associations. In addition, the FDIC's final rule 
    updates its regulations governing the safety and soundness of 
    securities activities of subsidiaries and affiliates of insured state 
    nonmember banks. The FDIC's final rule modernizes this group of 
    regulations and harmonizes the provisions governing activities that are 
    not permissible for national banks with those governing the securities 
    underwriting and distribution activities of subsidiaries of state 
    nonmember banks. The FDIC's final rule makes a number of substantive 
    changes and amends the regulations by deleting obsolete provisions, 
    rewriting the regulatory text to make it more readable, conforming the 
    treatment of state banks and savings associations to the extent 
    possible given the underlying statutory and regulatory scheme governing 
    the different charters. The FDIC's final rule also conforms most of the 
    disclosures required under the current regulation to the Interagency 
    Statement on the Retail Sale of Nondeposit Investment Products.
    
    EFFECTIVE DATE: January 1, 1999.
    
    FOR FURTHER INFORMATION CONTACT: Curtis Vaughn, Examination Specialist, 
    (202/898-6759), Division of Supervision; Linda L. Stamp, Counsel, (202/
    898-7310) or Jamey Basham, Counsel, (202/898-7265), Legal Division, 
    FDIC, 550 17th Street, N.W., Washington, D.C. 20429.
    
    SUPPLEMENTARY INFORMATION:
    
    I. Background
    
        Section 303 of the Riegle Community Development and Regulatory 
    Improvement Act of 1994 (RCDRIA) required that the FDIC review its 
    regulations for the purpose of streamlining those regulations, reducing 
    any unnecessary costs and eliminating unwarranted constraints on credit 
    availability while faithfully implementing statutory requirements. 
    Pursuant to that statutory direction, the FDIC reviewed part 362 
    ``Activities and Investments of Insured State Banks,'' subpart G of 
    Part 303, effective October 1, 1998, (formerly Sec. 303.13) ``Filings 
    by Savings Associations'', and Sec. 337.4 ``Securities Activities of 
    Subsidiaries of Insured State Banks: Bank Transactions with Affiliated 
    Securities Companies'', and proposed making a number of changes to 
    those regulations. That proposal is found in the September 12, 1997, 
    issue of the Federal Register at 62 FR 47969.
        The FDIC's final rule restructures existing part 362, placing the 
    substance of the text of the current regulation into new subpart A. 
    Subpart A addresses the Activities of Insured State Banks implementing 
    section 24 of the Federal Deposit Insurance Act (FDI Act). 12 U.S.C. 
    1831a. Section 24 restricts and prohibits insured state banks and their 
    subsidiaries from engaging in activities and investments of a type that 
    are not permissible for national banks and their subsidiaries. Through 
    this new final rule, the FDIC introduces a new streamlined notice 
    processing concept for insured state nonmember banks that want to 
    engage in certain activities that are impermissible for national banks 
    and their subsidiaries.
        Due to the experience that the FDIC has gained in reviewing 
    applications from insured state nonmember banks since the enactment of 
    section 24, the FDIC has standardized the eligibility criteria and 
    conditions for two activities. This mechanism gives insured state 
    nonmember banks a level of certainty that has been lacking for banks 
    that want to diversify their earnings and maintain their 
    competitiveness by investing in subsidiaries that engage in activities 
    not permissible for national banks. This framework sets forth the 
    eligibility criteria and conditions for majority-owned subsidiaries of 
    insured state nonmember banks to engage in real estate investment and 
    securities underwriting. This framework allows insured state nonmember 
    banks to proceed with their business plans in these areas with relative 
    certainty that the FDIC will consent to the execution of their plans 
    and with assurance that consent will be forthcoming on a predictable 
    schedule. This framework allows the insured state nonmember banks to be 
    creative and innovative in their business plan within the structure 
    appropriate to the activities being undertaken. The FDIC hopes that 
    this rule will assist the insured state nonmember banks as they 
    progress into the competitive financial environment of the 21st century 
    in which they operate their business.
        The FDIC's final rule moves the part of the FDIC's regulations 
    governing securities underwriting not permissible for national banks 
    (currently at 12 CFR 337.4) into subpart A of part 362. Although the 
    proposal contemplated that the entire regulation, Securities Activities 
    of Insured State Nonmember Banks, found in Sec. 337.4 of this chapter 
    would be removed and reserved, we have postponed that action while 
    redeveloping some of the safety and soundness criteria that govern 
    insured state bank subsidiaries that engage in the public sale, 
    distribution or underwriting of securities and other activities that 
    are not permissible for a national bank but that are permissible for 
    national bank subsidiaries. The redeveloped regulatory language that 
    will amend subpart B of this regulation is published as a proposed rule 
    elsewhere in this issue of the Federal Register for further public 
    comment. During the period that Sec. 337.4 still exists, where 
    activities are covered by both Sec. 337.4 and this final rule, we have 
    provided relief from the requirements of Sec. 337.4 in this rulemaking.
        For those activities that were covered under Sec. 337.4 and are now 
    covered under this part 362, we have attempted to modernize the 
    regulations governing those activities by updating the requirements, 
    revising the regulations by deleting obsolete provisions, rewriting the 
    regulatory text to make it more readable, removing a number of the 
    obsolete current restrictions on those activities, and removing the 
    disclosures required under the current regulation.
    
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        Safety and Soundness Rules Governing Insured State Nonmember Banks 
    is found in the new subpart B. Subpart B establishes modern standards 
    for insured state nonmember banks to conduct real estate investment 
    activities through a subsidiary, and for those insured state nonmember 
    banks that are not affiliated with a bank holding company (nonbank 
    banks), to conduct securities activities in an affiliated organization. 
    The existing restrictions on these securities activities are found in 
    Sec. 337.4 of this chapter.
        Subpart G of part 303, effective October 1, 1998, (formerly 
    Sec. 303.13) of this chapter which relates to activities and filings by 
    savings associations is revised in a number of ways. First, the 
    substantive portions applicable to state savings associations of 
    subpart G are placed in new subpart C of part 362. The substantive 
    requirements applicable to all savings associations when Acquiring, 
    Establishing, or Conducting New Activities through a Subsidiary are 
    moved to new subpart D.
        In the proposal, subpart E contained the revised application and 
    notice procedures as well as delegations of authority for insured state 
    banks, and subpart F contained the revised application and notice 
    procedures as well as delegations of authority for insured savings 
    associations. On a parallel track, the FDIC has completed its revision 
    of part 303 of the FDIC's rules and regulations. Part 303 contains 
    substantially all of the FDIC's applications procedures and delegations 
    of authority. Subparts G and H of part 303 were designated as the place 
    where the text of subparts E and F of our proposed rule would be 
    located. As a part of the part 303 review process and for ease of 
    reference, the FDIC is removing the applications procedures relating to 
    activities and investments of insured state banks from part 362 and 
    placing them in subpart G of part 303. The procedures applicable to 
    insured savings associations are consolidated in subpart H of part 303. 
    These subparts are published as an amendment to part 303 as a part of 
    this final regulation.
        Part 362 of the FDIC's regulations implements the provisions of 
    section 24 of the FDI Act. Section 24 was added to the FDI Act by the 
    Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). 
    With certain exceptions, section 24 limits the direct equity 
    investments of state chartered insured banks to equity investments of a 
    type permissible for national banks. Section 24 prohibits an insured 
    state bank from directly, or indirectly through a subsidiary, engaging 
    as principal in any activity that is not permissible for a national 
    bank unless the bank meets its capital requirements and the FDIC 
    determines that the activity will not pose a significant risk to the 
    appropriate deposit insurance fund. In addition, section 24 prohibits 
    the subsidiary of an insured state bank from directly or indirectly 
    engaging as principal in any activity that is not permissible for a 
    national bank subsidiary unless the bank meets its capital requirements 
    and the FDIC determines that the activity will not pose a significant 
    risk to the appropriate deposit insurance fund. The FDIC may make such 
    determinations by regulation or order. The statute requires 
    institutions that held equity investments not conforming to the new 
    requirements to divest no later than December 19, 1996. The statute 
    also requires that banks file certain notices with the FDIC concerning 
    grandfathered investments.
        Part 362 was adopted in two stages. The provisions of the current 
    regulation concerning equity investments appeared in the Federal 
    Register on November 9, 1992, at 57 FR 53234. The provisions of the 
    current regulation concerning activities of insured state banks and 
    their majority-owned subsidiaries appeared in the Federal Register on 
    December 8, 1993, at 58 FR 64455.
        Subpart G of Part 303, effective October 1, 1998, (formerly 
    Sec. 303.13) of the FDIC's regulations (12 CFR 303.140) implements FDI 
    Act sections 28 (12 U.S.C. 1831e) and 18(m) (12 U.S.C. 1828(m)). Both 
    sections were added to the FDI Act by the Financial Institutions 
    Reform, Recovery, and Enforcement Act of 1989 (FIRREA). While section 
    28 of the FDI Act and section 24 of the FDI Act are similar, there are 
    a number of fundamental differences between the two provisions which 
    caused the implementing regulations to differ in some respects.
        Section 18(m) of the FDI Act requires state and federal savings 
    associations to provide the FDIC with notice 30 days before 
    establishing or acquiring a subsidiary or engaging in any new activity 
    through a subsidiary. Section 28 governs the activities and equity 
    investments of state savings associations and provides that no state 
    savings association may engage as principal in any activity of a type 
    or in an amount that is impermissible for a federal savings association 
    unless the FDIC determines that the activity will not pose a 
    significant risk to the affected deposit insurance fund and the savings 
    association is in compliance with the fully phased-in capital 
    requirements prescribed under section 5(t) of the Home Owners' Loan Act 
    (12 U.S.C. 1464(t)) (HOLA). Except for its investment in service 
    corporations, a state savings association is prohibited from acquiring 
    or retaining any equity investment that is not permissible for a 
    federal savings association. A state savings association may acquire or 
    retain an investment in a service corporation of a type or in an amount 
    not permissible for a federal savings association if the FDIC 
    determines that neither the amount invested in the service corporation 
    nor the activities of the service corporation pose a significant risk 
    to the affected deposit insurance fund and the savings association 
    continues to meet the fully phased-in capital requirements. A savings 
    association was required to divest itself of prohibited equity 
    investments no later than July 1, 1994. Section 28 also prohibits state 
    and federal savings associations from acquiring any corporate debt 
    security that is not of investment grade (commonly known as ``junk 
    bonds'').
        Section 303.13 of the FDIC's regulations was adopted as an interim 
    final rule on December 29, 1989 (54 FR 53548). The FDIC revised the 
    rule after reviewing the comments and the regulation as adopted 
    appeared in the Federal Register on September 17, 1990 (55 FR 38042). 
    The regulation established application and notice procedures governing 
    requests by a state savings association to directly, or through a 
    service corporation, engage in activities that are not permissible for 
    a federal savings association; the intent of a state savings 
    association to engage in permissible activities in an amount exceeding 
    that permissible for a federal savings association; or the intent of a 
    state savings association to divest corporate debt securities not of 
    investment grade. The regulation also established procedures to give 
    prior notice for the establishment or acquisition of a subsidiary or 
    the conduct of new activities through a subsidiary. Section 303.13 was 
    recently moved with stylistic, but not substantive changes, to subpart 
    G of part 303, effective October 1, 1998 of the FDIC's regulations.
        Section 337.4 of the FDIC's regulations (12 CFR 337.4) governs 
    securities activities of subsidiaries of insured state nonmember banks 
    as well as transactions between insured state nonmember banks and their 
    securities subsidiaries and affiliates. The regulation was adopted in 
    1984 (49 FR 46723) and is designed to promote the safety and soundness 
    of insured state nonmember banks that have subsidiaries which engage in 
    securities activities, including activities that are impermissible for 
    banks directly under section 16 of the Banking Act of 1933
    
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    (12 U.S.C. section 24 (seventh)), commonly known as the Glass-Steagall 
    Act. For those subsidiaries that engage in underwriting activities that 
    are prohibited for a bank, the regulation requires that these 
    subsidiaries qualify as bona fide subsidiaries, establishes transaction 
    restrictions between a bank and its subsidiaries or other affiliates 
    that engage in such securities activities, requires that an insured 
    state nonmember bank give prior notice to the FDIC before establishing 
    or acquiring any securities subsidiary, requires that disclosures be 
    provided to securities customers in certain instances, and requires 
    that a bank's investment in such a securities subsidiary be deducted 
    from the bank's capital.
        On August 23, 1996, the FDIC published a notice of proposed 
    rulemaking (61 FR 43486, August 23, 1996) (August 1996 proposed rule) 
    to amend part 362. Under that proposed rule, a notice procedure would 
    have replaced the application currently required in the case of real 
    estate, life insurance, and annuity investment activities provided 
    certain conditions and restrictions were met. The proposed rule set 
    forth notice processing procedures for real estate, life insurance 
    policies, and annuity contract investments for well-capitalized, well-
    managed insured state banks. While the August 1996 proposed rule would 
    have amended existing part 362, this new final rule replaces existing 
    part 362.
        After considering the comments to the August 1996 proposed rule and 
    reconsidering the issues underlying the current regulation, the FDIC 
    withdrew that proposed rule in favor of the more comprehensive approach 
    presently adopted. One major change was the elimination of a life 
    insurance policy and annuity contract investment notice due to 
    intervening guidance provided by the Office of the Comptroller of the 
    Currency (OCC) that appears to eliminate the necessity for an 
    application with respect to virtually all of the life insurance and 
    annuity investments received by the FDIC in the past. While section 24 
    and the part 362 application process would continue to apply to those 
    life insurance and annuity investments which are impermissible for 
    national banks, the FDIC has decided that there is no need to adopt a 
    notice process that specifically addresses what we expect to be an 
    extremely small number of situations.
    
    II. Description of the Final Rule
    
        The FDIC divided part 362 into four subparts and changed some of 
    the structure of the rule. Generally, we moved substantive aspects of 
    the regulation that were formerly found in the definitions of terms 
    like ``bona fide subsidiary'' to the applicable regulation text. This 
    reorganization should assist the reader in understanding and applying 
    the regulation. Next we deleted most of the provisions relating to 
    divesture because we found them to be unnecessary due to the passage of 
    time. Third, we combined the rules covering the equity investments of 
    banks and savings associations into part 362 to regulate these 
    investments as consistently as possible given the limitations imposed 
    by the different statutes that govern each kind of insured institution. 
    Finally, although the FDIC agrees with the principles applicable to 
    transactions between insured depository institutions and its affiliates 
    contained in sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 
    371c and 371c-1), our experience over the last five years in applying 
    section 24 has led us to conclude that extending 23A and 23B by 
    reference to bank subsidiaries is inadvisable. For that reason, the 
    final regulation does not incorporate sections 23A and 23B of the 
    Federal Reserve Act by cross-reference; rather, the regulation adapts 
    similar principles to those set forth in sections 23A and 23B to the 
    bank/subsidiary relationship as appropriate. In drafting the final 
    rule, we have considered each of the requirements contained in sections 
    23A and 23B in the context of transactions between an insured 
    institution and its subsidiary and refined the restrictions 
    appropriately. We are comfortable that this approach strikes a better 
    balance between caution and commercial reality by harmonizing the 
    capital deductions and the principles of 23A and 23B.
        Subpart A of the final rule deals with the activities and 
    investments of insured state banks. Except for those sections 
    pertaining to the applications, notices and related delegations of 
    authority (procedural provisions), existing part 362 essentially 
    becomes subpart A under the current proposal. The procedural provisions 
    of existing part 362 have been transferred to subpart G of part 303. 
    Subpart A addresses the activities of insured state banks in 
    Sec. 362.3. The activities carried on in subsidiaries of insured state 
    banks are addressed separately in Sec. 362.4.
        Under a safety and soundness standard, subpart B of the final 
    regulation requires subsidiaries of insured state nonmember banks 
    engaged in certain activities to meet the standards established by the 
    FDIC, even if the OCC determines that those activities are permissible 
    for a national bank subsidiary. The FDIC has determined that real 
    estate investment activities may pose significant risks to the deposit 
    insurance funds. For that reason, the FDIC established standards that 
    an insured state nonmember bank must meet before engaging in real 
    estate investment activities that are not permissible for a national 
    bank, even if they are permissible for the subsidiary of a national 
    bank.
        Subpart B also establishes modern standards for insured state 
    nonmember banks to govern transactions between those insured state 
    nonmember banks that are not affiliated with a bank holding company 
    (nonbank banks) and affiliated organizations conducting securities 
    activities. The existing restrictions on these securities activities 
    are found in Sec. 337.4 of this chapter. The new rule only covers those 
    entities not covered by orders issued by the Board of Governors of the 
    Federal Reserve System (FRB) governing the securities activities of 
    those banks that are affiliated with a bank holding company or a member 
    bank.
        In addition, subpart B prohibits an insured state nonmember bank 
    not affiliated with a company that is treated as a bank holding company 
    (see section 4(f) of the Bank Holding Company Act, 12 U.S.C. 1843(f)), 
    from becoming affiliated with a company that directly engages in the 
    underwriting of securities not permissible for a bank itself unless the 
    standards established under the proposed regulation are met.
        Subpart C of the final rule concerns the activities and investments 
    of insured state savings associations. The substantive provisions 
    applicable to activities of savings associations currently appearing in 
    subpart G of part 303, effective October 1, 1998, (formerly 
    Sec. 303.13) would be revised in a number of ways and placed in new 
    subpart C. To the extent possible, activities and investments of 
    insured state savings associations are treated consistently with the 
    treatment accorded insured state banks. Thus, we revised a number of 
    definitions currently contained in subpart G of part 303 to track the 
    definitions used in subpart A of part 362.
        Subpart D of the final rule requires that an insured savings 
    association provide a 30-day notice to the FDIC whenever the 
    institution establishes or acquires a subsidiary or conducts a new 
    activity through a subsidiary. This provision does not alter the notice 
    required by statute and current subpart G of part 303. We moved this 
    requirement to a new subpart to accommodate Federally chartered savings 
    associations by limiting the
    
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    amount of regulation text they would have to read to learn how to 
    comply with this statutory notice.
    
    III. Comment Summary
    
        The FDIC received 129 comments in response to the proposed 
    regulation. The overall comments generally favored the FDIC's approach 
    to streamlining the consent process for banks and savings associations 
    to engage in activities using standardized criteria with seven comments 
    specifically supporting the FDIC's efforts to streamline these rules. 
    Comments were received from 102 financial institutions, 2 one bank 
    holding companies, 3 state banking departments, 14 trade associations, 
    2 investment companies, 4 Congressmen, 1 federal banking regulator and 
    1 individual.
        The overwhelming majority of the comments (107), primarily from 
    Massachusetts, were focused on concerns over proposed changes to the 
    standards governing holding equity securities in subsidiaries by banks 
    having grandfathered authority to hold the securities at the bank 
    level. We have responded to these comments by reinstating the exception 
    for a grandfathered bank to hold equity securities in a subsidiary. A 
    complete discussion of this issue is found in the section by section 
    analysis.
        With regard to the structure of the rule and the consolidation of 
    the banking and savings activities into a single rule, five comments 
    expressly supported the FDIC's efforts to accomplish these goals. 
    However, one comment suggested using a table like the Office of Thrift 
    Supervision (OTS) has used to aid understanding this complex and 
    difficult regulation. Three comments support cross-referencing the 
    Interagency Statement rather than restating disclosure requirements. A 
    readability analysis was submitted by one individual and, based upon 
    the results, the individual questioned whether the FDIC was successful 
    in achieving the stated objective of using plain English. This 
    individual offered his services to the FDIC as a writing consultant. 
    Other general comments observed that diversifying into new activities 
    increases safety and soundness and were pleased that the FDIC supports 
    state institutions' exercising of new powers. Two comments indicated 
    that in the preamble, the FDIC had overstated the authority of the FRB 
    to impose more stringent standards on any activity conducted by a state 
    member bank. This statement is derived from section 24(i); however, we 
    intended to refer to those activities not permissible for national 
    banks. At least one bank and the state banking departments advocate 
    further streamlining of the regulations to make it easier for banks to 
    use their capital through subsidiaries. The bank suggested that banks 
    must have more flexibility to keep their capital in the banking system, 
    rather than paying out more dividends to shareholders. Although we 
    favor diversifying the banks' income stream and making bankers' 
    compliance burden as light as possible, we also are charged with 
    maintaining safety and soundness and meeting the requirements of 
    section 24 of the FDI Act. Thus, we strive to balance these interests 
    in crafting more flexible regulations.
        Most of the remaining comments addressed the substance of the 
    regulation and provided constructive feedback on the regulation text. 
    Two comments focusing on the Purpose and Scope Section suggested a 
    definition of what is meant by ``acting as principal,'' although we 
    already had a definition of ``as principal.'' Two comments objected to 
    the FDIC accepting the time period imposed by the National Bank Act on 
    real estate that is acquired for debts previously contracted as a 
    limitation that carries over to state banks. We believe that the 
    authority of a national bank to own real estate is governed by the 
    statute and that this limitation is inherent in that authority. Thus, 
    we believe that a state bank is constrained by this same limitation 
    unless relief can be granted by the FDIC. Relief may be granted by the 
    FDIC only if the state bank transfers the property to a majority-owned 
    subsidiary with appropriate capital and complies with whatever other 
    constraints the FDIC deems adequate to protect the deposit insurance 
    fund from significant risk.
        In the definitions section, eight comments requested that we expand 
    the definition of majority-owned subsidiary to include limited 
    liability companies and limited partnership interests. One comment 
    suggested that the qualified housing exception also include limited 
    liability companies. Four comments expressed concern over the change to 
    the definition of ``change of control.'' Four comments expressed 
    concern about the change to the definition of ``significant risk to the 
    deposit insurance fund.'' One comment suggested a definition of 
    ``investment in subsidiary'' and further clarification of the items to 
    be included in debt and equity.
        With regard to the activities of insured state banks, two comments 
    supported the FDIC's new interpretation of when the ``in an amount'' 
    limitation is applicable. Six comments addressed insurance activities, 
    including three addressing the appropriate disclosures. Five comments 
    addressed the change in the measurement of the applicable capital limit 
    for adjustable rate and money market preferred stock. Six comments 
    addressed the 4(c)(8) list (closely related to banking) activities, 
    including specific alternatives on real estate leasing. One comment 
    supported the change in the qualified housing projects exception to 
    conform the meaning of lower income to that used in the community 
    reinvestment regulations in defining low and moderate income.
        With regard to the activities of subsidiaries of insured state 
    banks, one comment thought the control concept was unnecessary for 
    lower tier subsidiaries. Over one hundred ten comment letters addressed 
    the various issues involving the holding of equity securities through a 
    majority-owned subsidiary, with the overwhelming majority of the 
    comments coming from Massachusetts banking interests to advocate not 
    changing the constraints governing banks in that state owning 
    grandfathered equity securities in a subsidiary. Several of these 
    comment letters identified more than one issue. Twenty comments 
    addressed the issues involved with engaging in real estate investment 
    activity through a majority-owned subsidiary. Nine comments addressed 
    the issues identified in securities underwriting activity through a 
    majority-owned subsidiary. Eleven comments addressed the eligible 
    depository institution criteria. Twelve comments addressed the eligible 
    subsidiary criteria and generally expressed the view that the eligible 
    subsidiary was an improvement over the bona fide subsidiary concept 
    found in the old rule. Seventeen comments addressed the investment and 
    transaction limits criteria. Eight comments were directed to the way 
    the capital requirements operate. One comment said that banks should 
    have the option of complying with original conditions or the new rule.
        With regard to the real estate activities covered by subpart B, 
    five comments addressed this issue and generally thought that the FDIC 
    should not impose additional regulations on state nonmember banks.
        With regard to subpart C governing savings associations, one 
    comment expressed the view that thrifts do not know what is permissible 
    for national banks and needed greater specificity in the regulation. 
    There were no comments on subpart D; however, no substantive change was 
    made to this statutory filing requirement.
    
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        With regard to subparts E and F governing the notice and 
    application processing and content, two comments were received in favor 
    of firmer processing deadlines.
    
    IV. Section by Section Analysis
    
    A. Subpart A--Activities of Insured State Banks
    
    Section 362.1  Purpose and Scope
        As described in the preamble accompanying the proposal, included 
    within the proposed changes to the regulation was the inclusion of a 
    purpose and scope paragraph describing the statutory background, 
    intent, and nature of items covered by this subpart. Several commenters 
    acknowledged the FDIC's efforts to restructure the regulation and 
    agreed that the proposed reorganization simplifies what continues to be 
    complex material. These commenters stated that the use of purpose and 
    scope paragraphs helps clarify the coverage of each subpart.
        The intent of Sec. 362.1 is to clarify that the purpose and scope 
    of subpart A is to ensure that activities and investments undertaken by 
    insured state banks and their subsidiaries do not present a significant 
    risk to the deposit insurance funds, are not unsafe and are not 
    unsound, are consistent with the purposes of federal deposit insurance, 
    and are otherwise consistent with law. Subpart A implements the 
    provisions of section 24 of the FDI Act that restrict and prohibit 
    insured state banks and their subsidiaries from engaging in activities 
    and investments of a type that are not permissible for national banks 
    and their subsidiaries. The phrase ``activity permissible for a 
    national bank'' means any activity authorized for national banks under 
    any statute including the National Bank Act (12 U.S.C. 21 et. seq.), as 
    well as activities recognized as permissible for a national bank in 
    regulations, official circulars, bulletins, orders or written 
    interpretations issued by the OCC.
        This subpart governs activities conducted ``as principal'' and 
    therefore does not govern activities conducted as agent for a customer, 
    conducted in a brokerage, custodial, advisory, or administrative 
    capacity, conducted as trustee, or conducted in any substantially 
    similar capacity. As explained in the preamble accompanying the 
    proposal, we moved this language from Sec. 362.2(c) of the former 
    version of part 362 where the term ``as principal'' was defined to mean 
    acting other than as agent for a customer, acting as trustee, or 
    conducting an activity in a brokerage, custodial or advisory capacity. 
    The FDIC previously described this definition as not covering, for 
    example, acting as agent for the sale of insurance, acting as agent for 
    the sale of securities, acting as agent for the sale of real estate, or 
    acting as agent in arranging for travel services. Likewise, providing 
    safekeeping services, providing personal financial planning services, 
    and acting as trustee were described as not being ``as principal'' 
    activities within the meaning of this definition. In contrast, real 
    estate development, insurance underwriting, issuing annuities, and 
    securities underwriting would constitute ``as principal'' activities.
        Further, for example, travel agency activities have not been 
    brought within the scope of part 362 and would not require prior 
    consent from the FDIC even though a national bank is not permitted to 
    act as travel agent. Agency activities are not covered by the 
    regulations because the state bank would not be acting ``as principal'' 
    in providing those services. Thus, the fact that a national bank may 
    not engage in travel agency activities is of no consequence. Of course, 
    state banks would have to be authorized to engage in travel agency 
    activities under state law. We intend to continue to interpret section 
    24 and part 362 as excluding any coverage of activities being conducted 
    as agent. To highlight this issue, provide clarity, and alert the 
    reader of this rule that activities being conducted as agent are not 
    within the scope of section 24 and part 362, this language was moved to 
    the purpose and scope paragraph in the proposal.
        Comments addressing the proposed treatment of ``as principal'' were 
    submitted by two industry trade groups. One group agreed that moving 
    the applicable language to the purpose and scope paragraph helps 
    clarify that section 24 does not apply to activities conducted in an 
    agency or similar capacity. However, both commenters recommended that 
    the FDIC define ``as principal'' by specifying what is meant by acting 
    as principal rather than providing a list of capacities exempt from 
    that definition. In other words, the commenters desired a definition 
    consisting of an inclusive list rather than a list of exemptions. 
    Additionally, one commenter expressed concern that the current list of 
    exempt capacities may omit certain agency-like roles. As such, the 
    commenter recommended that the FDIC include ``substantially similar 
    capacities'' in the list of capacities that are not considered to be 
    conducted ``as principal''.
        The FDIC continues to believe that including the ``as principal'' 
    language in the purpose and scope paragraph provides clarity regarding 
    activities coming within the scope of section 24. As such, the FDIC 
    elects not to separately define ``as principal'', and has deleted as 
    redundant an overlapping definition of ``as principal'' contained in 
    Sec. 362.2(c) of the proposal. Additionally, the FDIC cannot reasonably 
    list all capacities that will be considered to be ``as principal''. 
    Therefore, the FDIC is not persuaded that changing the nature of the 
    definition to an inclusive list of capacities that are considered ``as 
    principal'' would alleviate confusion. Instead, ``as principal'' 
    activities will continue to be described as being all capacities other 
    than the listed exceptions. The FDIC nonetheless agrees that the 
    current list may exclude certain agency-like roles and is therefore 
    adding the phrase ``or in any substantially similar capacity'' to the 
    regulatory language of Sec. 362.1(b)(1). Also, the FDIC has added a 
    list of examples of activities that are not ``as principal'' to provide 
    the public with additional guidance.
        The preamble of the proposal also explains that equity investments 
    acquired in connection with debts previously contracted (DPC) are not 
    within the scope of this subpart when held within the shorter of the 
    time limits prescribed by state or federal law. The exclusion of equity 
    investments acquired in connection with DPC was moved from the 
    definition of ``equity investment'' in the former regulation to the 
    purpose and scope paragraph to highlight this issue, provide clarity, 
    and alert the reader of this rule that these investments are not within 
    the scope of section 24 and part 362. Interests taken as DPC are 
    excluded from the scope of this regulation provided that the interests 
    are not held for investment purposes and are not held longer than the 
    shorter of any time limit on holding such interests (1) set by 
    applicable state law or regulation or (2) the maximum time limit on 
    holding such interests set by applicable statute for a national bank. 
    The result of the modification would be to make it clear, for example, 
    that real estate taken DPC may not be held for longer than 10 years 
    (see 12 U.S.C. 29) or any shorter period of time set by the state. In 
    the case of equity securities taken DPC, the bank must divest the 
    equity securities ``within a reasonable time'' (i.e, as soon as 
    possible consistent with obtaining a reasonable return) (see OCC 
    Interpretive Letter No. 395, August 24, 1987, (1988-89 Transfer Binder) 
    Fed Banking L. Rep. (CCH) p. 85619, which interprets and applies the 
    National Bank Act) or no later than the time permitted under state law 
    if that time period is
    
    [[Page 66281]]
    
    shorter. Of course, a state bank permitted to hold such interests under 
    state law may apply to the FDIC for consent to continue to hold the 
    real property through a majority-owned subsidiary. In the final rule, 
    the FDIC has added some general information about the manner in which a 
    national bank may hold DPC.
        Two commenters objected to the FDIC imposing the national bank 
    holding period limits on insured state banks if those limits are 
    shorter than otherwise permitted under state law. One commenter 
    suggested applying a ``reasonable time period'' divestiture standard 
    similar to that concerning equity securities acquired DPC. The holding 
    periods governing a national bank's ability to own real estate acquired 
    DPC are contained within section 29 of the National Bank Act (12. 
    U.S.C. 29). Because a national bank can hold real estate acquired DPC 
    in limited circumstances, section 24 only allows a state bank to hold 
    such interests under the same constraints, i.e., for a maximum of 10 
    years. Conversely, section 29 does not contain divestiture periods for 
    equity securities acquired DPC and the FDIC has therefore elected to 
    defer to a ``reasonable time'' standard. However, due to the statutory 
    limitation in section 29, no changes are made to the exception for real 
    estate acquired DPC and the regulation will continue to apply the 
    holding periods in the manner proposed.
        As discussed in the proposal's preamble, the intent of the insured 
    state bank in holding equity investments acquired in connection with 
    DPC is also relevant to the analysis of whether the equity investment 
    is permitted. Any interest taken DPC may not be held for investment 
    purposes. For example, a bank may be able to expend monies in 
    connection with DPC property and/or take other actions with regard to 
    that property. However, if those expenditures and actions are not 
    permissible for a national bank, the property will not fall within the 
    DPC exception. For an additional example, if the bank's actions are 
    speculative in nature or go beyond what is necessary and prudent in 
    order for the bank to recover on the loan, a national bank would not be 
    permitted to take these actions. The FDIC expects bank management to 
    document that DPC property is being actively marketed; current 
    appraisals or other means of establishing fair market value may be used 
    to support management's decision not to dispose of property if offers 
    to purchase the property have been received and rejected by management.
        Similarly, the proposal also moved to the purpose and scope 
    paragraph language governing any interest in real estate in which the 
    real property is (1) used or intended in good faith to be used within a 
    reasonable time by an insured state bank or its subsidiaries as offices 
    or related facilities for the conduct of its business or future 
    expansion of its business or (2) used as public welfare investments of 
    a type permissible for national banks. Again, this language was moved 
    from the definition of ``equity investment'' in the former regulation 
    to highlight this issue, provide clarity, and alert the reader of this 
    rule that such investments are not within the scope of this subpart. In 
    the case of real property held for use at some time in the future as 
    premises, the holding of the property must reflect a bona fide intent 
    on the part of the bank to use the property in the future as premises. 
    We are not aware of any statutory time frame that applies in the case 
    of a national bank which limits the holding of such property to a 
    specific time period. Therefore, the issue of the precise time frame 
    under which future premises may be held without implicating part 362 
    must be decided on a case-by-case basis. If the holding period allowed 
    under state law is longer than what the FDIC determines to be 
    reasonable and consistent with a bona fide intent to use the property 
    for future premises, the bank will be so informed and will be required 
    to convert the property to use, divest the property, or apply for 
    consent to hold the property through a majority-owned subsidiary of the 
    bank. We note that the OCC's regulations indicate that real property 
    held for future premises should normally be converted to use within 
    five years after which time it will be considered other real estate 
    owned and must be actively marketed and divested within no more than 
    ten years (12 CFR part 34). We understand that the time periods set 
    forth in the OCC's regulations reflect safety and soundness 
    determinations by that agency. As such, and in keeping with what has 
    been to date the FDIC's posture with regard to safety and soundness 
    determinations of the OCC, the FDIC will make its own judgment to 
    determine when a reasonable time has elapsed for holding property for 
    future premises.
        The purpose and scope paragraph also explains that a subsidiary of 
    an insured state bank may not engage in activities that are not 
    permissible for a subsidiary of a national bank unless the bank is in 
    compliance with applicable capital standards and the FDIC has 
    determined that the activity poses no significant risk to the deposit 
    insurance fund. Subpart A provides standards for certain activities 
    that are not permissible for a subsidiary of a national bank. 
    Additionally, because of safety and soundness concerns relating to real 
    estate investment activities, subpart B reflects special rules for 
    subsidiaries of insured state nonmember banks that engage in real 
    estate investment activities of a type that are not permissible for a 
    national bank, but that may be otherwise permissible for a subsidiary 
    of a national bank.
        The FDIC intends to allow insured state banks and their 
    subsidiaries to undertake safe and sound activities and investments 
    that do not present a significant risk to the deposit insurance funds 
    and that are consistent with the purposes of federal deposit insurance 
    and other applicable law. This subpart does not authorize any insured 
    state bank to make investments or to conduct activities that are not 
    authorized or that are prohibited by either state or federal law.
    Section 362.2  Definitions
        Revised subpart A Sec. 362.2 contains the definitions applicable to 
    this subpart. Most definitions are unchanged from those used in the 
    current regulation. Nonetheless, the proposal contains edits to enhance 
    clarity and readability, define additional terms, and delete certain 
    definitions as unnecessary.
        To standardize as many definitions as possible, we incorporated the 
    following definitions from section 3 of the FDI Act (12 U.S.C. 1813): 
    ``depository institution'', ``insured state bank'', ``bank'', ``state 
    bank'', ``savings association'', ``state savings association'', 
    ``insured depository institution'', ``federal savings association'', 
    and ``insured state nonmember bank''. This standardization required 
    that we delete the definitions of the first two terms, ``depository 
    institution'' and ``insured state bank'', currently found in part 362. 
    No substantive change was intended by this modification. The remaining 
    terms were added by reference to provide clarity throughout the 
    proposed part 362 because we incorporate many of the definitions from 
    subpart A into the other part 362 subparts. The FDIC received no 
    comments concerning these changes and is therefore adopting the 
    referenced definitions as proposed.
        Several definitions were carried forward in the proposal from the 
    current regulation either unchanged or containing only minor edits to 
    enhance clarity or readability without changing the meaning. The 
    following definitions
    
    [[Page 66282]]
    
    were carried forward without any substantive meaning changes: 
    ``control'', ``extension of credit'', ``executive officer'', 
    ``director'', ``principal shareholder'', ``related interest'', 
    ``national securities exchange'', ``residents of state'', 
    ``subsidiary'', and ``tier one capital''. Again, the FDIC received no 
    comments on the referenced definitions which are adopted as proposed.
        The name of one definition was simplified without substantively 
    changing its meaning. The subject definition was formerly found in 
    Sec. 362.2(g) and was described as follows ``an insured state bank will 
    be considered to convert its charter''. This definition is now provided 
    by Sec. 362.2(f) and is named ``convert its charter''. No commenters 
    addressed this simplified title which is adopted as proposed.
        The definitions of ``activity permissible for a national bank'', 
    ``an activity is considered to be conducted as principal'', and 
    ``equity investment permissible for a national bank'' were deleted in 
    the proposed and final rule because the substance of the information 
    contained in those definitions was incorporated into the scope 
    paragraph in Sec. 362.1. When developing the proposal, the FDIC 
    concluded that moving the information contained in these definitions to 
    the scope paragraph made the coverage of the rule clearer. 
    Additionally, placing this information at the beginning of the subpart 
    is consistent with the purpose of a scope paragraph. Some readers may 
    save time by realizing sooner that the regulation may be inapplicable 
    to conduct contemplated by a particular bank. It also may be more 
    logical for the reader to consider the scope paragraph to determine the 
    rule's applicability, rather than having to rely on the definition 
    section. Moreover, we concluded that it would be unnecessary to 
    duplicate this same information in the definition section. The FDIC 
    received no specific comments on the proposed treatment, but 
    respondents commenting on the overall structure of the proposal 
    generally favored the use of the purpose and scope paragraphs. The 
    final regulation incorporates the changes as proposed. The proposed 
    definition of ``as principal'' at Sec. 362.2(c) duplicates material set 
    out in the scope section at Sec. 362.1(b)(1), and has therefore been 
    eliminated in the final rule. Appropriate definitional language has 
    been added to Sec. 362.1(b)(1).
        The proposal also deleted the definition of ``equity interest in 
    real estate'' and moved the recitation of the permissibility of owning 
    real estate for bank premises and future premises, owning real estate 
    for public welfare investments, and owning real estate from DPC to the 
    scope paragraph for the reasons stated in the preceding paragraph. 
    These activities are permissible for national banks and we concluded 
    that it was unnecessary to continue to restate this information in the 
    definition section of the regulation. No substantive change is intended 
    by the simplification of this language. Further, we determined that the 
    remainder of the definition of ``equity interest in real estate'' did 
    little to enhance clarity or understanding; therefore, we are relying 
    on the language defining ``equity investment'' to cover real estate 
    investments.
        Conforming changes were made to the definition of ``equity 
    investment'' by removing the reference to the deleted definition of 
    ``equity interest in real estate''. Additionally, the remaining part of 
    the ``equity investment'' definition was shortened and edited to 
    enhance readability. This definition is intended to encompass an 
    investment in an equity security, partnership interest, or real estate 
    as it did in the former regulation. No substantive changes were 
    intended by the changes described in this or the preceding paragraph. 
    The FDIC received no comments on these changes which are adopted as 
    proposed.
        With regard to the definition of ``equity security'', we modified 
    the definition by deleting references to circumstances where holding 
    equity securities is permissible for national banks, such as when 
    equity securities are held as a result of a foreclosure or other 
    arrangements concerning debts previously contracted. Language 
    discussing the exclusion of DPC and other investments that are 
    permissible for national banks was relocated to the scope paragraph for 
    the reasons previously stated. Like the exceptions concerning equity 
    investments in real estate, no substantive change is intended by the 
    relocation of the subject exceptions to the purpose and scope 
    paragraph. No comments were received on this proposed treatment which 
    is adopted as proposed.
        The definitions of ``investment in a department'' and 
    ``department'' were deleted because they are no longer needed in the 
    revised regulation text. The core standards applicable to a department 
    of a bank are detailed in Sec. 362.3(c) and defining the term 
    ``department'' is therefore unnecessary. If a calculation of an 
    ``investment in a department'' needs to be made, the FDIC intends to 
    defer to governing state law. As a result, a definition of ``investment 
    in a department'' is unnecessary and was deleted. There were no 
    comments addressing the removal of these definitions.
        Similarly, we deleted the definition of ``investment in a 
    subsidiary'' because the definition is no longer needed in the revised 
    regulation text. Amounts subject to the investment limits of 
    Sec. 362.4(d) are listed clearly in that subsection. The FDIC opted to 
    list amounts subject to investment limits in Sec. 362.4(d) to separate 
    those debt-type investments from the equity-type investments subject to 
    the capital treatment of Sec. 362.4(e). The regulation also contains 
    other investment limits applicable to both debt and equity investments. 
    Because of these different types of investment limits, the FDIC did not 
    find a single ``investment in a subsidiary'' definition helpful. 
    Therefore, the FDIC has elected not to incorporate such a definition 
    despite a request by one commenter. However, as the same commenter 
    suggested, the FDIC has attempted to clearly delineate amounts subject 
    to the various investment limits, transaction restrictions, and capital 
    requirements when applicable through both the regulation text and the 
    corresponding preamble language.
        We deleted the definition of ``bona fide subsidiary'' and chose to 
    make similar characteristics part of the ``eligible subsidiary'' 
    criteria in Sec. 362.4(c)(2). Including these criteria as a part of the 
    substantive regulation text in the referenced subsection, rather than 
    as a definition, makes reading the rule easier and the meaning clearer. 
    No commenters addressed this treatment. Comments concerning the various 
    elements of the eligible subsidiary criteria are discussed elsewhere in 
    this preamble under the appropriate section.
        The regulation substitutes the current definition of ``lower 
    income'' with a cross reference in Sec. 362.3(a)(2)(ii) to the 
    definition of ``low income'' and ``moderate income'' used for purposes 
    of part 345 of the FDIC's regulations (12 CFR 345) which implements the 
    Community Reinvestment Act (CRA). 12 U.S.C. 2901, et. seq. Under part 
    345, ``low income'' means an individual income that is less than 50 
    percent of the area median income or a median family income that is 
    less than 50 percent in the case of a census tract or a block numbering 
    area delineated by the United States Census in the most recent 
    decennial census. ``Moderate income'' means an individual income that 
    is at least 50 percent but less than 80 percent of the area median or a 
    median family income that is at least 50 but less than 80 percent in 
    the case of a census tract or block numbering area.
        The ``lower income'' definition is relevant for purposes of 
    applying the
    
    [[Page 66283]]
    
    exception in the regulation which allows an insured state bank to be a 
    partner in a limited partnership whose sole purpose is direct or 
    indirect investment in the acquisition, rehabilitation, or new 
    construction of qualified housing projects (housing for lower income 
    persons). As we anticipate that insured state banks will seek to use 
    such investments in meeting their community reinvestment obligations, 
    the FDIC is of the opinion that conforming the definition of lower 
    income to that used for CRA purposes will benefit banks. This change 
    has the effect of expanding the housing projects that qualify for the 
    exception. The FDIC received one comment addressing the altered 
    definition with the respondent favorably noting and supporting the 
    resultant effect. The final regulation adopts this change as proposed.
        The regulation includes an altered definition of the term 
    ``activity''. As modified, the definition includes both activities and 
    investments. Where equity investments are intended to be excluded from 
    a particular section of the regulation, we expressly exclude those 
    investments in the regulatory text. Previously, the term ``activity'' 
    was defined differently depending upon whether it was used in 
    connection with the direct conduct of business by an insured state bank 
    or in connection with the conduct of business by a subsidiary of the 
    bank. This change was made both to simplify the regulation and to 
    reflect the section 24 definition of ``activity''. No comments were 
    received on this proposed change.
        It is noted that no comments were received regarding the proposed 
    suggestion also to modify the ``activity'' definition to incorporate a 
    recent interpretation by the agency that determined that the act of 
    making a political campaign contribution does not constitute an 
    ``activity'' for purposes of part 362. The referenced interpretation 
    uses a three prong analysis to help determine whether particular 
    conduct should be considered an activity and therefore subject to 
    review under part 362 if the conduct is not permissible for a national 
    bank.
        First, any conduct that is an integral part of the business of 
    banking as well as any conduct which is closely related or incidental 
    to banking should be considered an activity. In applying this factor, 
    it is important to focus on what banks do that makes them different 
    from other types of businesses. For example, lending money is clearly 
    an ``activity'' for purposes of part 362. The second factor asks 
    whether the conduct is merely a corporate function as opposed to a 
    banking function. For example, paying dividends to shareholders is 
    primarily a general corporate function and not one associated with 
    banking because of some unique characteristic of banking as a business. 
    Generally, activities that are not general corporate functions will 
    involve interaction between the bank and its customers rather than its 
    employees or shareholders. The third factor asks whether the conduct 
    involves an attempt by the bank to generate a profit. For example, 
    banks make loans and accept deposits in an effort to make money. 
    However, contracting with another company to generate monthly customer 
    statements should not be considered to be an activity in and of itself 
    as it simply is entered into in support of the ``activity'' of taking 
    deposits. If at least two of the factors yield a conclusion that the 
    conduct is part of the authorized conduct of business by the bank, the 
    better conclusion is that the conduct is an activity. Because of the 
    lack of interest received on expanding the definition to reflect this 
    interpretation, no change is made to the definition proposed. The FDIC 
    intends to continue to apply the above analysis when determining 
    whether particular conduct should be considered an activity.
        The definition of ``real estate investment activity'' was shortened 
    to mean any interest in real estate held directly or indirectly that is 
    not permissible for a national bank. This term is used in 
    Sec. 362.4(b)(5) of subpart A. Additionally, it is used in Sec. 362.8 
    of subpart B which contains safety and soundness restrictions on real 
    estate activities of subsidiaries of insured state nonmember banks that 
    may be deemed to be permissible for operating subsidiaries of national 
    banks but that would not be permissible for a national bank itself. The 
    proposed definition contained a parenthetical excluding real estate 
    leasing from the definition of real estate investment activities. By 
    excluding leasing from the proposed ``real estate investment activity'' 
    definition, the FDIC was attempting to clearly separate leasing 
    activity from other real estate investment activities.
        Under the current regulation, banks and their majority-owned 
    subsidiaries are allowed to engage in real estate leasing under the 
    regulatory exceptions enabling them to engage in activities closely 
    related to banking.1 These regulatory exceptions were 
    carried forward in the proposal. However, the FDIC is concerned about 
    certain activities encompassed within this section. For example, the 
    4(c)(8) list includes real estate leasing. When an individual or entity 
    engages in leasing activity as the lessor of a particular parcel, the 
    landlord has an ownership interest in the underlying real estate. Under 
    section 24 of the FDI Act, insured state banks are limited in their 
    ability to own real estate. We are concerned that an insured state bank 
    could consider this regulation and its certain conditions as the FDIC 
    having permitted the bank or its majority-owned subsidiaries to own 
    real estate interests that would not be permissible for a national bank 
    or a subsidiary of a national bank. To prevent insured state banks from 
    attempting to use this consent to leasing activity as a way to avoid 
    the corporate separations, transaction limitations and restrictions, 
    and capital treatment applicable to other real estate investment 
    activities, the proposed definition expressly excluded leasing. 
    Additionally, the FDIC was attempting to ensure that banks using the 
    notice procedure to engage in real estate investment activities were 
    not, in effect, operating a commercial business by virtue of the terms 
    of the leasing activity.
    ---------------------------------------------------------------------------
    
        \1\ These regulatory exceptions were provided by 
    Sec. 362.4(c)(3)(ii)(A) and (B) depending upon whether conducted by 
    the bank or through a majority-owned subsidiary, respectively. The 
    exceptions provided that insured state banks or their majority-owned 
    subsidiaries could engage in principal in activities that the FRB by 
    regulation or order has found to be closely related to banking for 
    the purposes of section 4(c)(8) of the Bank Holding Company Act (12 
    U.S.C. 1843(c)(8)).
    ---------------------------------------------------------------------------
    
        The FDIC recognizes, however, that the proposed definition would 
    have effectively prevented an insured state bank's majority-owned 
    subsidiary that was proceeding under the notice procedure from leasing 
    property that it is otherwise permitted to own or develop.2 
    As a result, the insured state bank would have been required to submit 
    an application to seek further consent from the FDIC to lease real 
    property it was allowed to own. To correct this anomaly, the FDIC has 
    deleted the parenthetical from the definition and deals with the 
    activities of real estate leasing and other real estate investment 
    activities separately as discussed elsewhere in this preamble. The 
    subject definition is otherwise unchanged from the proposal.
    ---------------------------------------------------------------------------
    
        \2\ Provided it meets the conditions imposed by 
    Sec. 362.4(b)(5).
    ---------------------------------------------------------------------------
    
        The final rule includes a modified definition of ``company'' to 
    which we added limited liability companies to the list of entities 
    considered to be a company. This change was made to recognize the 
    creation of limited liability companies and their growing prevalence in 
    the market place. Four
    
    [[Page 66284]]
    
    commenters suggested explicitly adding limited liability partnerships 
    to the list of business structures included in the ``company'' 
    definition. The FDIC believes the suggested change is unnecessary 
    because limited liability partnerships are already included in the 
    definition through the term ``partnership''.
        As proposed, the FDIC adopted the modified definition of 
    ``significant risk to the fund'' with the second sentence that 
    clarifies that this definition includes the risk that may be present 
    either when an activity or an equity investment contributes or may 
    contribute to the decline in condition of a particular state-chartered 
    depository institution or when a type of activity or equity investment 
    is found by the FDIC to contribute or potentially contribute to the 
    deterioration of the overall condition of the banking system. Our 
    interpretation of the definition remains unchanged. Significant risk to 
    the deposit insurance fund is understood to be present whenever there 
    is a high probability that any insurance fund administered by the FDIC 
    may suffer a loss. The preamble accompanying the adoption of this 
    definition in 1992 (57 FR 53220, November 9, 1992) indicated that the 
    FDIC recognizes that no investment or activity may be said to be 
    without risk under all circumstances and that such a fact alone will 
    not cause the agency to determine that a particular activity or 
    investment poses a significant risk of loss to the fund. The definition 
    emphasizes that there is a high degree of likelihood under all of the 
    relevant circumstances that an investment or activity by a particular 
    bank, or by banks in general or in a given market or region, may 
    ultimately produce a loss to either of the funds. The relative or 
    absolute size of the loss that is projected in comparison to the fund 
    is not determinative of the issue. The preamble indicated that the 
    definition is consistent with and derived from the legislative history 
    of section 24 of the FDI Act. Previously, the FDIC rejected the 
    suggestion that a risk to the fund be found only if a particular 
    activity or investment is expected to result in the imminent failure of 
    a bank. The suggestion was rejected in 1992 as the FDIC determined that 
    it was inappropriate to approach the issue this narrowly in light of 
    the legislative intent.
        Four commenters addressed the proposed change to the wording of 
    this definition. One industry trade association complimented the 
    change. However, two other groups expressed concern that the added 
    sentence results in a definition that is overly broad, and a state bank 
    stated that the change makes the definition incoherent. The latter 
    three commenters expressed concern that the added sentence contains no 
    qualifications or limitations. These commenters state that numerous 
    activities may negatively impact the condition of an institution or may 
    contribute to deterioration in the overall banking system without 
    causing loss to the insurance fund. The commenters suggest that section 
    24 requires the FDIC to consider the extent of the impact before 
    determining that an activity presents a significant risk to the fund. 
    The FDIC agrees with the commenters that consideration must be given to 
    the extent that a negative event may harm an institution or the overall 
    banking industry. However, the FDIC believes that both sentences 
    contained in the definition must be read together. The second sentence 
    clarifies that significant risk is present whenever there is a high 
    probability that an activity or an equity investment will or could 
    result in a loss to an insurance fund administered by the FDIC, 
    regardless of whether the loss results from one or multiple 
    institutions. After consideration of the comments and the wording, the 
    FDIC adopts the expanded definition as proposed.
        The proposal re-defined the term ``well-capitalized'' to 
    incorporate the same meaning set forth in part 325 of this chapter for 
    an insured state nonmember bank. For other state-chartered depository 
    institutions, the term ``well-capitalized'' has the same meaning as set 
    forth in the capital regulations adopted by the state. Importing the 
    capital definitions used by the various state-chartered depository 
    institutions should simplify the calculations when they deal with their 
    appropriate federal banking agency. The other terms defined under 
    Sec. 362.2(x) of the current regulation were deleted as unnecessary due 
    to the other changes in the regulation text.
        The proposal added definitions of the following terms: ``change in 
    control'', ``institution'', ``majority-owned subsidiary'', ``security'' 
    and ``state-chartered depository institution.''
        After reconsideration of the proposed definition of ``change in 
    control'', the FDIC decided to adopt certain changes to bring the 
    definition back into substantive consistency with the broader reach of 
    the term as is provided by the current regulation. The change in 
    control definition comes into play primarily in connection with section 
    24's grandfather with respect to common or preferred stock listed on a 
    national securities exchange and shares of registered investment 
    companies. Section 24 states that the grandfather ceases to apply if 
    the bank converts its charter or undergoes a change in control.
        The definition proposed at Sec. 362.2(c) covered any instance in 
    which the bank undergoes a transaction which requires a notice to be 
    filed under section 7(j) of the FDI Act (12 U.S.C. 1817(j)) except a 
    transaction which is presumed to be a change in control for the 
    purposes of that section under FDIC's or FRB's regulations implementing 
    section 7(j), or in which the bank is acquired by or merged into a bank 
    that is not eligible for the grandfather. This proposed definition 
    eliminated two other instances which the current regulation, at 
    Sec. 362.3(b)(4)(ii), treats as a change in control: any transaction 
    subject to section 3 of the Bank Holding Company Act (12 U.S.C. 1842) 
    other than a one bank holding company formation (section 3 
    transactions), and a transaction in which control of the bank's parent 
    company changes (parent control changes).
        In the preamble to the proposal, the FDIC indicated that 
    elimination of the section 3 transactions and the parent control 
    changes would bring the definition more in line with what constituted a 
    true change in control. For example, the section 3 transaction language 
    in the current rule would encompass all mergers between the holding 
    company of a grandfathered bank and another bank holding company, 
    regardless of which holding company was the survivor. However, upon 
    further reflection, the FDIC has decided that total elimination of the 
    section 3 transactions would create anomalous results. If a controlling 
    interest in a grandfathered bank was acquired by an unrelated holding 
    company (which requires approval under section 3), it is difficult to 
    argue how this is materially less of a change in control than if 
    control of the bank was acquired by an individual in a section 7(j) 
    transaction. Still, there are cases in which a rigid application of the 
    section 3 transactions would reach too far. In contrast to the example 
    in which a bank holding company acquires control of a grandfathered 
    bank, the FRB's approval under section 3 is required if a bank holding 
    company acquires anything more than five percent of any outstanding 
    class of a bank's voting shares. The revised definition at 
    Sec. 362.2(c) contained in the final rule therefore includes 
    transactions subject to section 3 approval only when a bank holding 
    company acquires control of a grandfathered bank through the section 3 
    transaction. The current exclusion for one bank holding
    
    [[Page 66285]]
    
    company formations also is maintained in the final rule.
        Also, the elimination of the parent control changes in the proposed 
    rule created potentially confusing ambiguities, particularly when 
    coupled with the elimination of the section 3 transactions. For 
    example, if the holding company of a bank eligible for the grandfather 
    is acquired and merged into an unrelated bank holding company (again, 
    which requires approval under section 3), it is difficult to argue how 
    this is materially less of a change in control than if the bank itself 
    was merged with an unrelated bank. But the merger and acquisition 
    language in the proposed definition referred only to the bank itself. 
    The final rule expands the merger language to holding companies, 
    accordingly. As another example, it is difficult to argue that a 
    transaction requiring the holding company of a grandfathered bank to 
    submit a change in control notice under section 7(j) is materially less 
    of a change in control than a transaction requiring the grandfathered 
    bank itself to file such a notice, and the 7(j) language in the 
    proposed rule did not expressly refer to holding company transactions. 
    In the final rule, the FDIC has therefore revised the 7(j) language to 
    clarify its applicability to both scenarios.
        The FDIC received three similar comments expressing concern about 
    the proposed changes to the ``change in control'' definition. The 
    commenters acknowledge that deleting certain instances from the current 
    definition reduces the instances in which a bank would lose its 
    grandfathered rights. Nonetheless, the commenters feel that it is 
    unclear whether the proposed changes may have also inadvertently 
    broadened the reach of the remaining transactions causing the 
    grandfathered right to be terminated. This ambiguity appears to result 
    from an incomplete understanding of whether the definition continues to 
    exclude transactions presumed to be a change in control under the 
    FDIC's and FRB's regulations implementing section 7(j) of the FDI Act. 
    The FDIC wants to assure commenters that the regulatory language of the 
    final definition, like that of the proposal, continues to exclude such 
    presumed changes in control from the events that result in a loss of 
    the subject grandfathered rights.
        One additional commenter took exception to the FDIC's position 
    concerning the ability to look to the substance of a transaction in 
    determining whether grandfather rights terminate. The commenter 
    objected to the FDIC's statement in the preamble to the proposed rule 
    that state banks should be aware that, depending upon the 
    circumstances, the grandfather could be considered terminated after a 
    merger transaction in which an eligible bank is the survivor. For 
    example, if a state bank that is not eligible for the grandfather is 
    merged into a much smaller state bank that is eligible for the 
    grandfather, the FDIC may determine that in substance the eligible bank 
    has been acquired by a bank that is not eligible for the grandfather. 
    The commenter argues that the FDIC's interpretation is inconsistent 
    with the FDIC's current regulations, and claims that if the FDIC 
    subjects such transactions to subjective criteria such as relative 
    asset size, institutions considering mergers or acquisitions will be 
    disadvantaged because of the uncertainty regarding the potential loss 
    of grandfathered status. The commenter also asserts that the FDIC's 
    interpretation is inconsistent with congressional intent because 
    section 24 did not define change in control; Congress clearly intended 
    the use of ``change in control'' language in section 24(f)(5) to 
    reference the meaning of the phrase ``change in control'' established 
    by the Change in Bank Control Act (CBCA) (12 U.S.C. 1817(j)). In the 
    commenter's view, since the CBCA predates section 24 by nine years, 
    Congress intended to use ``change in control'' as a term of art.
        The interpretation set out in the preamble to the proposal is 
    consistent with the FDIC's current regulation and is in fact set out in 
    the preamble accompanying the FDIC's original adoption of the change in 
    control provisions under part 362 in 1992. 57 FR 53227 (Nov. 9, 1992). 
    The commenter's argument takes too narrow a view of section 24(f)(5), 
    as the FDIC pointed out in proposing the change of control provisions 
    of current part 362. In light of the broader congressional action under 
    section 24 to generally prohibit equity investments by state banks 
    which are not permissible for a national bank, and the limited nature 
    of the grandfather exception, it is appropriate to define the universe 
    of events constituting a change in control so as to encompass 
    transactions constituting a true acquisition. 57 FR 30444 (July 9, 
    1992). In modifying the change in control provisions of part 362, the 
    FDIC has narrowed the definition somewhat, as discussed above, to 
    approximate more closely when a true change in control of the bank has 
    taken place. If, as the commenter argues, change in control only 
    includes transactions subject to the CBCA, the exclusion under the CBCA 
    for all transactions reviewable under the Bank Merger Act (12 U.S.C. 
    1828(c)) or the Bank Holding Company Act would be brought to bear. 
    Therefore, the FDIC rejects the arguments provided by the commenter as 
    being an overly narrow interpretation of the statute.
        We defined ``state-chartered depository institution'' and 
    ``institution'' to mean any state bank or state savings association 
    insured by the FDIC. These definitions should enhance readability and 
    eliminate ambiguity concerning the subject terms. Defining 
    ``institution'' enables us to shorten the drafting of the rule. No 
    comments were received regarding these definitions which are adopted as 
    proposed.
        Additionally, the proposal added a definition of ``majority-owned 
    subsidiary'' which was defined to mean any corporation in which the 
    parent insured state bank owns a majority of the outstanding voting 
    stock. This definition was added to clarify our intention that 
    expedited notice procedures only be available when an insured state 
    bank interposes an entity providing limited liability to the parent 
    institution. We interpret Congress's intention in imposing the 
    majority-owned subsidiary requirement in section 24 of the FDI Act to 
    generally require that such a subsidiary provide limited liability to 
    the insured state bank. Thus, except in unusual circumstances, we have 
    and will require majority-owned subsidiaries to adopt a form of 
    business that provides limited liability to the parent bank. In 
    assessing our experience with applications, we have determined that the 
    notice procedure will be available only to banks that engage in 
    activities through a majority-owned subsidiary that takes the corporate 
    form of business. We welcome applications that may take a different 
    form of business such as a limited partnership or limited liability 
    company, but would like to develop more experience with appropriate 
    separations to protect the bank from liability under these other forms 
    of business enterprise through the application process before including 
    such entities in a notice procedure.
        Eight commenters objected to the FDIC's decision to construct the 
    definition around the corporate form of business. The commenters were 
    unanimous in suggesting that the FDIC expand the definition to include 
    limited liability companies (LLCs), limited liability partnerships 
    (LLPs), and limited partnerships. Several of the commenters note that 
    these forms of business have been in existence in many states for a 
    number of years, and they project that the presence of such
    
    [[Page 66286]]
    
    structures will continue to increase given the tax benefits, limited 
    liability, and flexible structure provided by these business forms. The 
    respondents contend that these business forms sufficiently insulate the 
    members and partners from liability. One commenter noted that they are 
    aware of no significant judicial challenge to the liability insulation 
    provided by these business forms. As such, the commenter asserts that 
    the proposed definition contravenes congressional intent because it 
    does not recognize a business form that would provide limited liability 
    to the insured state bank. Finally, the commenters note that both the 
    FRB and the OCC have recently permitted the limited liability 
    organizational form for operating subsidiaries.
        Limited liability partnerships and companies are both relatively 
    new business forms. There is little definitive legal guidance 
    concerning the liability protection offered by these organizational 
    structures. Among the unresolved issues is the question of how to 
    structure the management of LLCs and LPs to afford the same level of 
    separateness provided by the corporate form under the eligible 
    subsidiary criteria. Because of the limited existing case law regarding 
    piercing the veil of LLCs and LLPs, the FDIC is unable to determine the 
    appropriate objective separation criteria that will provide the parent 
    bank with substantially the same liability protection offered by an 
    independent corporate structure. Thus, we have not expanded the 
    definition to include LLCs and LLPs at this time. The FDIC views this 
    decision to preclude LLCs and LLPs as consistent with the agency's 
    interpretation of the congressional intent to limiting liability for 
    subsidiaries' activities from accruing to the insured state bank.
        The effect of the FDIC's decision is that the notice process is 
    limited to banks with subsidiaries organized using the corporate form. 
    We encourage banks to submit applications when they want to use an 
    alternative business form. Then, the banks can propose appropriate 
    objective separations that fit the particular activity and the FDIC can 
    evaluate these separations on a case-by-case basis. At some future 
    date, more standardized criteria may emerge. Then, the FDIC may 
    consider re-visiting this issue. The FDIC does not intend any exclusion 
    of these forms by omitting them from the notice processing criteria. 
    They simply do not allow for the more limited review involved in an 
    expedited notice processing system.
        Although the FDIC requires the first level majority-owned 
    subsidiary to be a corporation, it is noted that the final regulation 
    contains a provision, at Sec. 362.4(b)(3), allowing lower level 
    subsidiaries to assume other business forms including LLCs and LLPs. 
    Please refer to the applicable discussion of this section elsewhere in 
    this preamble.
        The final rule also incorporates the definition of ``security'' 
    from part 344 of this chapter to eliminate any ambiguity over the 
    coverage of this rule when securities activities and investments are 
    contemplated.
    Section 362.3  Activities of Insured State Banks
        Equity Investment Prohibition. Section 362.3(a) restates the 
    statutory prohibition on insured state banks making or retaining any 
    equity investment of a type that is not permissible for a national 
    bank. The prohibition does not apply if one of the statutory exceptions 
    contained in section 24 of the FDI Act (as restated in the current 
    regulation and carried forward in the final regulation) applies. As 
    discussed in the preamble accompanying the proposal, the final 
    regulation eliminates the reference to ``amount'' that is contained in 
    the current version of Sec. 362.3(a). The FDIC reconsidered our 
    interpretation of the language of section 24 in which paragraph (c) 
    prohibits an insured state bank from acquiring or retaining any equity 
    investment of a type that is impermissible for a national bank and 
    paragraph (f) prohibits an insured state bank from acquiring or 
    retaining any equity investment of a type or in an amount that is 
    impermissible for a national bank. We previously interpreted the 
    language of paragraph (f) as controlling and read that language into 
    the entire statute. We reconsidered this approach and decided that it 
    was not the most reasonable construction of this statute and determined 
    that the language of the earlier paragraph (c) is controlling without 
    the necessity to import the language of (f). We believe that the second 
    mention as contained in paragraph (f) should be limited to those items 
    discussed under paragraph (f). Thus, the language of paragraph (c) 
    controls when any other equity investment is being considered. 
    Therefore, we deleted the amount language from the prohibition stated 
    in the regulation. The FDIC received comments from two parties 
    expressly approving this revised interpretation.
        Exception for subsidiaries of which the bank is majority owner. The 
    final regulation retains the exception allowing investments in 
    subsidiaries of which the bank is majority owner as currently in effect 
    without any substantive change. However, the FDIC has modified the 
    language of this section to remove negative inferences and make the 
    text clearer. Rather than stating that the bank may do what is not 
    prohibited, the FDIC affirmatively states that an insured state 
    chartered bank may acquire or retain investments in these subsidiaries. 
    If an insured state bank holds less than a majority interest in the 
    subsidiary, and that equity investment is of a type that would be 
    prohibited to a national bank, the exception does not apply and the 
    investment is subject to divestiture.
        Majority ownership for the exception is understood to mean 
    ownership of greater than 50 percent of the outstanding voting stock of 
    the subsidiary. National banks may own a minority interest in certain 
    types of subsidiaries. (See 12 CFR 5.34 (1998)). Therefore, an insured 
    state bank may hold a minority interest in a subsidiary if a national 
    bank could do so. Thus, section 24 does not necessarily require a state 
    bank to hold at least a majority of the stock of a company in order for 
    the equity investment in the company to be permissible.
        For purposes of the notice procedure, the regulation defines the 
    business form of a majority-owned subsidiary to be a corporation. As is 
    discussed above in connection with the definition of a ``Majority-owned 
    subsidiary'', there may be other forms of business organization that 
    are suitable for the purposes of this exception such as partnerships or 
    limited liability companies, but the FDIC prefers to review such 
    alternate forms of organization on a case-by-case basis through the 
    application process to assure that appropriate separation between the 
    insured depository institution and the subsidiary is in place.
        To qualify for the exception, the majority-owned subsidiary may 
    engage only in the activities described in Sec. 362.4(b). The allowable 
    activities include exceptions to the general statutory prohibition, 
    some of which have a statutory basis and others of which are derived 
    through the FDIC's power to create regulatory exceptions.
        Investments in qualified housing projects. Section 362.3(a)(2)(ii) 
    of the final regulation provides an exception for qualified housing 
    projects. The final regulation combines the language found in two 
    paragraphs of the current regulation with the resulting paragraph 
    retaining substantially the same language. Changes were made to clarify 
    some technical aspects of the manner in which the qualified housing 
    rules work and are not intended to be substantive. In addition, the 
    FDIC modified the
    
    [[Page 66287]]
    
    language of the text to remove negative inferences and make the text 
    clearer.
        Under this exception, an insured state bank is allowed to invest as 
    a limited partner in a partnership, the sole purpose of which is direct 
    or indirect investment in the acquisition, rehabilitation, or new 
    construction of a residential housing project intended to primarily 
    benefit lower income persons throughout the period of the bank's 
    investment. The bank's investments, when aggregated with any existing 
    investment in such a partnership or partnerships, may not exceed 2 
    percent of the bank's total assets. The FDIC expects a bank to use the 
    figure reported on the bank's most recent consolidated report of 
    condition (Call Report) prior to making the investment as the measure 
    of its total assets. If an investment in a qualified housing project 
    does not exceed the limit at the time the investment is made, the 
    investment shall be considered to be a legal investment even if the 
    bank's total assets subsequently decline.
        The current exception is limited to instances in which the bank 
    invests as a limited partner in a partnership. In the proposal, comment 
    was invited on (1) whether the FDIC should expand the exception to 
    include limited liability companies and (2) whether doing so is 
    permissible under the statute. (Section 24(c)(3) of the FDI Act 
    provides that a state bank may invest ``as a limited partner in a 
    partnership''.). No comments were received on the legal issue. One 
    comment applauded our suggestion to expand this statutory exception by 
    regulation. In the final rule, we have expanded Sec. 362.3(a)(2)(ii) to 
    permit insured state banks to invest in qualified housing projects as a 
    limited partner or through a limited liability company.
        Although the statutory language in the paragraph allowing an 
    investment in qualified housing projects explicitly allows only a 
    limited partnership investment, it does not prohibit other forms of 
    ownership. For the purpose of this investment and consistent with the 
    underlying public policy purposes of this statute, we consider limited 
    liability companies to be substantially equivalent to limited 
    partnership interests. It is consistent with the FDIC's authority under 
    the statute to extend the qualified housing projects exception by 
    regulation to cover the limited liability company form of business 
    enterprise in this circumstance. Limited partnership interests and 
    limited liability companies provide similar forms of business 
    enterprise. Although we have been unwilling to expand the regulatory 
    exceptions to allow limited liability companies to substitute for 
    corporate forms of business enterprise where uniform separation 
    standards were required to protect the bank from the liability of its 
    subsidiaries that conduct activities not permissible for national bank 
    subsidiaries, we believe that no similar impediments exist here. We 
    also acknowledge that we have been reluctant to extend this exception 
    to limited liability companies in the past when informal 
    interpretations were requested.3 However, we believe, and no 
    commenter raised any contrary argument, that it is appropriate to 
    extend the statutory exception to cover these substantially similar 
    organizational structures through this regulation. Thus, subject to the 
    other limitations in the rule, we are allowing by regulation insured 
    state banks to invest in limited liability companies that invest in the 
    acquisition, rehabilitation or construction of a qualified housing 
    project.
    ---------------------------------------------------------------------------
    
        \3\ See 2 FDIC Law, Regulations, Related Acts (FDIC) 4903; 1994 
    WL 763183 (F.D.I.C.) and FDIC 94-50, 1994 FDIC Interp. Ltr. LEXIS 
    89, October 12, 1994.
    ---------------------------------------------------------------------------
    
        Grandfathered investments in listed common or preferred stock and 
    shares of registered investment companies. Available only to certain 
    grandfathered state banks, Sec. 326.3(a)(2)(iii) of the final 
    regulation carries forward the statutory exception for investments in 
    common or preferred stock listed on a national securities exchange and 
    for shares of investment companies registered under the Investment 
    Company Act of 1940. Although there is no substantive change, the FDIC 
    has modified the language of this section to remove negative inferences 
    and make the text clearer.
        To use the grandfathered authority, section 24 requires, among 
    other things, that a state bank file a notice with the FDIC before 
    relying on the exception and that the FDIC approve the notice. The 
    notice requirement, content of notice, presumptions with respect to the 
    notice, and the maximum permissible investment under the grandfather 
    also are set out in the current regulation. The references contained in 
    the current regulation describing the notice content and procedures 
    were deleted because we believe that most, if not all, of banks 
    eligible for the grandfather already have filed notices with the FDIC. 
    Thus, we eliminated language governing the specific content and 
    processing of notices and cross-referencing the notice procedures under 
    subpart G of part 303. Any bank that has filed a notice need not file 
    again.
        Paragraph (B) of this section of the final regulation provides that 
    the exception for listed stock and registered shares ceases to apply in 
    the event that the bank converts its charter or the bank or its parent 
    holding company undergoes a change in control. This language restates 
    the statutory language governing when grandfather rights terminate. As 
    is discussed in the preamble above in connection with the definition of 
    ``change in control'', the FDIC has revised both the current and 
    proposed scope of transactions encompassed in the notion of a change in 
    control.
        The regulation continues to provide that in the event an eligible 
    bank undergoes any transaction that results in the loss of the 
    exception, the bank is not prohibited from retaining its existing 
    investments unless the FDIC determines that retaining the investments 
    will adversely affect the bank and the FDIC orders the bank to divest 
    the stock and/or shares. This provision has been retained in the final 
    rule without any change except for the deletion of the citation to 
    specific authorities the FDIC may rely on concerning divestiture. 
    Rather than containing specific citations, the final regulation merely 
    references the FDIC's ability to order divestiture under any applicable 
    authority. State banks should continue to be aware that any inaction by 
    the FDIC would not preclude a bank's appropriate banking agency (when 
    that agency is an agency other than the FDIC) from taking steps to 
    require divestiture of the stock and/or shares if, in that agency's 
    judgment, divestiture is warranted.
        The FDIC has moved, simplified, and shortened the limit on the 
    maximum permissible investment in listed stock and registered shares. 
    The final regulation limits the bank's investment in grandfathered 
    listed stock and registered shares, when made, to a maximum of 100 
    percent of tier one capital as measured on the bank's most recent Call 
    Report prior to the investment. The final rule modifies the proposed 
    regulatory language somewhat, to clarify how the maximum investment 
    limit is to be determined. The final rule uses the lower of the bank's 
    cost or the market value of the stock and shares as the measure of 
    compliance with this limit. The proposal referred to book value. At the 
    time the FDIC adopted the current version of the rule, call report 
    instructions and generally accepted accounting principles (GAAP) 
    provided that equity securities were generally to be carried at the 
    lower of cost or market value. The FDIC adopted the book value
    
    [[Page 66288]]
    
    approach at that time, in response to industry comments that a market 
    value approach would exhaust a bank's grandfather authority as the 
    value of its stock and shares appreciated. Now that call report 
    instructions and GAAP require stock and shares covered by the rule to 
    be reported at market value in many cases, the book value approach no 
    longer serves the desired purpose. The FDIC is expressly referring to 
    the lower of cost or market approach in the final rule, in order to 
    maintain consistency with the current rule. The lower of cost or market 
    approach is also consistent with the federal banking agencies' rules 
    for determining tier one capital, which require exclusion of net 
    unrealized holding losses on available-for-sale equity securities with 
    readily determinable fair values.
        Language indicating that investments by well-capitalized banks in 
    amounts up to 100 percent of tier one capital will be presumed not to 
    present a significant risk to the fund was deleted, as was language 
    indicating that it will be presumed to present a significant risk to 
    the fund for an undercapitalized bank to invest in amounts that high. 
    In addition, the proposed rule deleted the language stating the 
    presumption that, absent some mitigating factor, it will not be 
    presumed to present a significant risk for an adequately capitalized 
    bank to invest up to 100 percent of tier one capital. The FDIC received 
    one comment asking that we retain regulatory language describing these 
    presumptions for well- and adequately-capitalized banks. The commenter 
    believes that removal of the presumptions will create uncertainty and 
    may cause banks to hesitate to take full advantage of these investment 
    opportunities. The FDIC nonetheless believes at this time that it is 
    not necessary to expressly state these presumptions in the regulation. 
    However, this action does not alter the FDIC's position regarding the 
    presumptions.
        Language in the current regulation concerning the divestiture of 
    stock and/or shares in excess of that permitted by the FDIC (as well as 
    such investments in excess of 100 percent of the bank's tier one 
    capital) has been deleted under the proposal as no longer necessary due 
    to the passage of time. In both instances, the time allowed for such 
    divestiture has passed.
        We note that the statute does not impose any conditions or 
    restrictions on a bank that enjoys the grandfather in terms of per 
    issuer limits. The proposal invited comment on whether the FDIC should 
    impose restrictions under the regulation that would, for example, limit 
    a bank to investing in less than a controlling interest in any given 
    issuer. Additionally, we asked whether the regulation should 
    incorporate other limits or restrictions to ensure the grandfathered 
    investments do not pose a risk. Although no comments specifically 
    addressed these questions, several commenters referred to the fact that 
    most institutions to which the grandfather is applicable have already 
    filed notices with the FDIC regarding those investments. These 
    institutions have since complied with any imposed conditions, or 
    subsequently applied to have the conditions altered or removed. The 
    commenters do not feel that banks should now be subject to requirements 
    the FDIC did not originally impose. Moreover, the commenters point out 
    that the FDIC and state banking authorities routinely review investment 
    portfolios as part of the supervisory process and can address any 
    deficiencies on a case-by-case basis. Upon further reflection, the FDIC 
    is persuaded not to impose any new regulatory requirements on these 
    grandfathered institutions for directly held investments. However, the 
    FDIC wants to emphasize that it expects banks using this grandfathered 
    investment authority to establish prudent limits and controls governing 
    these investments. Equity securities and registered shares that are 
    held by the bank must be consistent with the institution's overall 
    investment goals and will be reviewed by examiners in that context. The 
    FDIC will not take exception to listed stock and registered shares that 
    are well regarded by knowledgeable investors, marketable, held in 
    moderate proportions, and meet the institution's overall investment 
    goals.
        Stock investment in insured depository institutions owned 
    exclusively by other banks and savings associations (banker's banks). 
    Section 362.3(b)(2)(iv) of the final regulation continues to reflect 
    the statutory exception that an insured state bank is not prohibited 
    from acquiring or retaining the shares of depository institutions that 
    engage only in activities permissible for national banks, are subject 
    to examination and are regulated by a state bank supervisor, and are 
    owned by 20 or more depository institutions not one of which owns more 
    than 15 percent of the voting shares. In addition, the voting shares 
    must be held only by depository institutions (other than directors' 
    qualifying shares or shares held under or acquired through a plan 
    established for the benefit of the officers and employees). Note that 
    the proposal modified this exception to no longer limit the bank's 
    investment in such depository institutions to ``voting'' stock. This 
    change was made to allow banks to hold non-voting interests in these 
    entities because section 24(f)(3)(B) of the FDIC Act does not limit the 
    exception to voting stock. However, the final regulation retains the 
    reference to ``voting'' stock in determining the various ownership and 
    control thresholds. The FDIC received no comments on this provision 
    which is adopted as proposed.
        Stock investments in insurance companies. Section 362.3(a)(2)(v) of 
    the final regulation incorporates statutory exceptions permitting state 
    banks to hold equity investments in insurance companies. The exceptions 
    are provided by statute and are implemented in the current version of 
    part 362. For the most part, the exceptions are carried forward into 
    the final regulation with no substantive editing. The exceptions are 
    discussed separately below.
        Directors and officers liability insurance corporations. The first 
    exception permits insured state banks to own stock in corporations that 
    solely underwrite or reinsure financial institution directors' and 
    officers' liability insurance or blanket bond group insurance. A bank's 
    investment in any one corporation is limited to 10 percent of the 
    outstanding stock. Consistent with the proposal, we eliminated the 
    present limitation of 10 percent of the ``voting'' stock and changed 
    the present reference from ``company'' to ``corporation'' conforming 
    the language to the statutory exception.
        While the statute and regulation provide a limit on a bank's 
    investment in the stock of any one insurance company under this 
    provision, there is no statutory or regulatory ``aggregate'' investment 
    limit in all insurance companies, nor does the statute combine these 
    investments with any other exception under which a state bank may 
    invest in equity securities. In the past, the FDIC has addressed 
    investment concentration and diversification issues on a case-by-case 
    basis. Nonetheless, the FDIC invited comment on whether it should 
    incorporate aggregate limits on grandfathered bank investments in 
    insurance companies. Responses addressing this issue were submitted by 
    two trade associations and one bank consortium. While one trade 
    association suggested that it would be prudent for the FDIC to 
    incorporate some form of investment limit, the other two parties 
    strongly opposed the imposition of any regulatory limit on what are 
    statutory
    
    [[Page 66289]]
    
    exceptions. The FDIC has elected not to impose aggregate investment 
    limits on equity investments specifically permitted by statute, nor 
    will it combine the bank's investments in insurance companies with 
    other equity investments made pursuant to any regulatory exception. 
    Instead, the FDIC will continue to address investment concentration and 
    diversification issues on a case-by-case basis.
        Stock of savings bank life insurance company. The second exception 
    for equity investments in insurance companies permits any insured state 
    bank located in New York, Massachusetts, or Connecticut to own stock in 
    savings bank life insurance companies provided that certain consumer 
    disclosures are made. Again, this regulatory provision mirrors the 
    specific statutory exception found in section 24. The savings bank life 
    insurance investment exception is broader than the director and officer 
    liability insurance company exception discussed above. There are no 
    individual or aggregate investment limitations for investments in 
    savings bank life insurance companies.
        Consistent with the proposal, the provision implementing this 
    exception in the current regulation was carried forward into the final 
    regulation with some modifications. The language describing this 
    exception was revised to affirmatively permit banks located in New 
    York, Massachusetts, or Connecticut to own stock in a savings bank life 
    insurance company provided the company provides the required 
    disclosures. Additionally, the final regulation alters the required 
    disclosure from that provided by the current regulation. Rather than 
    continue the disclosure language currently contained in 
    Sec. 362.3(b)(3), the FDIC has decided to require disclosures of the 
    type provided for in the Interagency Statement. As a result, these 
    companies are required to provide their retail customers with written 
    and oral disclosures consistent with the Interagency Statement when 
    selling savings bank life insurance policies, other insurance products, 
    and annuities. The required disclosures in the Interagency Statement 
    include a statement that the products are not insured by the FDIC, are 
    not a deposit or other obligation of, or guaranteed by, the bank, and 
    are subject to investment risks, including the possible loss of the 
    principal amount invested. While the existing regulatory language is 
    similar to the Interagency Statement in what it requires to be 
    disclosed, it is not identical. The last disclosure--that such products 
    may involve risk of loss--is not required under the current regulation.
        Although commenters generally supported referencing the Interagency 
    Statement rather than incorporating a different disclosure standard, a 
    savings bank life insurance company and a United States Congressman 
    objected to the ``risk of loss'' disclosure. The savings bank life 
    insurance company claims that a disclosure of that nature is a 
    falsehood unsupported by factual data. Both commenters are concerned 
    that the ``risk of loss'' disclosure places savings bank life insurance 
    companies at a competitive disadvantage relative to other entities 
    selling life insurance products. The Congressman suggested replacing 
    the required disclosure concerning ``may involve risk of loss'' with 
    ``may involve market risk, if applicable''.
        It is the FDIC's view that FDIC-insured deposits differ from 
    savings bank life insurance products and annuities because investors in 
    such products are exposed to a possible loss of the principal amount 
    invested. The Interagency Statement does not distinguish between the 
    relative loss exposure presented by various nondeposit investment 
    products. The distinction is simply between insured deposits and other 
    investment products. Savings bank life insurance, other insurance 
    products, and annuities contain an investment risk component exposing 
    the investor to a loss of principal despite the assertion offered by 
    one commenter. Further, investors in nondeposit products are exposed to 
    more than market risks. The FDIC is therefore unwilling to change the 
    nature of the required disclosure.
        Nevertheless, the FDIC recognizes that the language proposed in 
    Sec. 362.3(a)(2)(v)(B) may be interpreted to mean the subject 
    disclosure must contain the phrase ``may involve risk of loss''. The 
    FDIC intends for the disclosures to be consistent with the Interagency 
    Statement and was simply paraphrasing the respective disclosure content 
    in the event the Interagency Statement is succeeded by another 
    statement or regulation. Included in the required disclosures is a 
    statement specifying that the nondeposit product is ``subject to 
    investment risks, including possible loss of the principal amount 
    invested''. The actual Interagency Statement language may convey a less 
    threatening tone concerning the possibility of loss. To avoid confusion 
    and reflect the FDIC's actual intent, the phrase ``may involve risk of 
    loss'' was replaced with ``are subject to investment risks, including 
    possible loss of the principal amount invested'' in the final rule.
        The FDIC is aware that insurance companies, including savings bank 
    life insurance companies, typically offer annuity products and that 
    many states regulate annuities through their insurance departments. The 
    FDIC agrees with the OCC that annuities are investment products that 
    are subject to the requirements found in the Interagency Statement when 
    sold to retail customers on bank premises as well as in other instances 
    specified in the Interagency Statement.
        Other activities prohibition. Section 362.3(b) of the final 
    regulation restates the statutory limit prohibiting insured state banks 
    from directly or indirectly engaging as principal in any activity that 
    is not permissible for a national bank. Activity is defined in the rule 
    as the conduct of business by a state-chartered depository institution 
    and includes acquiring or retaining any investment. Because acquiring 
    or retaining an investment is an activity by definition, the proposal 
    added language to make clear that this prohibition does not supersede 
    the equity investment exceptions of Sec. 362.3(a)(2). The prohibition 
    does not apply if one of the statutory exceptions contained in section 
    24 of the FDI Act (restated in the current regulation and carried 
    forward in the final regulation) applies. The FDIC has also provided a 
    regulatory exception to the prohibition on other activities concerning 
    the acquisition of certain debt-like instruments. Insured state banks 
    desiring to engage in other activities must submit an application to 
    the FDIC pursuant to Sec. 362.3(b)(2)(i).
        Consent through Application. The limit on activities contained in 
    section 24 states that an insured state bank may not engage as 
    principal in any type of activity that is not permissible for a 
    national bank unless the FDIC has determined that the activity would 
    pose no significant risk to the appropriate deposit insurance fund, and 
    the bank is and continues to be in compliance with applicable capital 
    standards prescribed by the appropriate federal banking agency. Section 
    362.3(b)(2)(i) establishes an application process for the FDIC to make 
    the determination concerning risk to the funds. The substance of this 
    process is unchanged from the current regulation.
        Insurance underwriting. This exception tracks the statutory 
    exception in section 24 which grandfathers: (1) Certain insured state 
    banks engaged in the underwriting of savings bank life insurance 
    through a department of the bank; (2) any insured state bank that 
    engaged in underwriting of insurance on
    
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    or before September 30, 1991, which was reinsured in whole or in part 
    by the Federal Crop Insurance Corporation; and (3) certain well-
    capitalized banks engaged in insurance underwriting through a 
    department of a bank. The exception is carried forward from the current 
    regulation with a number of modifications.
        The savings bank life insurance exception applies to insured state 
    banks located in Massachusetts, New York, or Connecticut. To use this 
    exception, banks must engage in the activity through a department of 
    the bank meeting the core standards discussed below. The standards for 
    conducting this activity are taken from the current regulation with the 
    exception of the disclosure standards which are discussed below. We 
    moved the requirements for a department from the definitions section to 
    the substantive portion of the regulation text.
        The exception for underwriting federal crop insurance is unchanged 
    from the current regulation, and there are no regulatory limitations on 
    the conduct of the activity.
        An insured state bank that wishes to use the remaining 
    grandfathered insurance underwriting exception may do so only if the 
    insured state bank was lawfully providing insurance, as principal, as 
    of November 21, 1991. Further, the insured state bank must be well-
    capitalized if it is to engage in insurance underwriting and the bank 
    must conduct the insurance underwriting in a department that meets the 
    core standards described below. Banks taking advantage of this 
    grandfather provision may underwrite only the same type of insurance 
    that was underwritten as of November 21, 1991, and may operate and have 
    customers only in the same states in which it was underwriting policies 
    on November 21, 1991. The grandfather authority for this activity does 
    not terminate upon a change in control of the bank or its parent 
    holding company.
        Both savings bank life insurance activities and grandfathered 
    insurance underwriting must take place in a department of the bank 
    which meets certain core operating and separation standards. Consistent 
    with the disclosure requirements of the current regulation, the core 
    operating standards require the department to inform its customers that 
    only the assets of the department may be used to satisfy the 
    obligations of the department. Note that this language does not require 
    the bank to say that the bank is not responsible for the obligations of 
    the department. The bank and the department constitute one corporate 
    entity. In the event of insolvency, the insurance underwriting 
    department's assets and liabilities would be segregated from the bank's 
    assets and liabilities due to the requirements of state law. The 
    regulatory language of the final rule has been changed to clarify that 
    a bank seeking to operate its department under separation standards 
    different than the core standards in the rule may submit an application 
    to the FDIC.
        The final regulation eliminates the proposed operating standard 
    requirement that the department provide customers with written 
    disclosures consistent with those in the Interagency Statement. The 
    FDIC proposed replacing the disclosure statement currently imposed by 
    Sec. 362.4(g)(1)(iii) with that required in the Interagency Statement 
    to increase consistency and reduce the regulatory burden of differing 
    requirements. Upon further reflection, the FDIC has decided that while 
    it is prudent to eliminate the disclosure currently required by part 
    362, the proposal to impose the Interagency Statement in connection 
    with this activity in this regulation is unnecessary. Unlike the 
    statutory exception permitting banks to engage in savings bank life 
    insurance activities, the authorizing statute does not require a 
    customer disclosure as a condition of engaging in other grandfathered 
    insurance activities. Nevertheless, banks engaged in grandfathered 
    insurance underwriting continue to be subject to the Interagency 
    Statement in connection with sales to bank customers, including the 
    disclosure provisions of that statement. Comments support this change 
    and recognize that any retail sale of nondeposit investment products to 
    bank customers is subject to the Interagency Statement if made on bank 
    premises, by a bank employee, or pursuant to a compensated referral.
        The FDIC cannot, however, eliminate the regulatory requirement that 
    insured state banks engaged in savings bank life insurance activities 
    make disclosures to all consumers. Section 24(e) of the FDI Act 
    authorizes this activity only if the bank meets the consumer disclosure 
    requirements. Thus, under the statute, the FDIC must promulgate 
    consumer disclosures for savings bank life insurance. Section 
    362.4(c)(1) of the current regulation addresses banks engaging in 
    savings bank life insurance underwriting activities. The referenced 
    section requires the bank to make certain disclosures to purchasers of 
    life insurance policies, other insurance products, and annuities. As 
    discussed previously in this preamble, these disclosures are similar to 
    those set out in the Interagency Statement but they are not identical. 
    Currently, banks engaging in savings bank life insurance underwriting 
    are covered by the Interagency Statement and part 362. As a result, 
    banks have been required to comply with both of these similar but 
    somewhat different requirements. The final regulation replaces the 
    current disclosure requirement with a cross reference to the 
    Interagency Statement to make compliance easier. Banks engaging in 
    savings bank life insurance activities should note, however, that 
    consistent with the proposal and the current regulation, the final rule 
    carries forward the requirement that the department also inform 
    purchasers that only the assets of the insurance department may be used 
    to satisfy the obligations of the department. Comments and the FDIC's 
    response are described elsewhere in this preamble.
        The core separation standards in the final rule restate the 
    requirements currently found in the definition of department. These 
    standards require the department to: (1) Be physically distinct from 
    the remainder of the bank; (2) maintain separate accounting and other 
    records; (3) have assets, liabilities, obligations, and expenses that 
    are separate and distinct from those of the remainder of the bank; and 
    (4) be subject to state statutes that permitting the obligations, 
    liabilities, and expenses to be satisfied only with the assets of the 
    department. The standards are unchanged from those in the current 
    regulation, but they have been moved from the definitions section to 
    ensure that the requirements are shown in connection with the 
    appropriate regulatory exception.
        Acquiring and retaining adjustable rate and money market preferred 
    stock. The proposal provides an exception that allows a state bank to 
    invest in up to 15 percent of the bank's tier one capital in adjustable 
    rate preferred stock and money market (auction rate) preferred stock 
    without filing an application with the FDIC. The exception was adopted 
    when the 1992 version of the regulation was adopted in final form. 
    After reviewing comments at that time, the FDIC found that adjustable 
    rate preferred stock and money market (auction rate) preferred stock 
    were essentially substitutes for money market investments such as 
    commercial paper and that these investments possess characteristics 
    closer to debt than to equity securities. Therefore, money market 
    preferred stock and adjustable rate preferred stock were excluded from 
    the definition of equity security. As a result, these investments are 
    not subject to the equity investment prohibitions of the statute or the 
    regulation and they are
    
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    considered to be an ``other activity'' for the purposes of this 
    regulation.
        This exception focuses on two categories of preferred stock. This 
    first category, adjustable rate preferred stock, refers to shares where 
    dividends are established by contract through the use of a formula 
    based on Treasury rates or some other readily available interest rate 
    levels. Money market preferred stock refers to those issues where 
    dividends are established through a periodic auction process that 
    establishes yields in relation to short-term rates paid on commercial 
    paper issued by the same or a similar company. The credit quality of 
    the issuer determines the value of the security. Money market preferred 
    shares are sold at auction.
        Consistent with other parts of the proposal, the FDIC has modified 
    the exception by limiting the 15 percent measurement to tier one 
    capital, rather than total capital. Throughout the final regulation, 
    all capital-based limitations are measured against tier one capital to 
    increase uniformity within the regulation. The FDIC recognizes that 
    this change may lower the permitted amount of these investments held by 
    institutions already engaged in the activity. An insured state bank 
    that has investments exceeding the proposed limit, but within the total 
    capital limit, may continue holding those investments until they are 
    redeemed or repurchased by the issuer. The 15 percent of tier one 
    capital limitation should be used in determining the allowable amount 
    of new purchases of money market preferred and adjustable rate 
    preferred stock. Of course, institutions wanting to increase their 
    holdings of these securities may submit an application to the FDIC.
        The FDIC received five comments regarding this proposed change. 
    Although the commenters applaud the desire for consistency, they 
    contend that the results of such a change are unjustified when done 
    principally for the sake of uniformity. Thus, the commenters suggest 
    that the FDIC either leave the measurement base unchanged or increase 
    the limit to offset the impact of the change. While the FDIC 
    acknowledges the concerns expressed by commenters, it is not persuaded 
    that changing the capital base from total to tier one capital creates a 
    significant hardship. Therefore, the final regulation uses the tier one 
    capital base to measure the applicable limit. The FDIC will handle 
    applications to exceed the governing threshold in an expeditious manner 
    according to procedures detailed in subpart G of part 303.
        The final regulation incorporates a provision allowing insured 
    state banks to acquire and retain other instruments of a type 
    determined by the FDIC to have the character of debt securities 
    provided the instruments do not represent a significant risk to the 
    deposit insurance funds. In response to investor and client needs, the 
    financial markets continually develop new financial products. A recent 
    example of such an instrument is trust preferred stock. Trust preferred 
    stock is a hybrid instrument possessing characteristics typically 
    associated with debt obligations. Trust preferred securities are issued 
    by an issuer trust that uses the proceeds to purchase subordinated 
    deferrable interest debentures in a corporation. The corporation 
    guarantees the obligations of the issuer trust and agrees to indemnify 
    third parties for other expenses and liabilities incurred by the issuer 
    trust. Taken together, the debentures, guarantee, and expense indemnity 
    agreement constitute a full, irrevocable, and unconditional guarantee 
    of the obligations of the issuer trust by the issuer corporation. With 
    the exception of credit risk, investors in trust preferred stock are 
    protected from changes in the value of the instruments. Like investors 
    in debt securities, trust preferred stock investors do not share any 
    appreciation in the value of the issuer trust and have no voting rights 
    in the management or ordinary course of business of the issuer trust. 
    Additionally, trust preferred stock is not perpetual and distributions 
    on the stock resemble the periodic interest payments on debt. In 
    essence, such investments are functionally equivalent to investments in 
    the underlying debentures. In the future, as such new instruments come 
    to the FDIC's attention, the FDIC will provide public notice of its 
    determinations under the rule by issuing Financial Institution Letters 
    describing its decisions. Any investments in such instruments would be 
    aggregated with investments in adjustable rate and money market 
    preferred stock for purposes of applying the 15 percent of tier one 
    capital limit.
        Activities that are closely related to banking. The language in the 
    proposal providing a regulatory exception allowing insured state banks 
    to engage in activities closely related to banking has been eliminated. 
    The proposed regulation continued language found in the current 
    regulation entitled ``Activities that are closely related to banking''. 
    Section 362.3(b)(2)(iv) of the proposal permitted an insured state bank 
    to engage as principal in any activity that is not permissible for a 
    national bank provided that the FRB by regulation or order has found 
    the activity to be closely related to banking for the purposes of 
    section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)). 
    However, the proposed exception was subject to the statutory 
    restrictions prohibiting the bank from directly holding equity 
    investments that a national bank may not hold or which are not 
    otherwise permissible investments for insured state banks pursuant to 
    Sec. 362.3(b). Additionally, the proposal imposed limits on certain of 
    the activities authorized by the 4(c)(8) reference. Included in the 
    limits was a provision requiring the bank, when acting as a real 
    property lessor, to either re-lease the real estate or dispose of the 
    same within two years after the lease expires.
        The FDIC received six comments on this provision, four of them 
    objecting to the two-year disposition period at the conclusion of a 
    real estate lease. Another opined that the bank's survival depends on 
    its ability to diversify by engaging in real estate leasing through a 
    subsidiary. An industry trade association supports continued reliance 
    on activities authorized by the FRB pursuant to 4(c)(8) of the Bank 
    Holding Company Act.
        Upon further analysis, the FDIC has deleted the reference to the 
    4(c)(8) list because the activities included on that list generally are 
    of a type permissible for national banks. The one exception that 
    clearly is not generally permissible for a national bank involves real 
    estate leasing. It is noted that national banks are permitted to engage 
    in certain real estate leasing activities. As with other activities 
    permissible for national banks, insured state banks can engage in the 
    same real estate leasing activities subject to any limitations imposed 
    by the applicable state law. However, since section 24 of the FDI Act 
    does not permit the FDIC to allow insured state banks, at the bank 
    level, to hold equity investments that are not permissible for national 
    banks, any FDIC authorization for real estate leasing raises a question 
    whether, under a particular leasing arrangement, the bank as lessor 
    holds an interest in real estate tantamount to an equity investment. 
    Given the variety of potential lease structures, it is not practicable 
    for the FDIC to deal with this issue categorically, under a regulatory 
    exception, at this time. If authorized under state law, state banks are 
    permitted to engage in leasing activities through majority-owned 
    subsidiaries. This exception is discussed in the description of 
    Sec. 362.4(b) in this preamble.
        Guarantee activities. The current regulation contains a provision 
    that
    
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    permits a state bank with a foreign branch to directly guarantee the 
    obligations of its customers as set out in what was formerly 
    Sec. 347.3(c)(1) of the FDIC's regulations without filing any 
    application under part 362. A technical amendment to part 362 was 
    recently made to update this reference to Sec. 347.103(a)(1) as 
    published in the Federal Register on April 8, 1998 (63 FR 17090). The 
    current regulation also permits a state bank to offer customer-
    sponsored credit card programs in which the bank guarantees the 
    obligations of its retail banking deposit customers. This provision has 
    been deleted as unnecessary since these activities are permissible for 
    a national bank. In its current rule, the FDIC used this provision to 
    clarify that part 362 does not prohibit these activities. To shorten 
    the regulation, such clarifying language has been deleted since the 
    activity is permissible for a national bank. The FDIC received no 
    comments addressing this provision and it is dropped as proposed.
    Section 362.4  Subsidiaries of Insured State Banks
        General prohibition. The regulatory language implementing the 
    statutory prohibition on an insured state bank engaging in ``as 
    principal'' activities that are not permissible for a national bank is 
    separated from the prohibition on an insured state bank subsidiary 
    engaging in activities which are not permissible for a subsidiary of a 
    national bank. For ease of reference we separated bank and subsidiary 
    activities. Section 362.4 deals exclusively with activities that may be 
    conducted in a subsidiary of an insured state bank. Five commenters 
    supported this restructuring of the regulation. The FDIC believes that 
    separating the activities that may be conducted at the bank level from 
    the activities that must be or may be conducted by a subsidiary makes 
    it easier for the reader to focus on the analysis of the regulation. 
    Therefore, the general prohibition in the final regulation is adopted 
    as proposed.
        Exceptions. First, the regulation provides that activities not 
    permissible for a national bank subsidiary may not be conducted by the 
    subsidiary of an insured state bank unless one of the exceptions in the 
    regulation applies. This language is similar to the current part 362 
    and we received no comments on the provision. The final regulation 
    contains no changes to the proposed language.
        Consent obtained through application. The revised regulation allows 
    approval by individual application provided that the insured state bank 
    meets and continues to meet the applicable capital standards and the 
    FDIC finds there is no significant risk to the fund. Language from the 
    current regulation is deleted that expressly provides that approval is 
    necessary for each subsidiary even if the bank received approval to 
    engage in the same activity through another subsidiary. Deleting this 
    language does not automatically permit a state bank to establish a 
    second subsidiary to conduct the same activity that was approved for 
    another subsidiary of the same bank; however, the issue will be handled 
    on a case-by-case basis by the FDIC pursuant to order. For example, if 
    the FDIC approves an application by a state bank to establish a 
    majority-owned subsidiary to engage in real estate investment 
    activities, the order may (in the FDIC's discretion) be written to 
    allow more than one subsidiary to conduct the activity or to require 
    that any additional real estate subsidiaries must be individually 
    approved.
        Application procedures may be used by a bank to request the FDIC's 
    consent to engage in an activity that is limited but not specifically 
    prohibited by this part. For instance, the notice procedures require 
    that the subsidiary take the corporate organizational form. Several 
    comments expressed concern about the restriction on the form of 
    business enterprise. Any subsidiary that is organized as a limited 
    liability company would be required to use the application procedures. 
    The FDIC does not intend to prohibit insured state banks from 
    organizing subsidiaries in a form other than a corporation, or to make 
    it more difficult to establish these other forms of business 
    enterprise. However, the FDIC would like to review other forms of 
    organizations, on a case-by-case basis, to satisfy itself that adequate 
    separations are placed between the bank and its subsidiary. At this 
    time, we have not found a way to craft standardized separation criteria 
    for these other forms of business enterprise. No commenters suggested 
    any criteria. Other requests that do not meet the notice criteria or 
    that desire relief from a limit or restriction included in the notice 
    criteria also are encouraged. Application instructions have been moved 
    to subpart G of part 303.
        Consistent with the proposal, the final rule eliminates language 
    that prohibited an insured state bank from engaging in insurance 
    underwriting through a subsidiary except to the extent that such 
    activities are permissible for a national bank. Eliminating this 
    language does not result in any substantive change as section 24 of the 
    FDI Act clearly provides that the FDIC may not approve an application 
    for a state bank to directly or indirectly conduct insurance 
    underwriting activities that are not permissible for a national bank. 
    The FDIC received no comment on this change. Therefore, the language is 
    unnecessary and has been eliminated as proposed.
        The current part 362 allows state banks that do not meet their 
    minimum capital requirements to gradually phase out otherwise 
    impermissible activities that were being conducted as of December 19, 
    1992. These provisions are eliminated due to the passage of time. The 
    relevant outside dates to complete the phase out of those activities 
    have passed (December 19, 1996, for real estate activities and December 
    8, 1994, for all other activities).
        Grandfathered Insurance Underwriting. The regulation provides for 
    three statutory exceptions that allow subsidiaries to engage in 
    insurance underwriting, covering ``grandfathered'' insurance 
    activities, title insurance, and crop insurance.
        Subsidiaries may engage in the same grandfathered insurance 
    underwriting as the bank if the bank or subsidiary was lawfully 
    providing insurance as principal on November 21, 1991. The limitations 
    under which this subsidiary may operate have been changed.
        The current standard that the bank must be well-capitalized has 
    been changed. Consistent with the proposal, the final rule requires the 
    bank to be well-capitalized after deducting its investment in the 
    insurance subsidiary. One comment on this change argues that the risk 
    involved in insurance underwriting depends upon the type of insurance 
    and that not all insurance underwriting is inherently risky enough to 
    justify an automatic capital deduction. The FDIC believes that this 
    capital treatment is an important element to separate the operations of 
    the bank and the subsidiary. This treatment clearly delineates and 
    identifies the capital that is available to support the bank and the 
    capital that is available to support the subsidiary. Capital standards 
    for insurance companies are based on different criteria from bank 
    capital requirements. Most states have minimum capital requirements for 
    insurance companies. The FDIC believes that a bank's investment in an 
    insurance underwriting subsidiary is not actually ``available'' to the 
    bank in the event the bank experiences losses and needs additional 
    capital. As a result, the bank's investment in the insurance subsidiary 
    should not be considered when determining whether the bank has 
    sufficient capital.
    
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        Another commenter objects to the introduction of the ``capital 
    deduction'' arguing that providing insurance as principal under the 
    ``grandfather'' provision is not an activity for which a state bank 
    must obtain a risk to the fund determination. The comment asserts that 
    the provision is self-operative in the absence of any determination or 
    regulations of the FDIC, since Congress evaluated the risk to the 
    insurance funds created by the activity and found that risk to be 
    acceptable. The FDIC agrees that, other than the requirement that the 
    bank must be well-capitalized, section 24 itself imposes no additional 
    conditions or restrictions on the activity. Nevertheless, ever since 
    the FDIC originally promulgated its part 362 rules regarding the 
    conduct of this activity, the FDIC has noted that the activity can 
    involve material risks, and it is therefore prudent to separate those 
    risks from the insured state bank. See 58 FR 64482 (Dec. 8, 1993). The 
    FDIC has always imposed conditions on this activity, over and above 
    those addressed in section 24 itself, to protect bank safety and 
    soundness and protect the deposit insurance funds. See 58 FR 6465 
    (January 29, 1993). As noted at the time, the FDIC is not precluded 
    from imposing such restrictions, as section 24(i) itself clearly 
    indicates.
        Commenters disagreed on the need for an aggregate investment limit 
    for equity investments in grandfathered insurance activities. One 
    comment argues that it is important to limit the maximum exposure to 
    the depository institution. Another comment states that such a limit is 
    not suggested by the statute, and the FDIC should retain the 
    flexibility to act on a case-by-case basis. After further consideration 
    of this issue, the FDIC is not convinced that the risks from the 
    different types of insurance subject to grandfather provisions are 
    similar. Therefore, an aggregate limit would not necessarily enhance 
    the safety and soundness of the banks involved in this activity. After 
    considering the comments received and for the reasons stated above, the 
    language in the final regulation is unchanged from the proposal.
        The revisions to the regulation require a subsidiary engaging in 
    grandfathered insurance underwriting to meet the standards for an 
    ``eligible subsidiary'' discussed below. This standard replaces the 
    ``bona fide'' subsidiary standard in the current regulation. The 
    ``eligible subsidiary'' standard generally contains the same 
    requirements for corporate separateness as the ``bona fide'' subsidiary 
    definition but adds the following provisions: (1) The subsidiary has 
    only one business purpose; (2) the subsidiary has a current written 
    business plan that is appropriate to its type and scope of business; 
    (3) the subsidiary has adequate management for the type of activity 
    contemplated, including appropriate licenses and memberships, and 
    complies with industry standards; and (4) the subsidiary establishes 
    policies and procedures to ensure adequate computer, audit and 
    accounting systems, internal risk management controls, and the 
    subsidiary has the necessary operational and managerial infrastructure 
    to implement the business plan. No comment was received relating to the 
    effect of these additional requirements on banks engaged in insurance 
    underwriting. We believe that the standards for adequate separation 
    between an insured state bank and any subsidiary engaged in insurance 
    underwriting should be similar to those that separate other 
    subsidiaries that engage in activities not permitted to the bank. 
    Therefore, no changes have been made to the proposed separation 
    standards.
        In lieu of the prescribed disclosures contained in the current 
    regulation and in a departure from the proposal, the revision does not 
    prescribe disclosures. Instead, the FDIC is relying on the terms of the 
    Interagency Statement as applicable guidance when the subsidiary's 
    products are sold on bank premises, are sold by bank employees, or are 
    sold when the bank receives remuneration for a referral. The FDIC has 
    made the change primarily because it recognizes that there is a reduced 
    likelihood of customer confusion when sales of insurance products by a 
    subsidiary of an insured state bank are not made on bank premises, are 
    not made by bank employees, and are not a result of a referral from the 
    bank.
        However, there is an increased risk of customer confusion where the 
    insured state bank and the subsidiary selling the product have similar 
    names. Those cases are addressed in part by a separation standard which 
    is discussed below. The separation standard requires that the 
    subsidiary conduct its business pursuant to independent policies and 
    procedures designed to inform customers and prospective customers of 
    the subsidiary that the subsidiary is a separate organization from the 
    state-chartered depository institution and that the state-chartered 
    depository institution is not responsible for and does not guarantee 
    the obligations of the subsidiary. The institution and its subsidiary 
    should take any steps necessary to avoid customer confusion on behalf 
    of non-bank customers, or bank customers in transactions not covered by 
    the Interagency Statement.
        Under Sec. 362.5(b)(2), banks with subsidiaries engaged in 
    grandfathered insurance underwriting activities are expected to meet 
    the new requirements, and have 90 days from the effective date to 
    achieve compliance or apply to the FDIC for approval to operate 
    otherwise. The FDIC will consider any such applications on a case-by-
    case basis.
        The regulation provides that a subsidiary may continue to 
    underwrite title insurance based on the specific statutory authority 
    from section 24. This provision is currently in part 362 and is carried 
    forward with no substantive change. The insured state bank is permitted 
    only to retain the investment if the insured state bank was required, 
    before June 1, 1991, to provide title insurance as a condition of the 
    bank's initial chartering under state law. The authority to retain the 
    investment terminates if a change in control of the grandfathered bank 
    or its holding company occurs after June 1, 1991. There are no 
    statutory or regulatory investment limits on banks holding these types 
    of grandfathered investments.
        The exception for subsidiaries engaged in underwriting crop 
    insurance is continued. Under section 24, insured state banks and their 
    subsidiaries are permitted to continue underwriting crop insurance 
    under two conditions: (1) They were engaged in the business on or 
    before September 30, 1991; and (2) the crop insurance was reinsured in 
    whole or in part by the Federal Crop Insurance Corporation. While this 
    grandfathered insurance underwriting authority requires that the bank 
    or its subsidiary had to be engaged in the activity as of a certain 
    date, the authority does not terminate upon a change in control of the 
    bank or its parent holding company.
        Majority-owned subsidiaries ownership of equity investments that 
    represent a control interest in a company. In proposed 
    Sec. 362.4(b)(3), the FDIC would have allowed majority-owned 
    subsidiaries of insured state banks to hold controlling interests in 
    lower-level subsidiaries engaged in certain activities which the FDIC 
    authorized to be conducted at the bank level in proposed 
    Sec. 362.3(b)(2). These activities were holding adjustable rate and 
    money market preferred stock; and engaging in activities found by the 
    FRB to be closely related to the business of banking under section 
    4(c)(8) of the Bank Holding Company Act (subject to certain 
    restrictions). Proposed Sec. 362.4(b)(3) differed from current 
    Sec. 362.4(c)(3)(iv)(C), which effectively
    
    [[Page 66294]]
    
    authorizes the majority-owned subsidiary to own stock of a corporation 
    engaged in 4(c)(8) activities by authorizing the ownership of stock of 
    a corporation that engages in activities permissible for a bank service 
    corporation but imposes no control requirement. Proposed 
    Sec. 362.4(b)(3) also contained no counterpart to current 
    Sec. 362.4(c)(3)(iv)(D), authorizing a majority-owned subsidiary to 
    invest in 50 percent or less of the stock of a corporation engaging 
    solely in activities which are not ``as principal'.
        In the final version, at Sec. 362.4(b)(3), the FDIC has broadened 
    the proposed language, so that the overall effect of the section is to 
    authorize insured state banks to have lower-level subsidiaries engaged 
    in many of the same types of activities which the FDIC previously found 
    do not pose a significant risk when conducted at the bank level or 
    through a majority-owned subsidiary. The FDIC has received questions 
    concerning the types of activities and the restrictions on these 
    activities if conducted by lower-level subsidiaries. This addition to 
    the final regulation is intended to clarify that generally, the same 
    limitations are imposed on the lower-level subsidiary as are imposed on 
    the majority-owned subsidiary conducting the same type of activity. As 
    discussed below, the FDIC has retained the control requirement (subject 
    to one modification), because the overall design of the section is to 
    authorize lower-level subsidiaries to engage in approved activities. Of 
    course, banks also may apply to the FDIC for permission to make 
    additional investments in excess of or which differ from those where 
    general consent is granted under the rule.
        As is also discussed below, the activities covered by the final 
    version of Sec. 362.4(b)(3) still differs from current 
    Sec. 362.4(c)(3)(iv)(C) and current Sec. 362.4(c)(3)(iv)(D), but 
    changes made from the proposed language narrow the gap.
        First, the FDIC has found that it is not a significant risk to the 
    deposit insurance funds if a majority-owned subsidiary holds a 
    controlling interest in a company engaged in real estate or securities 
    activities authorized under the real estate investment activities and 
    securities activities sections of this regulation at Sec. 362.4(b)(5), 
    discussed below. The bank must file notice with the FDIC, and may 
    proceed if the FDIC does not object. The bank must meet the same core 
    eligibility criteria in Sec. 362.4(c)(1) that would apply if the bank 
    were conducting the activity directly through a majority-owned 
    subsidiary. The bank's investments in and transactions with the lower 
    tier company are subject to the same limits under Sec. 362.4(d) as 
    would apply if the bank were conducting the activity directly through a 
    majority-owned subsidiary. The majority-owned subsidiary must also 
    comply with the investment and transaction limits, to ensure that the 
    majority-owned subsidiary is not used as a conduit to the lower tier 
    company in derogation of the Sec. 362.4(d) limits on the lower tier 
    company. The bank must also deduct its equity investment in the 
    majority-owned subsidiary and the lower tier company from its capital 
    in accordance with Sec. 362.4(e), as would be the case if the bank were 
    conducting the activity directly through a majority-owned subsidiary. 
    If the lower tier company is engaged in securities activities of the 
    type contemplated by Sec. 362.4(b)(5)(ii), the bank and the lower tier 
    company must observe the additional requirements set out in that 
    section. Finally, either the majority-owned subsidiary must observe the 
    core eligibility criteria in Sec. 362.4(c)(2), or the lower tier 
    company must observe them. However, absent an application to the FDIC, 
    the latter option is available only if the lower tier company takes 
    corporate form. The FDIC's rationale for each of these limits on the 
    activities authorized by Sec. 362.4(b)(5) is discussed in detail below.
        Second, the FDIC also has found that it is not a significant risk 
    to the deposit insurance funds if a majority-owned subsidiary holds a 
    controlling interest in a company which engages in: (1) Any activity 
    permissible for a national bank including such permissible activities 
    that may require the company to register as a securities broker; (2) 
    acting as an insurance agency; (3) acquiring or retaining adjustable 
    rate and money market preferred stock or other instruments of a similar 
    character to the same extent allowed for the bank itself under 
    Sec. 362.3(b)(2)(iii) and combined with the 15 percent limit therein; 
    or (4) engaging in real estate leasing activities to the same extent 
    permissible for the majority-owned subsidiary under Sec. 362.4(b)(6), 
    discussed below.
        One comment, on the use of the control test for defining activities 
    for lower level subsidiaries, indicated concern over the change from 
    the current regulation. Specifically, concern was expressed relating to 
    a group of insured depository institutions that collectively own 
    through majority-owned subsidiaries a company engaged in securities 
    brokerage and insurance underwriting. None of the banks involved own a 
    control interest. The structure of the ownership was set up in reliance 
    upon the exception in current Sec. 362.4(c)(3)(iv)(D). The FDIC 
    recognizes that many community banks rely on formation of a consortium 
    of banks to provide permissible financial services for its customers 
    that one bank could not efficiently provide. We believe it would be 
    imprudent to penalize institutions that have invested in these 
    activities through a majority-owned subsidiary. Therefore, the proposed 
    regulatory language has been changed, creating an exception to the 
    control requirement where the company in question is controlled by 
    insured depository institutions.
        The scope of the activities authorized under final Sec. 362.4(b)(3) 
    differ from current Sec. 362.4(c)(3)(iv)(C) and current 
    Sec. 362.4(c)(3)(iv)(D). The FDIC eliminated proposed 
    Sec. 362.3(b)(2)(iv), which would have authorized 4(c)(8) activities at 
    the bank level. In a parallel fashion, we eliminated current 
    Sec. 362.4(c)(3)(iv)(C), which effectively authorizes the majority-
    owned subsidiary to own stock of a corporation engaged in 4(c)(8) 
    activities. As is discussed above in connection with that change, the 
    activities included on the 4(c)(8) list are generally of a type 
    permissible for national banks, and the authorization in 
    Sec. 362.4(b)(3)(ii)(A) of the final rule authorizes the lower-level 
    subsidiary to engage in activities permissible for national banks. As 
    is also discussed above, the 4(c)(8) list's inclusion of real estate 
    leasing is the one significant exception that was not otherwise dealt 
    with in this regulation. To address the elimination of real estate 
    leasing under the 4(c)(8) list, the FDIC has created Sec. 362.4(b)(6) 
    to govern real estate leasing by a majority-owned subsidiary. Such 
    activity also is authorized for a lower-level subsidiary under 
    Sec. 362.4(b)(3)(ii)(D) of the final rule.
        With regard to current Sec. 362.4(c)(3)(iv)(D), authorizing a 
    majority-owned subsidiary to invest in 50 percent or less of the stock 
    of a corporation engaging solely in activities which are not ``as 
    principal'', the final version of Sec. 362.4(b)(3) has the effect of 
    authorizing non-principal activities which are financially-related. 
    Section 362.4(b)(3)(ii)(B) of the final rule authorizes insurance 
    agency activities by the lower-level subsidiary; and 
    362.4(b)(3)(ii)(A), authorizing the lower-level subsidiary to engage in 
    activities permissible for national banks, encompasses certain non-
    principal activities, such as securities brokerage and investment 
    advisory services.
        We have previously required applications to hold savings 
    association stock, although a savings association
    
    [[Page 66295]]
    
    could be owned, controlled or operated if the savings association 
    engages only in deposit-taking and other activities that are 
    permissible for a bank holding company.4
    ---------------------------------------------------------------------------
    
        \4\ 12 U.S.C. 1843(c) and 12 CFR 225.28(b)(4)(ii).
    ---------------------------------------------------------------------------
    
        If a bank was relying on a previous regulatory exception that has 
    now been eliminated, Sec. 362.5(b)(3) of the final rule provides the 
    activity may continue as previously conducted for 90 days after the 
    effective date of this regulation. If the activity of the lower-level 
    subsidiary is not authorized by the new rule, or the control standard 
    is not met in that time frame, the insured state bank must apply to the 
    FDIC for permission to continue the activity.
        Equity securities held by a majority-owned subsidiary. The FDIC 
    sought comment on whether the final regulation should contain an 
    exception that would allow an insured state bank to hold equity 
    securities at the subsidiary level. In light of comments received on 
    this issue, Staff is further analyzing the proposal. Thus, the final 
    rule does not contain the provision that would have permitted a 
    majority-owned subsidiary of a state bank and savings association to 
    engage in equity securities investment activities. At this time, we are 
    proceeding with the remainder of the final regulation so as to avoid 
    further delay in the streamlining benefits that state banks and savings 
    associations will enjoy from the revisions. As a part of this 
    regulation, we are inserting provisions from the current regulation 
    that allow: (1) An insured state bank through a majority-owned 
    subsidiary to invest in up to ten percent of the stock of another 
    insured bank; and (2) an insured state bank that has received approval 
    to invest in equity securities pursuant to the statutory grandfather to 
    conduct these activities through a majority-owned subsidiary without 
    any additional approval from the FDIC. The provisions have been 
    continued to allow previously approved activities to continue while 
    staff is analyzing equity securities investment activities further.
        The FDIC proposed to eliminate the notice for these activities, the 
    specific reference to grandfathered activity, and to allow similar 
    activity for all insured state banks. However, the exception provided 
    that the bank's investment in the majority-owned subsidiary be deducted 
    from capital and that the activity be subject to certain eligibility 
    requirements and transaction limitations. Comment was frequent and 
    strong that this proposal was unacceptable to the banks that held 
    stocks under the current regulation.
        Numerous commenters argued that the statutory grandfather for banks 
    holding common and preferred stock investments and registered shares 
    extends to the bank and its subsidiaries. Section 24(f) is the 
    governing statute in this matter. The exception contained in this 
    provision extends only to the insured state bank. The statute makes no 
    mention of the bank's subsidiary. Section 24(c) of the FDI Act does 
    allow the bank to hold common or preferred stock or shares of 
    registered investment companies through a majority-owned subsidiary. 
    Activities conducted in a majority-owned subsidiary are subject to the 
    bank's compliance with applicable capital standards and the FDIC's 
    finding under section 24(d) that the activity poses no significant risk 
    to the funds.
        Most of the comments received came from interested parties in the 
    Commonwealth of Massachusetts and referred to a type of subsidiary 
    authorized in Massachusetts to hold all types of securities, whether 
    permissible or impermissible for a national bank. These subsidiaries 
    were established to take advantage of specialized tax treatment under 
    Massachusetts law. The FDIC understands the tax-favored treatment of 
    these subsidiaries; however, that tax treatment is a matter of state 
    tax law and is not a factor in the FDIC's risk to the fund 
    determination under this statute. However, the FDIC is not 
    unsympathetic to the plight of insured state banks that have acted 
    lawfully in structuring their business to achieve tax-favored 
    treatment. The FDIC is unwilling to upset such good faith arrangements 
    without considering other alternatives.
        Reflecting a sentiment that is contained in many comment letters, 
    one commenter stated, ``as a practical matter, we are unaware of any 
    circumstance where banks have been harmed by conducting these 
    activities through a subsidiary, and thus we believe that conducting 
    the grandfathered activities in that manner poses no risk to the 
    deposit insurance funds''. The FDIC recognizes that for the past 15 
    years there has been an unprecedented rise in the value of common and 
    preferred stock and registered shares, and these markets have 
    experienced no sustained, appreciable downturn in value in over 10 
    years. The FDIC does not base its risk to the fund determination on the 
    recent history of markets for listed common and preferred stock and 
    registered shares. The FDIC's policy regarding holding individual 
    stocks is to not take exception to holding corporate equities which are 
    well regarded by knowledgeable investors, marketable and held in 
    moderate proportions. In reviewing equities held on an aggregate basis, 
    the bank's portfolio of common and preferred stock and registered 
    shares is reviewed in context of its overall investment portfolio. The 
    holding of common and preferred stock and registered shares must be in 
    the context of the bank's overall goals of investment quality, maturity 
    pattern, diversification of risks, marketability of the portfolio, and 
    income production. The bank's overall investment strategies are then 
    judged in relationship to the: (1) General character of the 
    institution's business; (2) analysis of funding sources; (3) available 
    capital funds; and (4) economic and monetary factors.
        The FDIC proposed that the bank's investment in a subsidiary 
    investing in equity securities be deducted from the bank's capital 
    before determining the adequacy of the bank's capital. This treatment 
    would separate the capital that is available to support the bank from 
    the capital that is available to support the activities of the 
    subsidiary. In that scenario, because the risks of holding equity 
    securities is borne by the capital of the subsidiary, the portfolio of 
    equity securities and registered shares does not have to be analyzed in 
    context of the bank's overall investment strategies. If the capital 
    separations are not present, then the risks of holding equity 
    securities through a fully consolidated subsidiary must be considered 
    in context of the bank's overall investment strategies. In addition, if 
    a bank chooses to hold investments that are permissible for a national 
    bank in a subsidiary that also may hold investments that are not 
    permissible for a national bank, the FDIC will treat the entire 
    subsidiary as engaged in an activity that is not permissible for a 
    national bank.
        Many comments say that the FDIC's proposal for deducting a bank's 
    investment in its securities subsidiary from the bank's capital before 
    determining capital adequacy is inconsistent with the capital treatment 
    for recognition of 45% of net unrealized gains in the equities 
    portfolio under the FDIC's capital regulations (12 CFR part 
    325).5 The argument that has been made by these comments is 
    persuasive to the FDIC. The two approaches to treatment of gains on 
    securities do seem inconsistent, and the capital regulation is 
    consistent with the other federal financial institution regulators' 
    approach to capital treatment of common and preferred stock and shares 
    of registered investment companies.
    ---------------------------------------------------------------------------
    
        \5\ 63 FR 46518 (Sept. 1, 1998).
    
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    [[Page 66296]]
    
        State law in Massachusetts permits a state bank to establish a 
    subsidiary to hold the equity security and investment company share of 
    investments that the bank is permitted to make under state law. Those 
    investments if made directly by the bank are eligible for the 
    ``grandfather'' provided for by section 24(f) of the FDI Act and 
    Sec. 362.3(a)(2)(iii). According to the comments, such subsidiaries 
    should be given the same treatment accorded to the bank, i.e., if the 
    bank is permitted by the FDIC to exercise its direct investment 
    authority, the bank should be permitted to invest in those securities 
    and investment company shares through a subsidiary under the same terms 
    as exist under the current rule without a capital deduction.
        After considering the comments, the FDIC has decided to retain the 
    current provision allowing grandfathered banks to hold their 
    investments in common or preferred stock and shares of investment 
    companies through a majority-owned subsidiary until the staff analysis 
    of equity securities investments is completed. Section 362.4(b)(4)(i) 
    of the final regulation provides that any insured state bank that has 
    received approval to invest in common or preferred stock or shares of 
    an investment company pursuant to Sec. 362.3(a)(2)(iii) may conduct the 
    approved investment activities through a majority-owned subsidiary 
    provided that any conditions or restrictions imposed with regard to the 
    approval granted under Sec. 362.3(a)(2)(iii) are met. Section 
    362.3(a)(2)(iii) provides that no insured state bank may take advantage 
    of the ``grandfather'' provided for investments in common or preferred 
    stock listed on a national securities exchange and shares of an 
    investment company registered under the Investment Company Act of 1940 
    (15 U.S.C. 80a-1, et seq.) unless the bank files a notice with the FDIC 
    of the bank's intent to make such investments and the FDIC determines 
    that such investments will not pose a significant risk to the deposit 
    insurance funds. In no event may the bank's investments in such 
    securities and/or investment company shares exceed 100% of the bank's 
    tier one capital. The FDIC may condition its finding of no risk upon 
    whatever conditions or restrictions it finds appropriate. The 
    ``grandfather'' will be lost if certain events occur (see 
    Sec. 362.3(a)(2)(iii)).
        The maximum permissible investment by the consolidated bank and 
    majority-owned subsidiary engaged in this activity is 100 percent of 
    the bank's consolidated tier one capital. If the bank also holds listed 
    common or preferred stock or shares of registered investment companies 
    at the bank level pursuant to the grandfather, such securities will 
    count toward the limit. For a particular bank, the FDIC may impose a 
    limit on a case-by-case basis at its discretion of less than the 
    maximum permissible investment of 100 percent of tier 1 capital. The 
    FDIC may require divestiture of some or all of the investments if it is 
    determined that retention of the investments will have an adverse 
    effect on the safety and soundness of the consolidated bank. The 
    limitation of up to 100 percent of tier one capital, the requirement 
    for bank policies, and the reservation of the authority to require 
    divestiture are taken directly from the current regulation of these 
    activities when conducted at the bank level.
        Bank stock. Section Sec. 362.4(b)(4)(ii) of the final regulation 
    restores the exception which allows an insured state bank to invest in 
    up to ten percent of the outstanding stock of another insured bank 
    without the FDIC's prior consent provided that the investment is made 
    through a majority-owned subsidiary which was organized for the purpose 
    of holding such shares. This exception is restored to the regulation to 
    provide relief for those state banks which are permitted under state 
    law to invest in the stock of other banks and have done so in reliance 
    on the current regulation. Insured state banks should note, however, 
    that the holding of such shares must of course be permissible under 
    other relevant state and federal law.
        The FDIC has become aware that some insured state banks own a 
    sufficient interest in the stock of other insured state banks to cause 
    the bank which is so owned to be considered a majority-owned subsidiary 
    under part 362. It is the FDIC's posture that such an owner bank does 
    not need to file a request under part 362 seeking approval for its 
    majority-owned subsidiary that is an insured state bank to conduct as 
    principal activities that are not permissible for a national bank. As 
    the majority-owned subsidiary is itself an insured state bank, that 
    bank is required under part 362 and section 24 of the FDI Act to 
    request consent on its own behalf for permission to engage in any as 
    principal activity that is not permissible for a national bank.
        Again, we are reinstating the provision in the current rule that 
    permits a majority-owned subsidiary of a state bank to invest in up to 
    ten percent of the outstanding stock of another insured bank. No other 
    restrictions on this investment are imposed until the staff analysis of 
    equity securities investment activities is complete.
        Majority-owned subsidiaries conducting real estate investment 
    activities and securities underwriting. The FDIC has determined that 
    real estate investment and securities underwriting activities do not 
    represent a significant risk to the deposit insurance funds, provided 
    that the activities are conducted by a majority-owned subsidiary in 
    compliance with the requirements set forth. These activities require 
    the insured state bank to file a notice. Then, as long as the FDIC does 
    not object to the notice, the bank may conduct the activity in 
    compliance with the requirements. The FDIC is not precluded from taking 
    any appropriate action or imposing additional requirements with respect 
    to the activities when the facts and circumstances warrant such action.
        Engage in real estate investment activities. Section 24 of the FDI 
    Act and the current version of part 362 generally prohibit an insured 
    state bank from engaging in real estate investment activities not 
    permissible for a national bank, absent FDIC approval. Section 24 does 
    not grant FDIC authority to permit an insured state bank to directly 
    engage in real estate investment activities not permissible for a 
    national bank. The circumstances under which national banks may hold 
    equity investments in real estate are limited. If a particular real 
    estate investment is permissible for a national bank, an insured state 
    bank only needs to document that determination. If a particular real 
    estate investment is not permissible for a national bank and an insured 
    state bank wants to engage in real estate investment activities (or 
    continue to hold the real estate investment in the case of investments 
    acquired before enactment of section 24 of the FDI Act), the insured 
    state bank must file an application with FDIC for consent. The FDIC may 
    approve such applications if the investment is made through a majority-
    owned subsidiary, the institution meets the stated capital requirements 
    and the FDIC determines that the activity does not pose a significant 
    risk to the affected deposit insurance fund.
        The FDIC evaluates a number of factors when acting on requests for 
    consent to engage in real estate investment activities. In evaluating a 
    request to conduct equity real estate investment activity, the FDIC 
    considers the type of proposed real estate investment activity to 
    determine if the activity is suitable for the insured depository 
    institution. Where appropriate, the FDIC fashions
    
    [[Page 66297]]
    
    conditions designed to address potential risks that have been 
    identified in the context of a given request. The FDIC also reviews the 
    proposed subsidiary structure and its management policies and practices 
    to determine if the insured state bank is adequately protected and 
    analyzes capital adequacy to ensure that the insured institution has 
    sufficient capital to support its banking activities.
        In all of the applications that have been approved to conduct a 
    real estate investment activity to date, the FDIC has imposed a number 
    of conditions in granting the approval. In short, the FDIC has 
    determined on a case-by-case basis that the conduct of certain real 
    estate investment activities by a majority-owned corporate subsidiary 
    of an insured state bank will not present a significant risk to the 
    deposit insurance fund provided certain conditions are observed. In 
    drafting these notice provisions, the FDIC has evaluated the conditions 
    usually imposed when granting approval to insured state banks to 
    conduct real estate activities and incorporated these conditions within 
    the revised regulation where appropriate.
        The revised rule allows majority-owned subsidiaries to invest in 
    and/or retain equity interests in real estate not permissible for a 
    national bank under an expedited notice process, provided certain 
    criteria are met. Institutions not meeting the criteria must make 
    application to the FDIC and obtain the FDIC's approval on a case-
    specific basis. To use the notice process, the insured state bank must 
    qualify as an ``eligible depository institution'', as that term is 
    defined within the revised regulation, and the majority-owned 
    subsidiary must qualify as an ``eligible subsidiary'', which is also 
    defined within the revised rule. These criteria are discussed below. 
    The insured state bank must also abide by the investment and 
    transaction limitations set forth in the revised regulation.
        Under the revisions, the insured state bank may not invest more 
    than 20 percent of the bank's tier one capital in all of its majority-
    owned subsidiaries which are conducting activities subject to the 
    investment limits. This language reflects two changes from the 
    proposal. First, the 10 percent per subsidiary limit has been 
    eliminated. Second, the revisions provide that the 20 percent aggregate 
    investment limit applies to all subsidiaries engaged in activities that 
    are being separated from the insured depository institution. Under the 
    regulation, the activities subject to the investment limit are real 
    estate investment activities and securities underwriting. These 
    investment limits may cover any other activities that the FDIC deems 
    appropriate by regulation or any FDIC order. For the purpose of 
    calculating the dollar amount of the investment limitations, the bank 
    would calculate 20 percent of its tier one capital after deducting all 
    amounts required by the regulation or any FDIC order.
        Comments received were generally supportive of the overall 
    investment limit but were critical of a provision in the proposed 
    regulation that the bank could invest no more than 10 percent of its 
    tier one capital in any one subsidiary engaged in real estate 
    activities. The comments questioned the rationale for requiring more 
    than one subsidiary if a bank is investing up to its aggregate limit in 
    real estate investment activities. The FDIC in its proposal attempted 
    to have the restrictions on transactions between an insured state bank 
    and its subsidiaries reflect as closely as possible the same 
    restrictions that are imposed on a bank/affiliate relationship. The 10 
    percent limitation per subsidiary in the proposal reflected the desire 
    of the FDIC that a bank engaging in real estate investment activities 
    diversify its risks. Upon reflection, the FDIC believes an arbitrary 
    limit on the amount that can be invested in any one subsidiary does not 
    necessarily accomplish the desired diversification. In reviewing 
    notices of intent to engage in this activity, the FDIC will look at the 
    bank's diversification of risks when making a determination of whether 
    to consent to the planned activity. Therefore, the final rule drops the 
    proposed 10 percent limit on investment in each subsidiary. The 20 
    percent limitation on the investment in real estate investment 
    activities provides an important safeguard against excessive investment 
    in these activities, and is retained in the final regulation. However, 
    that limit now includes all subsidiaries engaged in activities that are 
    being separated from the insured depository institution. This change 
    occurred when the FDIC reassessed the limit and decided to make it more 
    closely parallel the 23A standard governing affiliates. Thus, the 20 
    percent limit will apply to all activities that are separated from the 
    insured depository institution. Under the final regulation, the 
    activities subject to the investment limit are real estate investment 
    activities and securities underwriting. Of course this limit may be 
    modified by application.
        The FDIC recognizes that some real estate investments or activities 
    are more time, management and capital intensive than others. Our 
    experience in reviewing the requests submitted under section 24 has led 
    us to conclude that small equity investments in real estate--held under 
    certain conditions--do not pose a significant risk to the deposit 
    insurance fund. As a result, the final rule provides relief to insured 
    state banks having small investments in a majority-owned subsidiary 
    engaging in real estate investment activities. The FDIC is attempting 
    to strike a reasonable balance between prudential safeguards and 
    regulatory burden in its revisions. As a result, the final rule 
    establishes certain exceptions from the requirements necessary to 
    establish an eligible subsidiary whenever the insured state bank's 
    investment is of a de minimis nature and meets certain other criteria. 
    Under the final rule, whenever the bank's investment in its majority-
    owned subsidiary conducting real estate activities does not exceed 2 
    percent of the bank's tier one capital and the bank's investment in the 
    subsidiary does not include extensions of credit from the bank to the 
    subsidiary, a debt instrument purchased from the subsidiary or any 
    other transaction originated from the bank to the benefit of the 
    subsidiary, the subsidiary is relieved of certain of the requirements 
    that must be met to establish an eligible subsidiary under the 
    regulation. For example, the subsidiary need not be physically separate 
    from the insured state bank; the chief executive officer of the 
    subsidiary is not required to be an employee separate from the bank; a 
    majority of the board of directors of the subsidiary need not be 
    separate from the directors or officers of the bank; and the subsidiary 
    need not establish separate policies and procedures as described in the 
    regulation in Sec. 362.4(c)(2)(xi). Commenters did not object to the 
    elimination of these eligible subsidiary standards in these 
    circumstances. Several commenters expressed concern that the de minimis 
    investment level is too low. The comments suggested that 2 percent of 
    tier one capital is an arbitrary limit and should be raised to 5 
    percent. Another commenter supported the limit stating that it is an 
    appropriate safe harbor limit. The FDIC recognizes that arguments can 
    be made for varying limits in this regard. We have chosen a 
    conservative limit. With further experience that provides evidence that 
    this limit can be safely increased, we can reconsider the appropriate 
    level to be considered de minimis activity in the future.
        One commenter suggested that both investment limits should be 
    measured against tier one and tier two capital rather than using only 
    tier one capital. The FDIC believes that certain elements
    
    [[Page 66298]]
    
    of tier two capital such as the allowance for loan and lease losses do 
    not provide protection against activities such as real estate 
    investment. Therefore, the FDIC has decided to retain tier one capital 
    as the appropriate capital against which to measure risk in these 
    activities.
        Another commenter suggested that extensions of credit should be 
    permitted subject to an aggregate limit. This same comment added that 
    the restriction to a single subsidiary could be eliminated. In creating 
    the de minimis exception, the FDIC wanted this exception to be used 
    primarily for the passive holding of real estate. Multiple subsidiaries 
    and bank lending to fund the investments is indicative of a more active 
    investment.
        If the institution or its investment does not meet the criteria 
    established under the revised regulation for using the notice 
    procedure, an application may be filed with the FDIC. A description of 
    the requisite contents of notices and applications, and the FDIC's 
    processing thereof, is contained in subpart G of part 303. The FDIC 
    encourages institutions to file an application if the institution 
    wishes to request relief from any of the requirements necessary to be 
    considered an eligible depository institution or an eligible 
    subsidiary. The FDIC recognizes that not all real estate investment 
    should require a subsidiary to be established exactly as outlined under 
    the eligible subsidiary definition. However, the FDIC is unwilling to 
    eliminate those criteria under the expedited notice process.
        Engage in the public sale, distribution or underwriting of 
    securities that are not permissible for a national bank under section 
    16 of the Banking Act of 1933. The current regulation provides that an 
    insured state nonmember bank may establish a majority-owned subsidiary 
    that engages in the underwriting and distribution of securities without 
    filing an application with the FDIC if the requirements and 
    restrictions of Sec. 337.4 of the FDIC's regulations are met. Section 
    337.4 governs the manner in which subsidiaries of insured state 
    nonmember banks must operate if the subsidiaries engage in securities 
    activities that would not be permissible for the bank itself under 
    section 16 of the Banking Act of 1933, commonly known as the Glass-
    Steagall Act. In short, the regulation lists securities underwriting 
    and distribution as an activity that will not pose a significant risk 
    to the deposit insurance funds if conducted through a majority-owned 
    subsidiary that operates in accordance with Sec. 337.4. The proposed 
    revisions made significant changes to that exception. Most of the 
    proposal has been adopted without significant change in the final rule.
        Due to the existing cross reference to Sec. 337.4, the FDIC 
    reviewed Sec. 337.4 as a part of its review of part 362 for CDRI. The 
    purpose of the review was to streamline and clarify the regulation, 
    update the regulation as necessary given any changes in the law, 
    regulatory practice, and the marketplace since its adoption, and remove 
    any redundant or unnecessary provisions. As a result of that review, 
    the FDIC is making a number of substantive changes to the rules which 
    govern securities sales, distribution, or underwriting by subsidiaries 
    of insured state nonmember banks. Although the FDIC has chosen to place 
    the exception in the part of the regulation governing activities by 
    insured state banks, by law, only subsidiaries of state nonmember banks 
    may engage in securities underwriting activities that are not 
    permissible for national banks. As we have previously stated, subpart A 
    of this regulation does not grant authority to conduct activities or 
    make investments. Subpart A only gives relief from the prohibitions of 
    section 24 of the FDI Act. Insured state banks must be in compliance 
    with applicable state law when engaging in any activity.
        Since the FDIC issued its proposal to amend part 362, the OCC has 
    given its consent to an operating subsidiary of a national bank to 
    conduct municipal revenue bond underwriting. This activity currently is 
    not permissible for the national bank even though the activity has been 
    approved for a subsidiary of a national bank. Concurrent with these 
    revisions, the FDIC is issuing a proposal to address activities that 
    are permissible for a subsidiary of a national bank that are not 
    permissible for the national bank itself. Until that regulation is 
    finalized, Sec. 337.4 will remain operative to govern only activities 
    that are not covered by the final rule in subpart A of part 362.
        The FDIC is also issuing a technical amendment to Sec. 337.4, at 
    Sec. 337.4(i), in connection with this rulemaking to make this clear. 
    It provides that any state nonmember bank subsidiary or affiliate 
    conducting securities activities governed by Sec. 362.4(b)(5)(ii) or 
    Sec. 362.8(b) must comply with such rules, and such compliance 
    satisfies their obligations under Sec. 337.4.
        Background of section 337.4. On August 23, 1982, the FDIC adopted a 
    policy statement on the applicability of the Glass-Steagall Act to 
    securities activities of insured state nonmember banks (47 FR 38984). 
    That policy statement expressed the opinion of the FDIC that under the 
    Glass-Steagall Act: (1) Insured state nonmember banks may be affiliated 
    with companies that engage in securities activities; and (2) securities 
    activities of subsidiaries of insured state nonmember banks are not 
    subject to section 21 of the Glass-Steagall Act (12 U.S.C. 378) which 
    prohibits deposit taking institutions from engaging in the business of 
    issuing, underwriting, selling, or distributing stocks, bonds, 
    debentures, notes, or other securities.
        The policy statement applies solely to insured state nonmember 
    banks. As noted in the policy statement, the Bank Holding Company Act 
    of 1956 (12 U.S.C. 1841 et seq.) places certain restrictions on non-
    banking activities. Insured state nonmember banks that are members of a 
    bank holding company system need to take into consideration sections 
    4(a) and 4(c)(8) of the Bank Holding Company Act of 1956 (12 U.S.C. 
    1843 (a) and (c)) and applicable FRB regulations before entering into 
    securities activities through subsidiaries.
        The policy statement also expressed the opinion of the Board of 
    Directors of the FDIC that there may be a need to restrict or prohibit 
    certain securities activities of subsidiaries of state nonmember banks. 
    As the policy statement noted, ``the FDIC * * * recognizes its ongoing 
    responsibility to ensure the safe and sound operation of insured state 
    nonmember banks, and depending upon the facts, the potential risks 
    inherent in a bank subsidiary's involvement in certain securities 
    activities''.
        In November 1984, after notice and comment proceedings, the FDIC 
    adopted a final rule regulating the securities activities of affiliates 
    and subsidiaries of insured state nonmember banks under the FDI Act. 49 
    FR 46709 (Nov. 28, 1984), regulations codified at 12 CFR 337.4 
    (1986).6 Although the rule
    
    [[Page 66299]]
    
    does not prohibit such securities activities outright, it does restrict 
    these activities in a number of ways and only permits the activities if 
    authorized under state law.
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        \6\ After the regulations were adopted, the representatives of 
    mutual fund companies and investment bankers brought another action 
    challenging the regulations allowing insured banks, which are not 
    members of the Federal Reserve System, to have subsidiary or 
    affiliate relationships with firms engaged in securities work. The 
    United States District Court for the District of Columbia, Gerhard 
    A. Gesell, J., 606 F. Supp. 683, upheld the regulations, and 
    representatives appealed and also petitioned for review. The Court 
    of Appeals held that: (1) representatives had standing to challenge 
    regulations under both the Glass-Steagall Act and the FDI Act, but 
    (2) regulations did not violate either Act. Investment Company 
    Institute v. Federal Deposit Insurance Corporation, 815 F.2d 1540 
    (D.C. Cir. 1987).
        A trade association representing Federal Deposit Insurance 
    Corporation-insured savings banks also brought suit challenging FDIC 
    regulations respecting proper relationship between FDIC-insured 
    banks and their securities-dealing ``subsidiaries'' or 
    ``affiliates.'' On cross motions for summary judgment, the District 
    Court, Jackson, J., held that: (1) trade association had standing, 
    and (2) regulations were within authority of FDIC. National Council 
    of Savings Institutions v. Federal Deposit Insurance Corporation, 
    664 F.Supp. 572 (D.C. 1987).
    ---------------------------------------------------------------------------
    
        Section 337.4 is structured to ensure the separateness of the 
    subsidiary and the bank. This separation is necessary as the bank would 
    be prohibited by the Glass-Steagall Act from engaging in many 
    activities the subsidiary might undertake and the separation safeguards 
    the soundness of the parent bank.
        Section 337.4 adopted a tiered approach to the activities of the 
    subsidiary and limits the underwriting of securities that would 
    otherwise be prohibited to the bank itself under the Glass-Steagall Act 
    unless the subsidiary and bank meet the separation standards in the 
    regulation and the activities are limited to underwriting of investment 
    quality securities. Section 337.4 permitted a subsidiary to engage in 
    additional underwriting if it meets the separation standards and the 
    subsidiary is a member in good standing with the National Association 
    of Securities Dealers and management has at least five years experience 
    in the industry.
        The subsidiaries engaged in activities not permissible for the bank 
    itself also are required to be adequately capitalized, and therefore, 
    these subsidiaries are required to meet the capital standards of the 
    NASD and SEC. As a protection to the deposit insurance fund, a bank's 
    investment in these subsidiaries is not counted toward the bank's 
    capital.
        An insured state nonmember bank that has a subsidiary or affiliate 
    engaging in the sale, distribution, or underwriting of stocks, bonds, 
    debentures or notes, or other securities, or acting as an investment 
    advisor to any investment company is prohibited under Sec. 337.4 
    through a series of restrictions from engaging in transactions which 
    could create a conflict of interest or the appearance of a conflict of 
    interest.
        Under Sec. 337.4, the FDIC created an atmosphere in which bank 
    affiliation with entities engaged in securities activities is very 
    controlled. The FDIC has examination authority over bank subsidiaries. 
    Under section 10(b) of the FDI Act (12 U.S.C. 1820(b)), the FDIC has 
    the authority to examine affiliates to determine the effect of that 
    relationship on the insured institution. Nevertheless, the FDIC 
    generally has allowed these entities to be functionally regulated, that 
    is the FDIC usually examines the insured state nonmember bank and 
    primarily relies on the SEC and the NASD oversight of the securities 
    subsidiary or affiliate. The FDIC views its established separations for 
    banks and securities firms as creating an environment in which the 
    FDIC's responsibility to protect the deposit insurance funds has been 
    met without creating too much overlapping regulation for the securities 
    firms. The FDIC maintains an open dialogue with the NASD and the SEC 
    concerning matters of mutual interest. To that end, the FDIC has 
    entered into an agreement in principle with the NASD concerning 
    examination of securities companies affiliated with insured 
    institutions.
        The number of banks which have subsidiaries engaging in securities 
    activities that can not be conducted in the bank itself is very small. 
    These subsidiaries engage in the underwriting of debt and equity 
    securities and distribution and management of mutual funds.
        The FRB permits a nonbank subsidiary of a bank holding company to 
    underwrite and deal in securities through its orders under the Bank 
    Holding Company Act and section 20 of the Glass-Steagall 
    Act.7 The FDIC has reviewed its securities underwriting 
    activity regulations in light of the FRB's recently-adopted operating 
    standards that modify the FRB's section 20 orders.8 The FDIC 
    also reviewed the comments received by the FRB. The FRB conducted a 
    comprehensive review of the prudential limitations established in its 
    section 20 decisions. The FRB sought comment on modifying these 
    limitations to allow section 20 subsidiaries to operate more 
    efficiently and serve their customers more effectively.9 The 
    FDIC found the analysis of the FRB instructive and has determined that 
    its regulation already incorporates many of the same modifications that 
    the FRB has made.
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        \7\ The affiliate restrictions under Sec. 337.4 were created 
    prior to the time the FRB had approved securities activities under 
    section 20 of the Glass-Steagall Act as an activity that is closely 
    related to banking. Given the regulatory structure now in place for 
    affiliates of banks engaged in securities activities, the FDIC's 
    affiliate restrictions are no longer necessary except for those 
    holding companies that are not subject to the restrictions of the 
    Bank Holding Company Act. The restrictions on affiliation have been 
    moved to subpart B of this regulation and are focused only on those 
    companies that are not registered bank holding companies.
        \8\ 62 FR 45295, August 21, 1997.
        \9\ 61 FR 57679, November 7, 1996, and 62 FR 2622, January 17, 
    1997.
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        In the final rule, the FDIC is not adopting all of the standards of 
    the FRB. For instance, the FDIC is not requiring a separate statement 
    of operating standards. The final regulation applies certain standards 
    to insured state banks engaging in securities underwriting activities 
    through majority-owned through the ``eligible subsidiary'' 
    requirements. Separate operating standards are unnecessary because each 
    of these safeguards provides appropriate protections for bank 
    subsidiaries engaged in underwriting activities.
        However, the FDIC has retained the proposed requirement that the 
    chief executive officer of the subsidiary may not be an employee of the 
    bank and a majority of the subsidiary's board of directors must not be 
    directors or officers of the bank. This standard is the same as the 
    operating standard on interlocks adopted by the FRB to govern its 
    section 20 orders.
        One of the reasons for these safeguards involves the FDIC's 
    continuing concerns that the bank should be protected from liability 
    for the securities underwriting activities of the subsidiary. Under the 
    securities laws, a parent company may have liability as a ``controlling 
    person''.10 The FDIC views management and board of director 
    separation as enhanced protection from controlling person liability as 
    well as protection from disclosures of material nonpublic information. 
    Protection from disclosures of material nonpublic information also
    
    [[Page 66300]]
    
    may be enhanced by the use of appropriate policies and 
    procedures.11
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        \10\ Liability of ``controlling persons'' for securities law 
    violations by the persons or entities they ``control'' is found in 
    section 15 of the Securities Act of 1933, 15 U.S.C. 77o, and section 
    20 of the Securities and Exchange Act of 1934, 15 U.S.C. 78t(a). 
    Although the tests of liability under these statutes vary slightly, 
    the FDIC is concerned that under the most stringent of these 
    authorities liability may be imposed on a parent entity. Under the 
    Tenth Circuit's permissive test for controlling person liability, 
    any appearance of an ability to exercise influence, whether directly 
    or indirectly, and even if such influence cannot amount to control, 
    is sufficient to cause a person to be a controlling person within 
    the meaning of sections 15 or 20. Although liability may be avoided 
    by proving no knowledge or good faith, proving no knowledge requires 
    no knowledge of the general operations or actions of the primary 
    violator and good faith requires both good faith and 
    nonparticipation. See First Interstate Bank of Denver, N.A. versus 
    Pring, 969 F.2d 891 (10th Cir. 1992), rev'd on other grounds, 511 
    U.S. 164 (1994); Arena Land & Inv. Co. Inc. versus Petty, 906 
    F.Supp. 1470 (D. Utah 1994); San Francisco-Oklahoma Petroleum 
    Exploration Corp. versus Carstan Oil Co., Inc., 765 F.2d 962 (10th 
    Cir. 1985); Seattle-First National Bank versus Carlstedt, 678 
    F.Supp. 1543 (W.D. Okla. 1987). However, to the extent that any 
    securities underwriting liability may have been reduced due to the 
    enactment of The Private Securities Litigation Reform Act of 1995, 
    Pub. L. 104-67, then the FDIC's concerns regarding controlling 
    person liability may be reduced. It is likely that the FDIC will 
    want to await the development of the standards under this new law 
    before taking actions that could risk liability on a parent bank 
    that has an underwriting subsidiary.
        \11\ See ``Anti-manipulation Rules Concerning Securities 
    Offerings'', Regulation M, 17 CFR part 242 (1997) where the SEC 
    grapples with limiting trading advantages that might otherwise 
    accrue to affiliates by limiting trading in prohibited securities by 
    affiliates. The SEC is attempting to prevent trading on material 
    nonpublic information. To reduce the danger of such trading, the SEC 
    has a broad ban on affiliated purchasers. To narrow that exception 
    while continuing to limit access to the nonpublic information that 
    might otherwise occur, the SEC has limited access to material 
    nonpublic information through restraints on common officers. 
    Alternatively, the SEC could prohibit trading by affiliates that 
    shared any common officers or employees. In narrowing this exception 
    to ``those officers or employees that direct, effect or recommend 
    transactions in securities'', the SEC stated that it ``believes that 
    this modification will resolve substantially commenters'' concerns 
    that sharing one or more senior executives with a distribution 
    participant, issuer, or selling security holder would preclude an 
    affiliate from availing itself of the exclusion''. 62 FR 520 at 523, 
    fn. 22 (January 3, 1997). As the SEC also stated, the requirement 
    would not preclude the affiliates from sharing common executives 
    charged with risk management, compliance or general oversight 
    responsibilities.
    ---------------------------------------------------------------------------
    
        Substantive changes to the subsidiary underwriting activities. 
    Generally, the regulations governing the securities underwriting 
    activity of state nonmember banks have been streamlined to make 
    compliance easier. In addition, state nonmember banks that deem any 
    particular constraint to be burdensome may file an application with the 
    FDIC to have the constraint removed for that bank and its majority-
    owned subsidiary. The FDIC has eliminated those constraints that were 
    deemed to overlap other requirements or that could be eliminated while 
    maintaining safety and soundness standards. For example, the FDIC has 
    eliminated the notice requirement for all state nonmember bank 
    subsidiaries that engage in securities activities that are permissible 
    for a national bank. Under the final regulation, a notice is required 
    only of state nonmember banks with subsidiaries engaging in securities 
    activities that would be impermissible for a national bank. The FDIC 
    has determined that it can adequately monitor the other securities 
    activities through its regular reporting and examination processes.
        As indicated in the following discussion on core eligibility 
    requirements, the final rule permits a state nonmember bank meeting 
    certain criteria to conduct, as principal, securities activities 
    through a subsidiary that are not permissible for a national bank after 
    filing an expedited notice with the FDIC, rather than a full 
    application. The insured state bank must be an ``eligible depository 
    institution'' and the subsidiary must be an ``eligible subsidiary''. 
    Briefly, an ``eligible depository institution'' must be chartered and 
    operating for at least three years, have satisfactory composite and 
    management ratings under the Uniform Financial Institution Rating 
    System (UFIRS) as well as satisfactory compliance and CRA ratings, and 
    not be subject to any formal or informal corrective or supervisory 
    order or agreement. These requirements are uniform with other part 362 
    notice procedures for insured state banks to engage in activities not 
    permissible for national banks. These requirements are not presently 
    found in Sec. 337.4 but the FDIC believes that only banks that are 
    well-run and well-managed should be given the opportunity to engage in 
    securities activities that are not permissible for a national bank 
    under the streamlined notice procedures. These criteria are imposed as 
    expedited processing criteria rather than substantive criteria. Other 
    banks that want to enter these activities should be subject to the 
    scrutiny of the application process. Although operations not 
    permissible for a national bank are conducted and managed by a separate 
    majority-owned subsidiary, such activities are part of the analysis of 
    the consolidated financial institution. The condition of the 
    institution and the ability of its management are an important 
    component in determining if the risks of the securities activities will 
    have a negative impact on the insured institution. The ``eligible 
    subsidiary'' definition, discussed below, recognizes the level of risk 
    present in securities underwriting activities. Commenters did not 
    object to using these standards for institutions that wish to engage in 
    these securities activities.
        One of the other notable differences between the current and final 
    regulations is the substitution of the ``eligible subsidiary'' criteria 
    for that of the ``bona fide subsidiary'' definition contained in 
    Sec. 337.4(a)(2). The definitions are similar, but changes have been 
    made to the existing capital and physical separation requirements. 
    Also, new requirements have been added to ensure that the subsidiary's 
    business is conducted according to independent policies and procedures. 
    With regard to those subsidiaries which engage in the public sale, 
    distribution or underwriting of securities that are not permissible for 
    a national bank, additional conditions also must be met. The conditions 
    are that: (1) The state-chartered depository institution must adopt 
    policies and procedures, including appropriate limits on exposure, to 
    govern the institution's participation in financing transactions 
    underwritten or arranged by an underwriting majority-owned subsidiary; 
    (2) the state-chartered depository institution may not express an 
    opinion on the value or the advisability of the purchase or sale of 
    securities underwritten or dealt in by a majority-owned subsidiary 
    unless the state-chartered depository institution notifies the customer 
    that the majority-owned subsidiary is underwriting, making a market, 
    distributing or dealing in the security; (3) the majority-owned 
    corporate subsidiary is registered and is a member in good standing 
    with the appropriate self-regulatory organization (SRO), and promptly 
    informs the appropriate regional director of the Division of 
    Supervision (DOS) in writing of any material actions taken against the 
    majority-owned subsidiary or any of its employees by the state, the 
    appropriate SROs or the SEC; and (4) the state-chartered depository 
    institution does not knowingly purchase as principal or fiduciary 
    during the existence of any underwriting or selling syndicate any 
    securities underwritten by the majority-owned subsidiary unless the 
    purchase is approved by the state-chartered depository institution's 
    board of directors before the securities are initially offered for sale 
    to the public. These additional requirements are similar to but 
    simplify the requirements currently contained in Sec. 337.4. Commenters 
    did not offer objection to these simplified standards and they have 
    been adopted as proposed.
        In addition, the FDIC has eliminated the five-year period limiting 
    the securities activities of a state nonmember bank's underwriting 
    subsidiary's business operations. Rather, with notice and compliance 
    with the safeguards, a state nonmember bank's securities subsidiary may 
    conduct any securities business set forth in its business plan after 
    the notice period has expired without an objection by the FDIC. The 
    reasons the FDIC initially chose the more conservative posture are 
    rooted in the time they were adopted. When the FDIC approved 
    establishment of the initial underwriting subsidiaries, it had no 
    experience supervising investment banking operations in the United 
    States. Because affiliation between banks and securities underwriters 
    and dealers was long considered impractical or illegal, banks had not 
    operated such entities since enactment of the Glass-Steagall Act in 
    1933. Moreover, pre-Glass-Steagall affiliations were considered to have 
    caused losses to the banking industry and investors, although some 
    modern
    
    [[Page 66301]]
    
    research questions this view.12 Thus, the affiliation of 
    banks and investment banks presented unknown risks that were considered 
    substantial in 1983. In addition, although the FDIC recognized that 
    supervision and regulation of broker-dealers by the SEC provided 
    significant protections, the FDIC had little experience with how these 
    protections operated. The FDIC has now gained experience with 
    supervising the securities activities of banks and is better able to 
    assess which safeguards are appropriate to impose on these activities 
    to protect the bank and the deposit insurance funds. For those reasons, 
    the limitations and restrictions contained in Sec. 337.4 on 
    underwriting other than ``investment quality debt securities'' or 
    ``investment quality equity securities'' have been eliminated from the 
    regulation. It should be noted that certain safeguards have been added 
    to the system since Sec. 337.4 was adopted. These safeguards include 
    risk-based capital standards and the Interagency Statement. The FDIC 
    has removed the disclosures currently contained in Sec. 337.4, which 
    are similar to the disclosures required by the Interagency Statement. 
    In lieu of the prescribed disclosures, the FDIC will rely on the 
    Interagency Statement as applicable guidance when the subsidiary's 
    products are sold on bank premises, by bank employees or when the bank 
    receives remuneration for a referral. This change makes compliance 
    easier. Comments support this change and recognize that any retail sale 
    of nondeposit investment products to bank customers is subject to the 
    Interagency Statement when the subsidiary's products are sold on bank 
    premises, by bank employees, or as a result of a compensated referral.
    ---------------------------------------------------------------------------
    
        \12\ See, e.g., George J. Benston, The Separation of Commercial 
    and Investment Banking: The Glass-Steagall Act Revisited and 
    Reconsidered 41 (1990).
    ---------------------------------------------------------------------------
    
        The FDIC has changed its disclosure standards relating to 
    subsidiaries engaged in insurance underwriting to those found in the 
    Interagency Statement for reasons similar to those discussed above. In 
    addition, securities firms are subject to a comprehensive Federal 
    supervisory and regulatory system designed to inform investors of risks 
    inherent in their transactions. However, as was also discussed above in 
    connection with insurance subsidiaries, there is a risk of customer 
    confusion where the insured state bank and the subsidiary selling the 
    product have similar names. Those cases are addressed in this part by a 
    separation standard which is discussed below. The separation standard 
    requires that the subsidiary conduct its business pursuant to 
    independent policies and procedures designed to inform customers and 
    prospective customers of the subsidiary that the subsidiary is a 
    separate organization from the state-chartered depository institution 
    and that the state-chartered depository institution is not responsible 
    for and does not guarantee the obligations of the subsidiary. The 
    institution and its subsidiary should take any steps necessary to avoid 
    customer confusion on behalf of non-bank customers, or bank customers 
    in transactions not covered by the Interagency Statement.
        Finally, the FDIC will continue to impose many of the safeguards 
    found in section 23A of the Federal Reserve Act and to impose the types 
    of safeguards found in section 23B of the Federal Reserve Act. Although 
    section 23B did not exist until 1987 and only covers transactions where 
    banks and their subsidiaries are on one side and other affiliates are 
    on the other side, the FDIC had included some similar constraints in 
    the original version of Sec. 337.4. Now, most of the transaction 
    restrictions found in section 23B are adopted by the FDIC in the final 
    rule to promote consistency with the restrictions imposed by other 
    banking agencies on similar activities. These restrictions require that 
    bank/subsidiary transactions be on an arm's length basis and that the 
    subsidiary disclose that the bank is not responsible for the 
    subsidiary's obligations. The bank also is prohibited from purchasing 
    certain products from the subsidiary. While imposing the arm's length 
    restrictions, the FDIC is eliminating any overlapping safeguards. 
    Comments received did not recommend reinstating any of the restrictions 
    from the current Sec. 337.4.
        In contrast to the arm's length transaction restrictions, 
    transaction limitations did exist and were incorporated into Sec. 337.4 
    by reference to section 23A of the Federal Reserve Act. To simplify 
    compliance for transactions between state nonmember banks and their 
    subsidiaries, the FDIC has placed the transactions limits and arm's 
    length requirements in the regulatory text language and only included 
    the restrictions that are relevant to a particular activity. The FDIC 
    hopes that this restatement will clarify the standards being imposed on 
    state nonmember banks and their subsidiaries.
        On June 11, 1998, the FRB requested comment on an interpretation of 
    section 23A that would exempt certain transactions between an insured 
    depository institution and its affiliates. These interpretations would 
    be published in part 250 of the FRB's regulations. 63 FR 32766 (June 
    16, 1998). Specifically, the interpretation would expand the exemption 
    of section 23A(d)(6), which permits a bank to purchase assets of an 
    affiliate when the assets have a ``readily identifiable and publicly 
    available market quotation''. The proposal would, with some caveats, 
    bring within the exemption securities that have a ``ready market'', as 
    defined by the SEC.
        The second interpretation would create two exemptions to the 
    provision of section 23A relating to transactions with third parties 
    that benefit the bank (and are therefore treated as ``covered 
    transactions''.) The context for this exemption is an extension of 
    credit by a bank to a third party to purchase securities through the 
    bank's registered broker-dealer affiliate. The first exemption would 
    apply when the affiliate acts solely as broker or riskless principal in 
    a securities transaction. The second exemption would apply when the 
    extension of credit is made pursuant to a preexisting line of credit 
    that was not established for the purpose of buying securities from or 
    through an affiliate.
        In light of the FRB's proposals, we have re-evaluated our proposed 
    coverage of similar transactions and have determined that the language 
    we have crafted to govern securities underwriting subsidiaries would 
    already allow the transactions that the FRB proposes to exempt under 
    these interpretations. We believe that these transactions do not raise 
    safety and soundness issues if conducted under the arm's length 
    standards that we proposed and adopt in our final rule. Thus, we will 
    allow a bank to purchase assets (including securities) when those 
    transactions are carried out on terms and conditions that are 
    substantially similar to those prevailing at the time for comparable 
    transactions with unaffiliated parties. In addition, we already allow 
    an extension of credit to buy an asset from the subsidiary when those 
    transactions are carried out on terms and conditions that are 
    substantially similar to those prevailing at the time for comparable 
    transactions with unaffiliated parties. We consider that language to be 
    broad enough to include purchasing securities, including when the 
    subsidiary acts solely as broker or riskless principal in a securities 
    transaction. A preexisting line of credit that was not established for 
    the purpose of buying securities from or through the subsidiary is also 
    allowed, if it otherwise meets the terms of the FDIC's exception.
    
    [[Page 66302]]
    
        In addition, the FDIC has sought to eliminate transaction 
    restrictions that would duplicate the restrictions on information flow 
    or transactions imposed by the SROs and/or by the SEC.13 The 
    FDIC does not seek to eliminate the obligation to protect material 
    nonpublic information nor does it seek to undercut or minimize the 
    importance of the restrictions imposed by the SROs and SEC. Rather, the 
    FDIC seeks to avoid imposing burdensome overlapping restrictions merely 
    because a securities underwriting entity is owned by a bank. Further, 
    the FDIC seeks to avoid restrictions where the risk of loss or 
    manipulation is small or the costs of compliance are disproportionate 
    to the purposes the restrictions serve. In addition, the FDIC defers to 
    the expertise of the SEC which has found that greater flexibility for 
    market activities during public offerings is appropriate due to greater 
    securities market transparency, the surveillance capabilities of the 
    SROs, and the continuing application of the anti-fraud and anti-
    manipulation provisions of the federal securities laws.14
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        \13\ See ``Anti-manipulation Rules Concerning Securities 
    Offerings,'' 62 FR 520 (January 3, 1997); 15 U.S.C. 78o(f), 
    requiring registered brokers or dealers to maintain and enforce 
    written policies and procedures reasonably designed to prevent the 
    misuse of material nonpublic information; and ``Broker-Dealer 
    Policies and Procedures Designed to Segment the Flow and Prevent the 
    Misuse of Material Nonpublic Information,'' A Report by the Division 
    of Market Regulation, U.S. SEC, (March 1990).
        \14\ Id. at 520.
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        Consistent with the current notice procedure found in Sec. 337.4, 
    an insured state nonmember bank may indirectly through a majority-owned 
    subsidiary engage in the public sale, distribution or underwriting of 
    securities that would be impermissible for a national bank provided 
    that the bank files notice prior to initiating the activities, the FDIC 
    does not object prior to the expiration of the notice period and 
    certain conditions are, and continue to be, met. The FDIC has shortened 
    the notice period from the existing 60 days to 30 days and placed 
    filing procedures in subpart G of part 303. Previously, specific 
    instructions and guidelines on the form and content of any applications 
    or notices required under Sec. 337.4 were found within that section. 
    With regard to those insured state nonmember banks that have been 
    engaging in a securities activity covered by the new Sec. 362.4(b)(5) 
    under a notice filed and in compliance with Sec. 337.4, Sec. 362.5(b) 
    of the regulation allows those activities to continue as long as the 
    bank and its majority-owned subsidiaries meet the core eligibility 
    requirements, the investment and transaction limitations, and capital 
    requirements contained in Sec. 362.4 (c), (d), and (e). The revised 
    regulation requires these securities subsidiaries to meet the 
    additional conditions specified in Sec. 362.4(b)(5)(ii) that require 
    securities subsidiaries to adopt appropriate policies and procedures, 
    register with the SEC and take steps to avoid conflicts of interest. 
    The revisions also require the state nonmember bank to adopt policies 
    concerning the financing of issues underwritten or distributed by the 
    subsidiary. The state nonmember bank and its securities subsidiary will 
    have one year from the effective date of the regulation to meet these 
    restrictions and would be expected to be working toward full compliance 
    over that time period. Failure to meet the restrictions within a year 
    after the adoption of a final rule will necessitate an application for 
    the FDIC's consent to continue those activities.
        To qualify for the streamlined notice procedure, a bank must be 
    well-capitalized after deducting from its tier one capital the equity 
    investment in the subsidiary as well as the bank's pro rata share of 
    any retained earnings of the subsidiary. The deduction must be 
    reflected on the bank's consolidated report of income and condition and 
    the resulting capital will be used for assessment risk classification 
    purposes under part 327 and for prompt corrective action purposes under 
    part 325. However, the capital deduction will not be used to determine 
    whether the bank is ``critically undercapitalized'' under part 325. 
    Since the risk-based capital requirements had not been adopted when the 
    current version of Sec. 337.4 was adopted, no similar capital level was 
    required of banks to establish an underwriting subsidiary, although the 
    capital deduction has always been required. This requirement is uniform 
    with the requirements found in the other part 362 notice procedures for 
    insured state banks to engage in activities not permissible for 
    national banks. The well-capitalized standard and the capital deduction 
    recognize the level of risk present in securities underwriting 
    activities by a subsidiary of a state nonmember bank. This risk 
    includes the potential that a bank could reallocate capital from the 
    insured depository institution to the underwriting subsidiary. Thus, it 
    is appropriate for the FDIC to retain the capital deduction even though 
    the FRB eliminated the requirement that a holding company deduct its 
    investment in a section 20 subsidiary on August 21, 1997.
        Comment was divided on the issue of whether the FDIC should impose 
    revenue limits similar to those the FRB has established for section 20 
    affiliates. One comment noted that in order to provide for consistency 
    between regulators and limit exposure to risk, the FDIC should adopt a 
    limitation similar to that adopted by the FRB for section 20 affiliates 
    that a securities subsidiary may earn no more than 25 percent of its 
    income from activities that are ineligible for the bank. Other comments 
    countered that there is not a legal or safety and soundness reason to 
    apply such a revenue limit. We agree that there is no legal reason for 
    a revenue limit. Because of the restrictions on transactions, the 
    capital deduction, and separations required between a bank and a 
    subsidiary, the FDIC does not believe that the revenue limit is 
    necessary to control the risk to the affected deposit insurance fund.
        One comment asserts that there are significant benefits of 
    securities underwriting and no material disadvantages. The revisions 
    that have been made are intended to strike a balance between enabling 
    banks to compete in the financial services arena and allowing 
    activities without consideration of risks involved. With appropriate 
    safeguards, any material disadvantages can be mitigated or eliminated.
        Notice for change in circumstances. The regulation requires the 
    bank to provide written notice to the appropriate Regional Office of 
    the FDIC within 10 business days of a change in circumstances in its 
    real estate or securities subsidiary. Under the revised regulation, a 
    change in circumstances is described as a material change in a 
    subsidiary's business plan or management. The standard of material 
    change would indicate such events as a change in chief executive 
    officer of the subsidiary or a change in investment strategy or type of 
    business or activity engaged in by the subsidiary. The regional 
    director also may address other changes that come to the attention of 
    the FDIC during the normal supervisory process. The FDIC received two 
    comments concerning the change of circumstance notice. Both comments 
    indicated that the notice is burdensome and unnecessary. The comments 
    argue that a change in the chief executive office or investment 
    strategies are routine. The FDIC is putting significant reliance on the 
    management and the business plan presented when an activity is approved 
    for a majority-owned subsidiary. The FDIC does not consider either 
    change to be routine and believes that it is important that the FDIC be 
    aware of material changes in the operations of the subsidiary. One
    
    [[Page 66303]]
    
    comment requested that the notice period be extended from ten days to 
    30 days. The FDIC believes that both a change in management and a 
    change in the business plan of the subsidiary should be matters that 
    have received significant prior consideration before these events 
    occur. It is not unreasonable to request notice of these events within 
    ten days of the change. Therefore, after careful consideration of the 
    comments, we have not changed the proposed requirement for a notice of 
    change of circumstances to be submitted within 10 business days after 
    any such change.
        In the case of a state member bank, the FDIC will communicate our 
    concerns to the appropriate persons in the Federal Reserve System 
    regarding the continued conduct of an activity after a change in 
    circumstances. The FDIC will work with the identified persons within 
    the Federal Reserve System to develop the appropriate response to the 
    new circumstances.
        The FDIC does not intend to require a bank which falls out of 
    compliance with eligibility conditions to immediately cease any 
    activity in which the bank had been engaged. The FDIC will deal with 
    each situation on a case-by-case basis through the supervision and 
    examination process. In short, the FDIC intends to utilize its 
    supervisory and regulatory tools in dealing with a bank's failure to 
    meet the eligibility requirements on a continuing basis. The issue of 
    the bank's ongoing activities will be dealt with in the context of that 
    effort. The FDIC views the case-by-case approach to whether a bank will 
    be permitted to continue an activity as preferable to forcing a bank 
    to, in all instances, immediately cease the activity. Such an 
    inflexible approach could exacerbate an already poor situation.
        Real estate leasing. As was discussed above, the FDIC has deleted 
    the current exception allowing a majority-owned subsidiary to engage in 
    activities included on the referenced list of activities determined by 
    the FRB to be closely related to the business of banking under section 
    4(c)(8) of the Bank Holding Company Act, because the activities 
    included on that list are generally of a type permissible for national 
    banks. The one exception that clearly is not generally permissible for 
    a national bank involves real estate leasing. The FDIC has inserted a 
    real estate leasing provision to allow continuation of activities that 
    are permitted under the current exception but may be lost with the 
    elimination of the reference to the 4(c)(8) list.
        For the purposes of part 362, the FDIC studied real estate leasing 
    to make a determination if there is a significant risk to the fund. The 
    FDIC's determination requires that we look at the possibility of loss 
    inherent in the leasing transaction.
        In a real estate leasing transaction, the lessor is the owner of 
    the parcel subject to the lease. The FDIC has defined equity investment 
    to include any interest in real estate. A threshold question for the 
    FDIC involves whether an ownership interest as lessor carries all of 
    the risks and rewards of ownership when there is no lease.
        By inserting a reference to the 4(c)(8) list, the FDIC consented 
    that real estate leasing could be conducted under the standards set by 
    the FRB. These standards provided that leasing real property or acting 
    as agent, broker, or adviser in leasing such property is allowed if: 
    (1) The lease is on a nonoperating basis which means that the banking 
    holding company may not engage in operating, servicing, maintaining, or 
    repairing leased property during the lease term; (2) the initial term 
    of the lease is at least 90 days; (3) at the inception of the lease, 
    the effect of the transaction will yield a return that will compensate 
    the lessor for not less than the lessor's full investment in the 
    property plus the estimated cost of financing the property over the 
    term of the lease from rental payments, estimated tax benefits, and the 
    estimated residual value of the property and the expiration of the 
    initial lease; and (4) the estimated residual value of the property 
    shall not exceed 25 percent of the acquisition cost of the property to 
    the lessor. In defining the real estate leasing parameters, the FRB's 
    definition focuses on characteristics that make the activity closely 
    related to banking.
        In making its risk to the fund determination, the FDIC looked not 
    only at banking standards for leasing transactions but also at GAAP. 
    Under GAAP, a lease is defined as the right to use an asset for a 
    stated period of time. Generally, a transaction is not a lease if the 
    right to use the property is not transferred; the transaction involves 
    the right to explore natural resources; or the transaction represents 
    licensing agreements. Also under GAAP, leases are considered under two 
    broad categories: (1) Capital leases which effectively transfer the 
    benefits and risks of ownership from the lessor to the lessee; and (2) 
    operating leases which is everything that is not a capital lease and 
    represents a series of cash flows. If any one of the following criteria 
    is met, a lease may be considered to be a capital lease:
         Ownership of the property is transferred to the lessee at 
    the end of the lease term; or
         The lease contains a bargain purchase option; or
         The lease term represents at least 75 percent of the 
    estimated economic life of the leased property; or
         The present value of the minimum lease payments at the 
    beginning of the lease term is 90 percent of more of the fair value of 
    the leased property to the lessor at the inception of the lease less 
    any related investment tax credit retained by and expected to be 
    realized by the lessor.
        Two other criteria must be present in order for the lessor to 
    determine that a lease is a capital lease: (1) Collection of minimum 
    lease payments is reasonably predictable; and (2) no important 
    uncertainties exist for unreimbursable costs to be borne by the lessor.
        The FDIC has decided that a majority-owned subsidiary acting as 
    lessor under a real property lease which meets certain criteria does 
    not represent a significant risk to the deposit insurance fund. To meet 
    these criteria, the lease must qualify as a capital lease under GAAP 
    and the bank and the majority-owned subsidiary may not provide 
    servicing, repair, or maintenance to the property except to the extent 
    needed to protect the value of the property. In addition, the majority-
    owned subsidiary may not acquire real estate to be leased unless it has 
    entered into a capital lease, or has a binding commitment to enter into 
    such a lease, or has a binding written agreement that indemnifies the 
    subsidiary against loss in connection with its acquisition of the 
    property. Any expenditures by the majority-owned subsidiary to make 
    reasonable repairs, renovations, and necessary improvements shall not 
    exceed 25 percent of the subsidiary's full investment in the property. 
    These standards provide a framework in which the risks and rewards of 
    ownership of the leased property have effectively been transferred from 
    the lessor to the lessee.
        A majority-owned subsidiary that acquires property for lease under 
    this provision may not use this exception as a vehicle to acquire an 
    equity investment in real estate. Upon expiration of the initial lease, 
    the majority-owned subsidiary must as soon as practicable, but in any 
    event in less than two years, re-lease the property under a capital 
    lease or divest itself of the property. An application will be required 
    if the subsidiary cannot meet the two-year deadline.
    
    [[Page 66304]]
    
        Acquiring and retaining adjustable rate and money market preferred 
    stock. The proposed regulation text has been revised in the final rule 
    to provide that a majority-owned subsidiary may acquire and retain 
    adjustable rate and money market preferred stock and any other 
    instrument that the FDIC has determined to have the character of debt 
    securities to the same extent that these activities may be conducted by 
    the bank itself. Since these subsidiaries are fully consolidated with 
    the bank, the 15 percent of tier one capital limitation will be 
    calculated against the consolidated tier one capital of the bank and 
    subsidiary. If a bank and its majority-owned subsidiary both engage in 
    this activity, the authority to conduct this activity in a majority-
    owned subsidiary may not be used to exceed the 15 percent limitation on 
    this type of activity without further consent of the FDIC. This 
    exception is provided to allow consistency between the authorized 
    activities of the bank and its majority-owned subsidiary.
        Core eligibility requirements. Consistent with the proposal, the 
    revised regulation has been organized much differently from the current 
    regulation where separation standards between an insured state bank and 
    its subsidiary are contained in the regulation's definition of ``bona 
    fide'' subsidiary. The revised regulation introduces the concept of 
    core eligibility requirements. These requirements are defined in two 
    parts. The first part defines the eligible depository institution 
    criteria and the second part defines the eligible subsidiary standards.
        Eligible depository institution. An ``eligible depository 
    institution'' is a depository institution that has been chartered and 
    operating for at least three years; received an FDIC-assigned composite 
    UFIRS rating of 1 or 2 at its most recent examination; received a 
    rating of 1 or 2 under the ``management'' component of the UFIRS at its 
    most recent examination; received at least a satisfactory CRA rating 
    from its primary federal regulator at its last examination; received a 
    compliance rating of 1 or 2 from its primary federal regulator at its 
    last examination; and is not subject to any corrective or supervisory 
    order or agreement. The FDIC believes that these criteria are 
    appropriate to ensure that expedited processing under the notice 
    procedures is available only to well-managed institutions that do not 
    present any supervisory, compliance or CRA concerns.
        The standards for an ``eligible depository institution'' are being 
    coordinated with similar requirements for other types of notices and 
    applications made to the FDIC. In developing the eligibility standards, 
    several items have been added that previously were not a stated 
    standard for banks wishing to engage in activities not permissible for 
    a national bank.
        The requirement that the institution has been chartered and 
    operated for three or more years reflects the experience of the FDIC 
    that newly formed depository institutions need closer scrutiny. 
    Therefore, a request by this type of institution to become involved in 
    activities not permissible for a national bank should receive 
    consideration under the application process rather than being eligible 
    for a notice process. Several comments noted that the provision 
    requiring the bank to be operating for three or more years ignores the 
    presence of an established bank holding company or seasoned management. 
    The FDIC is persuaded by the arguments that an exception is appropriate 
    when there is an established holding company or seasoned management is 
    present. Therefore, the criterion has been changed to require that the 
    bank must have been chartered and operating for 3 or more years unless 
    the appropriate regional director (DOS) finds that the bank is owned by 
    an established, well-capitalized, well-managed holding company or is 
    managed by seasoned management.
        The revised regulation provides that the notice procedures should 
    be available only to well-managed, well-capitalized banks. Banks which 
    have composite and management ratings of 1 or 2 have shown that they 
    have the requisite financial and managerial resources to run a 
    financial institution without presenting a significant risk to the 
    deposit insurance fund. While lower-rated financial institutions may 
    have the requisite financial and managerial resources and skills to 
    undertake such activities, the FDIC believes that those institutions 
    should be subject to the formal part 362 application process as opposed 
    to the streamlined notice process. Institutions that do not meet the 
    eligibility criteria have been evaluated and have been determined to 
    have some weaknesses that may require additional attention before 
    allowing them to engage in additional activities. For that reason, the 
    FDIC has concluded that it is more prudent to require institutions 
    rated 3 or below to utilize the application process.
        Comments received did not object to the standard of a composite 
    rating of 1 or 2 or a management rating of 1 or 2; however, the 
    regulatory language that the ratings used be assigned by the 
    appropriate federal banking agency was questioned. Some comments 
    contended that this provision fails to consider that the FDIC and FRB 
    recognize and generally adopt the ratings assigned by the state banking 
    departments under an alternate examination program. The language does 
    not ignore ratings assigned by the state banking authorities. All 
    ratings, whether state or Federal, considered by the FDIC for purposes 
    of processing applications must be assigned by the FDIC after reviewing 
    the results of an examination conducted by another banking agency. 
    Although the language differs between this processing criteria and the 
    proposal to amend our applications processing regulation (part 303), 
    there is no intention of establishing a different standard. To reduce 
    confusion, the language in the revised regulation has been changed to 
    reflect that the ratings are the FDIC-assigned rating at the 
    institution's most recent state or Federal examination.
        In setting criteria to define which banks are eligible to use the 
    notice process, the FDIC has determined it is appropriate to take into 
    account all areas of managerial and operational expertise. In 
    particular, the revised regulation requires that the institution have a 
    satisfactory or better CRA rating, a 1 or 2 compliance rating, and not 
    be subject to any formal or informal enforcement action before it may 
    use the notice procedures.
        The proposal to use the CRA ratings as an eligibility criteria drew 
    negative comments. One commenter even expressed the opinion that the 
    FDIC's use of a CRA rating as an eligibility criterion for expedited 
    processing is a violation of the CRA itself. The FDIC is not proposing 
    some alternative method of CRA enforcement. The CRA criterion is not 
    intended to ``punish'' any bank which the FDIC has previously 
    criticized for substandard CRA performance; nor is it intended to 
    ``reward'' a bank with satisfactory performance. The CRA criterion acts 
    solely as a procedural device for application processing, in connection 
    with the other criteria, to identify applications for further review if 
    they come from banks which have not been meeting all the primary 
    supervisory requirements. If a bank has not complied with all of these 
    primary supervisory expectations, it may be a symptom of financial, 
    management, or operational deficiencies which could be exacerbated by 
    undertaking the proposed additional activities. The consequence of 
    failing to meet all the eligibility criteria is only that the request 
    will be subject to exactly the same kind and level of review to which
    
    [[Page 66305]]
    
    it is subject under the current rules which have no expedited 
    processing procedures. Therefore, the FDIC retains the same eligibility 
    criteria in the final regulation as proposed.
        Eligible Subsidiary. The eligible subsidiary requirements are also 
    used to determine which institutions qualify for notice processing. 
    Additionally, the requirements are also criteria the FDIC is likely to 
    take into account when reviewing and considering applications. The 
    FDIC's support of the concept of the expansion of bank powers is based 
    in part on establishing a corporate separateness between the insured 
    state bank and the entity conducting activities that are not 
    permissible for the depository institution directly. The revised 
    regulation establishes these separations as well as standards for 
    operations through the concept of ``eligible subsidiary''. An entity is 
    an ``eligible subsidiary'' if it: (1) Meets applicable statutory or 
    regulatory capital requirements and has sufficient operating capital in 
    light of the normal obligations that are reasonably foreseeable for a 
    business of its size and character; (2) is physically separate and 
    distinct in its operations from the operations of the bank, provided 
    that this requirement shall not be construed to prohibit the bank and 
    its subsidiary from sharing the same facility if the area where the 
    subsidiary conducts business with the public is clearly distinct from 
    the area where customers of the bank conduct business with the 
    institution--the extent of the separation will vary according to the 
    type and frequency of customer contact; (3) maintains separate 
    accounting and other business records; (4) observes separate business 
    formalities such as separate board of directors' meetings; (5) has a 
    chief executive officer who is not an employee of the bank; (6) has a 
    majority of its board of directors who are neither directors nor 
    officers of the bank; (7) conducts business pursuant to independent 
    policies and procedures designed to inform customers and prospective 
    customers of the subsidiary that the subsidiary is a separate 
    organization from the bank and that the bank is not responsible for and 
    does not guarantee the obligations of the subsidiary; (8) has only one 
    business purpose; (9) has a current written business plan that is 
    appropriate to the type and scope of business conducted by the 
    subsidiary; (10) has adequate management for the type of activity 
    contemplated, including appropriate licenses and memberships, and 
    complies with industry standards; and (11) establishes policies and 
    procedures to ensure adequate computer, audit and accounting systems, 
    internal risk management controls, and has the necessary operational 
    and managerial infrastructure to implement the business plan.
        The separations currently necessary between the bank and subsidiary 
    are outlined in the definitions of ``bona fide'' subsidiary contained 
    in Sec. 337.4 and part 362. The broad principles of separation upon 
    which the ``bona fide'' subsidiary definition and the ``eligible 
    subsidiary'' definition are based include: (1) Adequate capitalization 
    of the subsidiary; (2) separate corporate functions; (3) separation of 
    facilities; (4) separation of personnel; and (5) advertising the bank 
    and the subsidiary as separate entities. In developing the standards 
    for an ``eligible subsidiary'', the FDIC has modified some of the 
    criteria used in the current regulation. The changes are found in the 
    capital requirement, the physical separation requirement, the separate 
    employee standard, and the requirement that the subsidiary's business 
    be conducted pursuant to independent policies and procedures.
        The language in the current part 362 allows the subsidiary and the 
    parent bank to share officers so long as a majority of the subsidiary's 
    executive officers were neither officers nor directors of the bank. 
    Section 337.4 contains a requirement that there be no shared officers. 
    The ``eligible subsidiary'' concept adopts a standard that the chief 
    executive officer of the subsidiary should not be an employee of the 
    bank. The eligible subsidiary requirements in this regard are thus less 
    restrictive than those found in both Sec. 337.4 and the current version 
    of part 362, as well as those in many FDIC orders authorizing real 
    estate activities. The eligible subsidiary definition only requires 
    that the chief executive officer not be an employee of the bank. 
    Officers are employees of the bank. This limitation would allow the 
    chief executive officer to be an employee of an affiliated entity or be 
    on the board of directors of the bank. Two comments indicated that the 
    requirement for an independent chief executive officer is too 
    restrictive. One comment suggested that this requirement be dropped for 
    small banks. The FDIC is sympathetic to the concerns of small banks; 
    however, banks that desire relief from this standard may apply to the 
    FDIC for approval. The FDIC recognizes that there may be instances in 
    which this standard may not be needed. The FDIC will consider such 
    requests and waive the standard in appropriate situations.
        The current rule's requirement that the subsidiary be adequately 
    capitalized was revised to provide that the subsidiary must meet any 
    applicable statutory or regulatory capital requirements, that the 
    subsidiary have sufficient operating capital in light of the normal 
    obligations that are reasonably foreseeable for a business of its size 
    and character, and that the subsidiary's capital meet any commonly 
    accepted industry standard for a business of its size and character. 
    This definition clarifies that the FDIC expects the subsidiary to meet 
    the capital requirements of its primary regulator, particularly those 
    subsidiaries involved in securities and insurance. No comments objected 
    to this change. This standard is unchanged in the final rule.
        The physical separation requirement of the current rule was 
    clarified by the addition of a sentence which indicates that the extent 
    to which the bank and the subsidiary must carry on operations in 
    physically distinct areas will vary according to the type and frequency 
    of public contacts. The FDIC does not intend to require physical 
    separation where such a standard adds little value such as where a 
    subsidiary engaged in developing commercial real estate has little or 
    no customer contact. The possibility of customer confusion should be 
    the determining factor in deciding the physical separation requirements 
    for the subsidiary.
        One commenter stated that this clarification is an improvement over 
    the existing regulation; however, the comment encourages the FDIC to 
    clarify that the subsidiary and the bank may conduct activities in the 
    same location if the subsidiary is engaging in activities that are 
    permissible for the bank to engage. The FDIC agrees that this point is 
    important. The requirements of this regulation apply to activities that 
    are not permissible for a national bank. Activities such as the sale of 
    securities are covered by the requirements of the Interagency 
    Statement. We have decided that no change in the regulation language is 
    necessary to further clarify that these standards do not apply to 
    subsidiaries engaging solely in activities permissible for a national 
    bank. We believe it is clear that the coverage of the core eligibility 
    requirements is for institutions to conduct as principal activities 
    through a subsidiary that are not permissible for a subsidiary of a 
    national bank.
        We eliminated the provision contained in the current regulation 
    that required employees of the bank and subsidiary to be separately 
    compensated when they have contact with the public. This requirement 
    was imposed to
    
    [[Page 66306]]
    
    reduce confusion relating to whether customers were dealing with the 
    bank or the subsidiary. Since the adoption of the current regulation, 
    the Interagency Statement was issued. The Interagency Statement 
    recognizes the concept of employees who work both for a registered 
    broker-dealer and the bank. Because of the disclosures required under 
    the Interagency Statement informing the customer of the nature of the 
    product being sold and the physical separation requirements, the need 
    for separate public contact employees is diminished. No objections to 
    the proposed changes were offered, and the requirement for separate 
    public contact employees is dropped from the revised regulation.
        Language was added that the subsidiary must conduct business in a 
    manner that informs customers that the bank is not responsible for and 
    does not guarantee the obligations of the subsidiary. This standard is 
    taken from section 23B of the Federal Reserve Act which prohibits banks 
    from entering into any agreement to guarantee the obligations of their 
    affiliates and prohibits banks as well as their affiliates from 
    advertising that the bank is responsible for the obligations of its 
    affiliates. In the proposal, we made this standard an affirmative duty 
    of disclosure. This type of disclosure is intended to reduce customer 
    confusion concerning who is responsible for the products purchased. Two 
    comments questioned the affirmative nature of the standard. The duty to 
    inform customers would in many cases be unnecessary. For instance, when 
    a transaction is covered by the Interagency Statement disclosures are 
    already required to inform customers that the product is not an 
    obligation of the bank. The commenters believe that the requirement 
    should be analogous to section 23B and only require that the subsidiary 
    not mislead its customers. The FDIC has not been persuaded by the 
    arguments. The affirmative requirement to make disclosures applies to 
    the subsidiary and the Interagency Statement disclosures apply to the 
    bank. One of the most important steps the subsidiary can take to assure 
    a separate corporate existence from the parent bank is to make 
    affirmative disclosures to its customers as prescribed. Therefore, the 
    disclosure requirement remains as proposed.
        The regulation contains a standard that a majority of the board of 
    directors of the eligible subsidiary act as neither a director nor an 
    officer of the bank. Commenters suggested that this standard be 
    altered. One comment suggested that the standard be eliminated for 
    small banks. The issue of the need for management separation is not an 
    issue that clearly relates to the size of the bank. We recognize that 
    this requirement for some small banks may present a challenge. The FDIC 
    believes that management separations are an important safeguard. If an 
    institution desires a different structure than that proposed in these 
    standards, they may submit an application for FDIC consideration. 
    Another commenter suggested that the FDIC defer to the OCC standard 
    that permits \2/3\ of the subsidiary's board members to be directors of 
    the depository institution. The FDIC believes that the majority of the 
    board standard provides a structure in which decisions relating to the 
    subsidiary are being made by a majority of persons who are not 
    associated with the bank. This standard provides an easily identifiable 
    level of separation. If the standard creates a burden for a bank, the 
    FDIC will consider a request for relief. After considering the 
    comments, the FDIC has decided not to change this standard.
        In a previous proposal a question was raised if this standard 
    prohibited directors of a subsidiary from serving as directors and 
    officers of the parent holding company or an affiliated entity. The 
    FDIC is primarily concerned about risk to the deposit insurance funds 
    and is therefore looking to establish separation between the insured 
    bank and its subsidiary. The eligible subsidiary requirement is 
    designed to assure that the subsidiary is in fact a separate and 
    distinct entity from the bank. This requirement should prevent 
    ``piercing of the corporate veil'' and insulate the bank, and the 
    deposit insurance fund, from any liabilities of the subsidiary.
        We recognize that a director or officer employed by the bank's 
    parent holding company or a sister affiliate is not as ``independent'' 
    as a totally disinterested third party. The FDIC is, however, 
    attempting to strike a reasonable balance between prudential safeguards 
    and regulatory burden. The requirement that a majority of the board not 
    be directors or officers of the bank will provide certain benefits that 
    the FDIC thinks are very important in the context of subsidiary 
    operations. The FDIC expects these persons to act as a safeguard 
    against conflicts of interest and to be independent voices on the board 
    of directors. While the presence of ``independent'' directors may not, 
    in and of itself, prevent piercing of the corporate veil, it will add 
    incremental protection and in some circumstances may be key to 
    preserving the separation of the bank and its subsidiary in terms of 
    liability. In view of the other standards of separateness that have 
    been established under the eligible subsidiary standard as well as the 
    imposition of investment and transaction limits, we do not believe that 
    a connection between the bank's parent or affiliate will pose undue 
    risk to the insured bank.
        In addition to the separation standards, the ``eligible 
    subsidiary'' concept introduces operational standards that are not part 
    of the current regulation. These standards provide guidance concerning 
    the organization of the subsidiary that the FDIC believes important to 
    the independent operation of the subsidiary.
        The revised regulation requires that a bank that wishes to file a 
    notice to establish a subsidiary to engage in insurance, real estate or 
    securities have only one business purpose among those categories. 
    Several comments objected to this standard. One comment stated that the 
    subsidiary should be allowed to engage in similar business lines rather 
    than being held to a strict sole purpose standard. Other comments 
    encouraged a broad definition of the term ``one business purpose''. 
    Other comments recommended eliminating the requirement stating the FDIC 
    should rely on the business plan for information needed to address any 
    concerns. Because the FDIC is limiting a bank's transactions with 
    subsidiaries engaged in real estate, or securities activities 
    authorized under subpart A, and the aggregate limits only extend to 
    subsidiaries engaged in the activities subject to the investment 
    limits, the FDIC believes it is important to limit the scope of the 
    subsidiary's activities when using the expedited procedures. The FDIC 
    will use the business plan as a tool to review the lines of business 
    engaged in by the subsidiary. The FDIC will be flexible in its 
    interpretation of the term ``one business purpose.'' For instance, the 
    FDIC would consider a subsidiary engaged in underwriting a financial 
    product and also selling that product to have one business purpose.
        The regulation contains a standard that the subsidiary have a 
    current written business plan that is appropriate to its type and scope 
    of business. The FDIC believes that an institution that is 
    contemplating involvement with activities that are not permissible for 
    a national bank or a subsidiary of a national bank should have a 
    carefully conceived plan for how it will operate the business. We 
    recognize that certain activities do not require elaborate business 
    plans; however, every activity should be considered by the board of the 
    bank to determine the scope of the
    
    [[Page 66307]]
    
    activity allowed and how profitability is to be attained. We received 
    no comments on this requirement. This standard is adopted without 
    change.
        The requirement for adequate management of the subsidiary 
    establishes the FDIC's view that insured depository institutions should 
    consider the importance of management in the success of an operation. 
    The requirement to obtain appropriate licenses and memberships and to 
    comply with industry standards indicates the FDIC's support of 
    securities and insurance industry standards in determining adequacy of 
    subsidiary management. We received no comments, and this standard is 
    adopted without change.
        An important factor in controlling the spread of liabilities from 
    the subsidiary to the insured depository institution is that the 
    subsidiary establishes necessary internal controls, accounting systems, 
    and audit standards. The FDIC does not expect to supplement this 
    requirement with specific guidance since the systems must be tailored 
    to specific activities, some of which are otherwise regulated. We 
    received no comments on this standard, and it is unchanged.
        Investment and transaction limits. The revised regulation contains 
    investment limits and other requirements that apply to an insured state 
    bank and its subsidiaries that engage in ``as principal'' activities 
    that are not permissible for a national bank if the requirements are 
    imposed by order or expressly imposed by regulation. The provision is 
    not contained in the current regulation; however, Sec. 337.4 imposes by 
    reference the limitations of section 23A of the Federal Reserve Act 
    (Sec. 337.4 was adopted prior to the adoption of section 23B of the 
    Federal Reserve Act). Both section 23A and section 23B restrictions 
    have been imposed by the FDIC through its orders authorizing insured 
    state banks to engage in activities not permissible for a national 
    bank.
        Some of the provisions of sections 23A and 23B are inconsistent 
    when applied in the context of a bank/subsidiary relationship. The FDIC 
    believes that merely incorporating sections 23A and 23B by reference 
    raises significant interpretative issues and only promotes confusion in 
    an already complex area.
        For these reasons, the FDIC has adopted a separate subsection which 
    sets forth the specific investment limits and arm's length transaction 
    requirements. In general, the provisions impose an aggregate investment 
    on all subsidiaries that engage in activities covered by the investment 
    limits, require that extensions of credit from a bank to its 
    subsidiaries be fully-collateralized when made, prohibit the bank from 
    taking a low quality asset as collateral on such loans, and require 
    that transactions between the bank and its subsidiaries be on an arm's 
    length basis. The comments received state that the investment and 
    transaction limits which have been proposed are preferable to 
    incorporating sections 23A and 23B by reference. Two comments suggested 
    that this section be eliminated if the FRB adopts its proposal to 
    expand sections 23A and 23B coverage to subsidiaries engaged in 
    activities not permissible for a national bank. The FDIC will not 
    respond to this scenario until the FRB has issued a final regulation. 
    Another comment expressed the opinion that in view of the explicit 
    statutory exception in sections 23A and 23B for transactions between an 
    insured bank and its subsidiaries, the restrictions in these provisions 
    should not be applied in any form by the FDIC. The FDIC agrees that 
    section 23A and 23B should not be applied to a bank/subsidiary 
    relationship that is fully consolidated for capital reporting purposes. 
    For subsidiaries that are engaged in activities for which the FDIC 
    imposes a requirement that capital of the subsidiary be deducted from 
    the bank's capital in determining the bank's capital adequacy, we 
    believe that restrictions on transactions between the bank and the 
    subsidiary are also necessary. Another comment indicated that the 
    investment and transaction limits proposed are unnecessarily complex 
    and would make many activities uneconomic. Specifically, the cost of 
    collateral requirements would diminish if not eliminate the potential 
    profit from the permitted activity. The FDIC is concerned that an 
    insured bank not be allowed to easily and cheaply transfer risks from 
    the uninsured entity to the insured depository institution. Collateral 
    requirements are a method of assuring that any money lent by the bank 
    to its subsidiary will ultimately be repaid. This comment also suggests 
    that Regulation K of the FRB would provide a more appropriate analogue 
    than sections 23A and 23B. In this regulation, appropriate safeguards 
    are provided by focusing on the capital strength of the bank and the 
    extent of its investment in the entity. We believe that capital 
    strength of the bank and the extent of its investment in a subsidiary 
    are important considerations. The revised regulation addresses each of 
    those areas. In addition, restrictions on the flow of funds from an 
    insured bank to a subsidiary engaged in activities not permissible for 
    the bank itself are necessary. We have chosen to keep the investment 
    and transaction limitations in the final regulation.
        The revised regulation expands the definition of bank for the 
    purposes of the investment and transaction limitations. A bank includes 
    not only the insured entity but also any subsidiary that is engaged in 
    activities that are not subject to these investment and transaction 
    limits. Sections 23A and 23B of the Federal Reserve Act combine the 
    bank and all of its subsidiaries in imposing investment limitations on 
    all affiliates. The FDIC is using the same concept in separating 
    subsidiaries conducting activities that are subject to investment and 
    transaction limits from the bank and any other subsidiary that engages 
    in activities not subject to the investment and transaction limits. 
    This rule will prohibit a bank from funding a subsidiary that is 
    subject to the investment and transaction limits through a subsidiary 
    that is not subject to the limits. One comment expressed support for 
    this concept but emphasized that there is no need to include ``eligible 
    subsidiaries'' in the restrictions since these entities have already 
    been separated from the insured depository institution. The FDIC did 
    not intend to extend these restrictions to transactions between 
    ``eligible subsidiaries''. Therefore, this language has not been 
    changed.
        Investment limit. Under the proposed rule, the FDIC limited bank 
    investments in certain subsidiaries. Those limits are basically the 
    same as would apply between a bank and its affiliates under section 
    23A. As is the case with covered transactions under section 23A, 
    extensions of credit and other transactions that benefit the bank's 
    subsidiary would be considered part of the bank's investment. The only 
    exception would be for arm's length extensions of credit made by the 
    bank to finance sales of assets by the subsidiary to third parties. 
    These transactions would not need to comply with the collateral 
    requirements and investment limitations of section 23A, provided that 
    they met certain arm's length standards.
        In contrast to the bank-affiliate relationship being governed by 
    the statutory limits of sections 23A and 23B, inherent in the idea of a 
    subsidiary is the subsidiary's value to the bank as an asset. That 
    value increases as the subsidiary earns profits and decreases as the 
    subsidiary loses money. The increases are reflected in the subsidiary's 
    retained earnings and the consolidated retained earnings of the bank as 
    a whole. The FDIC wants to
    
    [[Page 66308]]
    
    separate the bank's equity investment in the subsidiary from any 
    lending to or covered transactions with the subsidiary. Thus, the FDIC 
    proposed to treat the bank's equity investment as a deduction from 
    capital, while limiting any lending to or covered transactions with the 
    subsidiary in a similar fashion as these transactions are limited in 
    the bank-affiliate relationship. Then, the question arises as to how to 
    properly treat retained earnings at the subsidiary level. If retained 
    earnings at the subsidiary level were treated as subject to the 
    investment limits, the bank could be forced to take the retained 
    earnings out of the subsidiary to stay under the applicable limits. If 
    retained earnings are allowed to accumulate without limit, then the 
    bank could declare dividends to its shareholders based on the retained 
    earnings at the subsidiary. Later, in the event that the subsidiary 
    incurred losses, the bank's capital could become inadequate based on 
    the subsidiary's losses. Thus, the FDIC decided that retained earnings 
    should be deducted from capital in the same way as the equity 
    investment is deducted.
        Comments were supportive of the proposed concept of investment 
    limits for loans to and debt of the subsidiary in contrast to the 
    capital deduction for equity investments in and retained earnings of 
    the subsidiary. One commenter expressed reservations about the 
    structure of the investment limits. The proposal to limit transactions 
    between a bank and its eligible subsidiary to 10 percent of capital to 
    any one subsidiary and 20 percent of capital to all eligible 
    subsidiaries conducting the same activity was questioned. By including 
    the 10 percent limitation to any one subsidiary, the FDIC would only 
    create burden to institutions without the benefit of appreciably 
    limiting or diversifying risk. The commenter points out that since the 
    eligible subsidiaries are not subject to transaction limitations 
    between each other, it would be easy to structure the use of the entire 
    20 percent investment provision between the two subsidiaries but really 
    for the benefit of the same project or business. The comment accepts 
    that the 20 percent aggregate limit is appropriate, and recommends that 
    the regulation be amended to apply only the 20 percent limitation. The 
    FDIC is persuaded by this argument, and the final rule has dropped the 
    10 percent to any one subsidiary limitation.
        The definition of ``investment'' under this provision has four 
    components. The first component is any extension of credit by the bank 
    to the subsidiary. The term ``extension of credit'' is defined in part 
    362 to have the same meaning as that under section 22(h) of the Federal 
    Reserve Act (12 U.S.C. 375b) and would therefore apply not only to 
    loans but also to commitments of credit. The second component is ``any 
    debt securities of the subsidiary'' held by the bank. This component 
    recognizes that debt securities are very similar to extensions of 
    credit. The third component is the acceptance of securities issued by 
    the subsidiary as collateral for extensions of credit to any person or 
    company. The fourth and final component addresses any extensions or 
    commitments of credit to a third party for investment in the 
    subsidiary, investment in a project in which the subsidiary has an 
    interest, or extensions of credit or commitments of credit which are 
    used for the benefit of, or transferred to, the subsidiary. Commenters 
    did not object to these components of ``investment,'' and the 
    definition is unchanged.
        The revised regulation calculates the 20 percent limit based on 
    tier one capital. Also, the revisions limit the aggregate investment to 
    all subsidiaries conducting activities subject to the investment 
    limits. Comments note that the 20 percent limit is calculated against 
    tier one capital instead of capital and surplus as is the standard for 
    section 23A. One comment goes on to state that even though the FDIC has 
    proposed a more restrictive standard, the 20 percent limit applies to 
    an aggregate of the same activity rather than the section 23A standard 
    covering all affiliates. In that respect, the 20 percent limit in the 
    proposal is less restrictive. Although the FDIC does not intend to 
    mimic section 23A in all respects, the FDIC has determined that an 
    aggregate limit on activities that are covered by the investment limits 
    is appropriate. The standard established is intended to reflect an 
    appropriate limitation for subsidiary activities. The FDIC continues to 
    use the more restrictive tier one capital as its measure to create 
    consistency throughout the regulation. The FDIC does not find the 
    burden of this more restrictive capital base to be unreasonable.
        Arm's length transaction requirement. For subsidiaries engaged in 
    activities covered by the investment and transactions limitations, the 
    revisions require that any transaction between a bank and its 
    subsidiary must be on terms and conditions that are substantially the 
    same as those prevailing at the time for comparable transactions with 
    unaffiliated parties. This ``arm's length transaction'' requirement is 
    intended to make sure that the business of the subsidiary does not take 
    place to the disadvantage of the bank. The types of transactions 
    covered by the requirement include: (1) Investments in the subsidiary; 
    (2) the purchase from or sale to the subsidiary of any assets, 
    including securities; (3) entering into any contract, lease or other 
    agreement with the subsidiary; and (4) paying compensation to the 
    subsidiary or any person who has an interest in the subsidiary. The 
    revised regulation indicates, however, that the restrictions do not 
    apply to an insured state bank giving immediate credit to a subsidiary 
    for uncollected items received in the ordinary course of business.
        The arm's length transaction requirement is meant to protect the 
    bank from abusive practices. To the extent that the subsidiary offers 
    the parent bank a transaction which is at or better than market terms 
    and conditions, the bank may accept such transaction since the bank is 
    receiving a benefit, as opposed to being harmed. It may be the case, 
    however, that a bank will be unable to meet the regulatory standard 
    because there are no known comparable transactions between unaffiliated 
    parties. In these situations, the FDIC will review the transactions and 
    expect the bank to meet a ``good faith'' standard.
        This section and the language therein is not a substantive change 
    from the proposal. Comments had mixed messages about this section of 
    the regulation. Commenters agreed that this proposal is preferable to 
    the incorporation by reference to section 23B. One comment stated that 
    if the FRB's proposal to impose section 23B on subsidiaries is 
    finalized, the FDIC should withdraw its regulatory language to avoid 
    confusion. The FDIC is aware of the FRB proposal and will react once 
    the final position of the FRB is known. Another comment stated that in 
    view of the explicit statutory exception in section 23B between an 
    insured depository institution and its subsidiaries, these restrictions 
    in any form should not be applied by the FDIC. When engaging in 
    transactions with a subsidiary, banks and bank counsel should be aware 
    of the FDIC's separate corporate existence concerns. Bank subsidiaries 
    should be organized and operated as separate corporate entities. 
    Subsidiaries should be adequately capitalized for the business they are 
    engaged in and separate corporate formalities should be observed. 
    Frequent transactions between the bank and its subsidiary which are not 
    on an arm's length basis may lead to questions as to whether the 
    subsidiary is actually a separate corporate entity or merely the alter 
    ego of the bank. One of the primary
    
    [[Page 66309]]
    
    reasons for the FDIC requiring that certain activities be conducted 
    through an eligible subsidiary is to provide the bank, and the deposit 
    insurance funds, with liability protection. To the extent a bank 
    ignores the separate corporate existence of the subsidiary, this 
    liability protection is jeopardized. We believe setting forth the exact 
    requirements will reduce regulatory burden and confusion as banks and 
    bank counsel will more readily know what requirements are to be 
    followed.
        Banks will be prohibited from buying low quality assets from their 
    subsidiaries. We received no comments objecting to this standard. The 
    FDIC has taken the definition of ``low quality asset'' from the 
    proposal without modification.
        The revised regulation contains provisions addressing insider 
    transactions and product tying. The arm's length standard addresses 
    transactions between an insured depository institution and its 
    subsidiaries. The FDIC is adding a provision that an arm's length 
    standard applies to transactions between the subsidiary and insiders of 
    the insured depository institution. The revised regulation requires 
    that any transactions with insiders must meet the requirements that 
    transactions be on substantially the same terms and conditions as 
    generally available to unaffiliated parties. Banks engaging in such 
    transactions should retain proper documentation showing that the 
    transactions meet the arm's length requirement. The FDIC will review 
    transactions with insiders in the normal course of the examination 
    process and take such actions as may be necessary and appropriate if 
    problems arise. Questionable transactions will have to be justified 
    under the standards of the regulation.
        Comments were not supportive of this standard. One comment stated 
    that the new restriction is unnecessary since such insiders would 
    already be subject to the restrictions set forth in Regulation O. The 
    FDIC has recognized this overlap by excluding transactions covered by 
    Sec. 337.3, which implements many of the restrictions contained in 
    Regulation O for insured state nonmember banks. The comment also 
    contends that if the subsidiary is isolated from the bank as would be 
    required by the revised regulation, there should be no need to regulate 
    transactions between bank insiders and the eligible subsidiary. The 
    FDIC is implementing these provisions in an abundance of caution. The 
    standard is that insider transactions should be on the same terms and 
    conditions as those prevailing at the time for comparable transactions 
    with persons not affiliated with the insured state bank. The standard 
    does not prohibit transactions; it merely sets parameters that does not 
    allow insiders to engage in transactions that are on terms more 
    favorable than those available in the market. Another comment states 
    that, for example, this standard potentially would prohibit an 
    executive officer from participating in an employee benefit program 
    that waives trustee fees for IRA accounts if the assets of such 
    accounts are invested in mutual funds distributed by a securities firm 
    affiliate of the bank. The FDIC is persuaded by this argument and has 
    added an exception that the standard shall not prohibit any transaction 
    made pursuant to a benefit or compensation program that is widely 
    available to employees of the insured state bank and that does not give 
    preference to any insider of the insured state bank over other 
    employees of the insured state bank.
        The proposed regulation also contained a requirement that neither 
    the insured state bank nor the majority-owned subsidiary may require a 
    customer to either buy a product or use a service from the other as a 
    condition of entering into a transaction. While the condition may 
    duplicate existing standards under applicable law for banks to some 
    extent, it is not clear that all circumstances addressed by the 
    proposed condition are covered by the existing statutory and regulatory 
    restrictions. Banks are subject to statutory anti-tying restrictions at 
    12 U.S.C. Sec. 1972. The OCC extends anti-tying provisions to national 
    bank subsidiaries. See OCC Bulletin 95-20. The extension of anti-tying 
    restrictions to savings and loan holding companies and their affiliates 
    in transactions involving a savings association is statutory. 
    Consequently, the OTS is not authorized to exempt savings and loan 
    holding companies and their affiliates entirely from all tying 
    restrictions. 62 FR 15819.
        The FDIC specifically requested public comment on whether the 
    proposed anti-tying restriction was appropriate. The FDIC received five 
    comments opposed to the proposed anti-tying requirement. One commenter 
    objected to the requirement on general grounds. The other four asserted 
    that statutory tying limits imposed by Congress in 1970 (12 U.S.C. 
    1972) are sufficient, and that the FDIC should not impose additional 
    restrictions on tying by bank subsidiaries. Of these, two commenters 
    were of the view that statutory tying limits are based on outdated 
    views of banks' market power and constitute a competitive disadvantage 
    for banks which should not be compounded by the addition of the FDIC's 
    proposed tying restriction for real estate investment and securities 
    underwriting subsidiaries. These commenters also made note of recent 
    FRB action (as discussed in the FDIC's preamble to the proposed rule) 
    eliminating the FRB's extension of tying restrictions to bank holding 
    companies and their nonbank affiliates. The FRB based its action on its 
    experience that bank holding companies and their nonbank affiliates do 
    not possess the market power over credit or other unique competitive 
    advantages that Congress assumed that banks enjoyed in 1970, when 
    Congress adopted 12 U.S.C. 1972, and nonstatutory blanket anti-tying 
    restrictions are therefore not justified. 62 FR 9312. The commenters 
    suggest the FDIC take a similar approach.
        The FDIC is concerned that opportunities may exist for abusive 
    tying arrangements. It is this concern which has caused the FDIC to 
    include particular tying restrictions of varying types in its approval 
    orders governing real estate investment activities, and in its rules 
    under Sec. 337.4 on securities underwriting. In the real estate orders, 
    the FDIC has typically prohibited the bank from conditioning an 
    extension of credit on the borrower's agreement to also acquire real 
    estate from the real estate development subsidiary. Under Sec. 337.4, a 
    bank could not directly or indirectly condition an extension of credit 
    on the borrower's agreement to contract with the securities subsidiary 
    to underwrite or distribute the borrower's securities, or to purchase 
    any security currently underwritten by the subsidiary. The inclusion of 
    these conditions highlighted the FDIC's concerns with these particular 
    practices. Because of the FDIC's concern about the potential for 
    abusive tying practices, and because the tying restrictions as proposed 
    are only used to further delineate the circumstances in which a notice, 
    rather than an application, is required, the FDIC has decided to adopt 
    the tying restriction as proposed. Any bank wishing to conduct business 
    on a basis different than the general rule set out in the tying 
    restriction may submit an application. Then, the FDIC can evaluate the 
    arrangement in light of its particular facts, including the 
    permissibility of the arrangement under other applicable tying laws, 
    its safety and soundness, and what risk it poses to the fund.
        Collateralization requirements. The revised regulation provides 
    that an insured state bank is prohibited from
    
    [[Page 66310]]
    
    making an extension of credit to a subsidiary covered by the investment 
    and transaction limits unless such transaction is fully-collateralized 
    at the time the bank makes the loan or extension of credit. This 
    requirement is intended to protect the bank in the event of a loan 
    default. ``Fully collateralized'' under the regulation means extensions 
    of credit secured by collateral with a market value at the time the 
    extension of credit is entered into of at least 100 percent of the 
    extension of credit amount for government securities or a segregated 
    deposit in a bank; 110 percent of the extension of credit amount for 
    municipal securities; 120 percent of the extension of credit amount for 
    other debt securities; and 130 percent of the extension of credit 
    amount for other securities, leases or other real or personal property. 
    One comment objected to the fact that the FDIC proposed to use this 
    schedule as minimum guidance. The comment questions if the FDIC intends 
    to require collateral standards that are more rigid than those in 
    effect under section 23A. As stated, the FDIC intends to look to the 
    collateralization schedule as minimum guidance, but wants to retain 
    flexibility in making the determination if additional collateral is 
    necessary. Maintaining flexibility does not mean that the FDIC intends 
    to impose harsh new standards; however, we intend on a case-by-case 
    basis to reserve the ability to require greater collateral in 
    situations where the risk potential is higher.
        Two comments were received on this issue. Both commenters believe 
    the collateral requirements are unnecessary. The comments argue that if 
    collateralization were a normal term of the transaction, it would be 
    required by the arms length transaction requirements. One commenter 
    noted that the cost of the collateral requirements would diminish if 
    not eliminate the potential profit from the permitted activity. The 
    FDIC understands the concerns about the collateral requirement; 
    however, this provision provides a higher level of protection to the 
    insured state bank. If there are instances in which the collateral 
    requirements are uneconomical, the insured state bank may use the 
    application procedures of this regulation to request relief. Therefore, 
    the FDIC has decided to make no change to the collateral requirements 
    of this section.
        Capital requirements. Under the revised rule, a bank using the 
    notice process to invest in a subsidiary engaging in certain activities 
    authorized by subpart A would be required to deduct its equity 
    investment in the subsidiary as well as its pro rata share of retained 
    earnings of the subsidiary when reporting its capital position on the 
    bank's consolidated report of income and condition, in assessment risk 
    classification and for prompt corrective action purposes (except for 
    the purposes of determining if an institution is critically 
    undercapitalized). Such a capital deduction may be required as a 
    condition of an order issued by the FDIC, is required to use the notice 
    procedure to request consent for real estate investment activities and 
    securities underwriting and distribution, and is required to engage in 
    grandfathered insurance underwriting. The purpose of the restriction is 
    to ensure that the bank has sufficient capital devoted to its banking 
    operations and that it would not be adversely impacted even if its 
    entire investment in the subsidiary is lost.
        This treatment of the bank's investment in subsidiaries engaged in 
    activities not permissible for a national bank creates a regulatory 
    capital standard. Section 37 of the FDI Act (12 U.S.C. 1831n) generally 
    requires that accounting principles applicable to depository 
    institutions for regulatory reporting purposes must be consistent with, 
    or not less stringent than, GAAP. The FDIC believes that this 
    requirement does not extend to the Federal banking agencies' 
    definitions of regulatory capital. It is well established that the 
    calculation of regulatory capital for supervisory purposes may differ 
    from the measurement of equity capital for financial reporting 
    purposes, and section 37 by its terms contemplates the necessity of 
    such differences. For example, statutory restrictions against the 
    recognition of goodwill for regulatory capital purposes may lead to 
    differences between the reported amount of equity capital and the 
    regulatory capital calculation for tier one capital. Other types of 
    intangible assets are also subject to limitations under the agencies' 
    regulatory capital rules. In addition, subordinated debt and the 
    allowance for loan and lease losses are examples of items where the 
    regulatory reporting and the regulatory capital treatments differ.
        The capital deduction as contained in the revised regulation is not 
    a new concept for the federal banking regulators. The FDIC has required 
    a capital deduction for investments by state nonmember banks in 
    securities underwriting subsidiaries for years. See 12 CFR 325.5(c). In 
    addition, the OCC recently endorsed the idea of deducting from capital 
    a national bank's investments in certain types of operating 
    subsidiaries. See 12 CFR 5.34(f)(3)(i), 61 FR 60342, 60377 (Nov. 27, 
    1996).
        The calculation of the amount deducted from capital in this 
    proposal includes the bank's equity investment in the subsidiary as 
    well as the bank's share of retained earnings. The calculation does not 
    require the deduction of any loans from the bank to the subsidiary or 
    the bank's investment in the debt securities of the subsidiary.
        Several comments questioned the capital deduction requirement. One 
    commenter suggested that the FDIC should consider the impact of this 
    provision on state laws, standards and policies. For example, state 
    loan-to-one borrower restrictions that are determined by the bank's 
    capital level may be affected. The FDIC is setting a capital standard 
    for regulatory purposes. The effect of this standard on limitations 
    based on capital under state law depend on the construction of state 
    laws and regulations.
        One comment was supportive of the capital deduction concept but 
    also encouraged the FDIC to reconsider activities at a future date to 
    determine whether it is appropriate to eliminate this requirement. The 
    FDIC agrees with this suggestion and will consider such requests as 
    experience is gained. Affected institutions also have the option of 
    applying to the FDIC and setting forth their arguments why the capital 
    deduction is unnecessary in their cases.
        One other comment suggests that if the FDIC imposes the capital 
    deduction, then it is essential that the deduction be limited to the 
    bank's investment in the subsidiaries and not include retained 
    earnings. The commenter contends that this requirement would result in 
    the bank's capital being adversely affected by the subsidiary's 
    success. The FDIC does not agree with this conclusion. The capital 
    deduction required by this standard is a requirement for calculating 
    regulatory capital. Under GAAP, a majority-owned subsidiary is fully 
    consolidated with the bank and included in the amount reported on 
    Statements of Condition and Income in the Consolidated Reports of 
    Condition and Income. The subsidiary's retained earnings are 
    incorporated into the bank's capital through this consolidation 
    process. The treatment required by Sec. 362.4(e) simply isolates the 
    capital used to support the insured state bank from that supporting the 
    subsidiary for regulatory capital purposes. The referenced requirement 
    accomplishes that goal by subtracting both the bank's stock investment 
    in the
    
    [[Page 66311]]
    
    subsidiary and the bank's share of the subsidiary's retained earnings 
    from the parent bank's capital. This requirement is not punitive as the 
    only amounts subtracted are those equity investments already included 
    on the balance sheet (and thereby balance sheet capital) through 
    consolidation.
        Other underwriting activities. The regulatory text does not 
    directly address the underwriting of annuities. The FDIC has opined 
    that annuities are not an insurance product and are not subject to 
    section 24(b) and 24(d)(2), prohibiting the FDIC from authorizing 
    insurance underwriting. The FDIC has approved two requests from insured 
    state banks to engage in annuity underwriting activities through a 
    majority-owned subsidiary. The revised regulation does not provide a 
    notice procedure to engage in such activities. No comment was received 
    on this activity. The FDIC has decided to continue handling such 
    requests on a case-by-case basis through the applications procedures 
    established under this regulation.
    Section 362.5  Approvals Previously Granted
        There are a number of areas in which the final rule differs in 
    approach from the current part 362. Because of these differing 
    approaches, the revised regulation contains a section dealing with 
    approvals previously granted.
        Insured state banks that have previously received consent by order 
    or notice from this agency should not need to reapply to continue the 
    activity, including real estate investment activities, provided the 
    bank and subsidiary, as applicable, continue to comply with the 
    conditions of the order of approval. It is not the intent of the FDIC 
    to require insured state banks to request consent to engage in an 
    activity which has already been approved previously by this agency. 
    Section 362.5(a) of the final rule makes this clear.
        One comment stated that banks that have previously received 
    approval from the FDIC should have the option of complying with the 
    original order or the new regulation. The FDIC agrees with this 
    approach. Because previously granted approvals may contain conditions 
    that are different from the standards that are established in this 
    proposal, in certain circumstances, the bank may elect to operate under 
    the restrictions of this proposal. Specifically, the bank may comply 
    with the investment and transaction limitations between the bank and 
    its subsidiaries contained in Sec. 362.4(d), the capital requirement 
    limitations detailed in Sec. 362.4(e), and the subsidiary restrictions 
    as outlined in the term ``eligible subsidiary'' and contained in 
    Sec. 362.4(c)(2) in lieu of similar requirements contained in its 
    approval order. Any conditions that are specific to a bank's situation 
    and do not fall within the above limitations will continue to be 
    effective. Language has been added to the final rule to clarify that 
    once a bank elects to follow the regulatory restrictions instead of 
    those in the approval order, the bank may not elect to revert to the 
    applicable conditions of the order.
        An insured state bank that has received a previous approval and 
    qualifies for the exception in Sec. 362.4(b)(5)(i) relating to real 
    estate investment activities that do not exceed 2 percent of the bank's 
    tier one capital may take advantage of the exceptions contained in that 
    section without further application or notice to the FDIC. Additional 
    regulatory language clarifying this point has been added to the final 
    rule in Sec. 362.5(a).
        The FDIC has also approved certain activities through its current 
    regulations. Specifically, the FDIC has incorporated and modified the 
    restrictions of Sec. 337.4 in this revision. The revised rule will 
    allow an insured state nonmember bank engaging in a securities activity 
    covered by Sec. 362.4(b)(5)(ii), which has engaged in such activity 
    prior to this rule's effective date in accordance with Sec. 337.4, to 
    continue those activities if the bank and its subsidiary meet the 
    restrictions of Sec. 362.4(b)(5)(ii), (c), (d), and (e). For securities 
    activity covered by Sec. 362.4(b)(5)(ii), the FDIC intends that these 
    requirements replace the restrictions contained in Sec. 337.4.
        The FDIC recognizes that the requirements of the final rule differ 
    from the requirements of Sec. 337.4. Because the transition from the 
    current Sec. 337.4 requirements to the new regulatory requirements may 
    have unforeseen implementation problems, the bank and its subsidiary 
    will have one year from the effective date to comply with new 
    restrictions and conditions without further application or notice to 
    the FDIC. If the bank and its subsidiary are unable to comply within 
    the one-year time period, the bank must apply in accordance with 
    Sec. 362.4(b)(1) and subpart G of part 303 to continue with the 
    securities underwriting activity. Commenters did not object to this 
    transition language and it is being implemented as proposed.
        The restrictions for engaging in grandfathered insurance 
    underwriting through a subsidiary have also been changed from the 
    current regulation. The current regulation prescribes disclosures, 
    requires that the subsidiary be a bona fide subsidiary, and requires 
    that the bank be adequately capitalized after deducting the bank's 
    investment in the grandfathered insurance subsidiary. The revisions 
    rely on disclosures to bank customers when required by the Interagency 
    Statement, require that the subsidiary meet the requirements of an 
    eligible subsidiary, and require that the bank be well-capitalized 
    after deducting its investment in the grandfathered insurance 
    subsidiary. The FDIC recognizes that these standards are not the same 
    as previous requirements, and the capital standard in particular is 
    more stringent. For grandfathered insurance conducted at the bank 
    level, the final rule also makes certain changes from the current rule, 
    including the requirement that the bank disclose the separate nature of 
    the department to insurance customers. Section 362.5(b)(2) of the final 
    rule provides that an insured state bank which is engaged in providing 
    insurance as principal may continue that activity if it complies with 
    the final rule within 90 days of the effective date of the regulation. 
    If the bank is unable to comply with these provisions setting forth the 
    FDIC's guidance for conducting grandfathered insurance activities in a 
    safe and sound manner, the bank should submit a notice to the FDIC 
    concerning the deficiencies.
        Insured state banks that have subsidiaries that have been operating 
    under the exceptions relating to owning stock of a company engaged in 
    activities permissible for a bank service corporation or activities 
    that are not ``as principal'' in the current regulation are now subject 
    to new requirements including the requirement that the subsidiary have 
    at least a control interest in the company conducting the activity. The 
    scope of authorized activities has also been changed slightly. Any bank 
    affected by these changes will have 90 days to meet the requirements of 
    the final rule. If the bank or its subsidiary does not meet these 
    requirements, the bank must apply for the FDIC's consent. The FDIC does 
    not intend to use this request for consent as a punitive measure; 
    however, the FDIC would like to review a bank's investment in these 
    equity securities of companies that are engaged in these activities. 
    Comments did not indicate any circumstance in which this request for 
    consent may be necessary.
        The FDIC also is requiring that an insured state bank that converts 
    from a savings association charter and engages in activities through a 
    subsidiary, even if such activity was permissible for a subsidiary of a 
    federal savings
    
    [[Page 66312]]
    
    association, shall make application or provide notice, whichever 
    applies, to the FDIC to continue the activity unless the activity and 
    manner and amount in which the activity is operated is one that the 
    FDIC has determined by regulation does not pose a significant risk to 
    the deposit insurance fund. Since the statutory and regulatory systems 
    developed for savings associations are different from the bank systems, 
    the FDIC believes that any institution that converts its charter should 
    be subject to the same regulatory requirements as other institutions 
    with the same type of charter.
        If, prior to conversion, the savings association had received 
    approval from the FDIC to continue through a subsidiary the activity of 
    a type or in an amount that was not permissible for a federal savings 
    association, the converted insured state bank need not reapply for 
    consent provided the bank and subsidiary continue to comply with the 
    terms of the approval order, meet all the conditions and restrictions 
    for being an eligible subsidiary contained in Sec. 362.4(c)(2), comply 
    with the investment and transactions limits of Sec. 362.4(d), and meet 
    the capital requirement of Sec. 362.4(e). If the converted bank or its 
    subsidiary, as applicable, does not comply with all these requirements, 
    the bank must obtain the FDIC's consent to continue the activity. The 
    FDIC has imposed these conditions to fill a regulatory gap. Savings 
    associations and their service corporations are subject to regulatory 
    standards of separation, the savings association is limited in the 
    amount it may invest in the service corporation, and the savings 
    association must deduct its investment in the service corporation from 
    its capital if the service corporation engages in activities that are 
    not permissible for a national bank. The eligible subsidiary standard, 
    the investment and transaction limits, and the capital requirements 
    replace these standards once the savings association has converted its 
    charter to a bank.
        If the bank does not receive the FDIC's consent for its subsidiary 
    to continue an activity, the bank must divest its nonconforming 
    investment in the subsidiary within two years of the date of conversion 
    either by divesting itself of its subsidiary or by the subsidiary 
    divesting itself of the impermissible activity. The FDIC did not 
    receive comment concerning these transition issues for charter 
    conversions. The final rule adopts the language as proposed.
    
    B. Subpart B--Safety and Soundness Rules Governing State Nonmember 
    Banks
    
    Section 362.6  Purpose and Scope
        This subpart, along with the notice and application provisions of 
    subpart G of part 303, applies to certain banking practices that may 
    have adverse effects on the safety and soundness of insured state 
    nonmember banks. The FDIC intends to allow insured state nonmember 
    banks and their subsidiaries to undertake only safe and sound 
    activities and investments that would not present a significant risk to 
    the deposit insurance fund and that are consistent with the purposes of 
    federal deposit insurance and other law. The safety and soundness 
    standards of this subpart apply to activities undertaken by insured 
    state nonmember banks through a subsidiary if those activities are 
    permissible for a national bank subsidiary but that are not permissible 
    for the national bank itself. This subpart addresses only real estate 
    investment activities undertaken through a subsidiary; however, the 
    FDIC is issuing concurrently a notice of proposed rulemaking published 
    elsewhere in today's Federal Register which addresses securities 
    underwriting and distribution activities conducted by a subsidiary of 
    an insured state nonmember bank if those activities are permissible for 
    a national bank only through a subsidiary. The FDIC has a long history 
    of considering the risks from activities such as real estate investment 
    and securities underwriting and distribution to be unsafe and unsound 
    for a bank to undertake without appropriate safeguards to address that 
    risk. The FDIC also proposes a notice requirement for other activities 
    permissible for a national bank only through a subsidiary.
        Additionally, this subpart sets forth the standards that apply when 
    affiliated organizations of insured state nonmember banks that are not 
    affiliated with a bank holding company conduct securities activities. 
    The collective business enterprises of these entities are commonly 
    described as nonbank bank holding company affiliates. The FDIC has a 
    long history of considering the risks from the conduct of securities 
    activities by affiliates of insured state nonmember banks to be unsafe 
    and unsound without appropriate safeguards to address those risks. This 
    rule incorporates many of the standards currently applicable to these 
    entities through Sec. 337.4 of the FDIC's regulations. This rule will 
    replace Sec. 337.4 although that section of the FDIC's rules will not 
    be eliminated until the FDIC finalizes its rule regarding securities 
    activities of subsidiaries. The scope of this regulation is narrower 
    than Sec. 337.4 due to intervening regulations promulgated by other 
    Federal banking agencies that render more comprehensive rules 
    unnecessary. In addition, the FDIC has updated the restrictions and 
    brought them into line with modern views of appropriate securities 
    safeguards between affiliates and insured banks.
    Section 362.7  Definitions
        The definitions of ``activity'', ``company'', ``control'', ``equity 
    security'', ``insured state nonmember bank'', ``real estate investment 
    activity'', ``security'', and ``subsidiary'' apply as is described 
    above in subpart A. These definitions remain consistent to avoid 
    confusion among the various subparts of this regulation.
        This subpart introduces restrictions on activities of entities that 
    are commonly owned with the insured state bank by a holding company 
    that is not considered to be a bank holding company under the Bank 
    Holding Company Act. Therefore, for the purposes of this subpart, 
    ``affiliate'' is defined as any company that directly or indirectly, 
    through one or more intermediaries, controls or is under common control 
    with an insured state nonmember bank. The proposed definition of the 
    term ``affiliate'' was not intended to include a subsidiary of an 
    insured state nonmember bank, and language expressly stating this has 
    been added in the final rule to clarify this point. Subsidiaries of 
    insured state nonmember banks engaged in these activities are already 
    covered by Sec. 362.4(b)(5)(ii).
    Section 362.8  Restrictions on Activities of Insured State Nonmember 
    Banks
        Real Estate. Since national banks are generally prohibited from 
    owning and developing real estate, insured state banks have been 
    required to apply to the FDIC under section 24 before undertaking or 
    continuing such real estate activities. The FDIC has concluded as a 
    result of its experience in reviewing these applications that while 
    real estate investments generally possess many risks that are not 
    readily comparable to other equity investments, institutions may 
    contain these risks by undertaking real estate investments within 
    certain parameters. The FDIC has considered the manner under which an 
    insured state nonmember bank may undertake real estate investment 
    activities and determined that insured state nonmember banks and their
    
    [[Page 66313]]
    
    subsidiaries should generally meet certain standards before engaging in 
    real estate investment activities that are not permissible for national 
    banks. As a result, the final rule establishes standards under which 
    insured state nonmember banks may participate in real estate investment 
    activities. These standards address the FDIC's safety and soundness 
    concerns with real estate investment activities permissible for a 
    national bank subsidiary but not for the national bank itself. 
    Providing this listing of such standards will allow insured state 
    nonmember banks to initiate investment activities with knowledge of 
    what the FDIC considers when evaluating the safety and soundness of the 
    operations of the institution and its subsidiaries. This rule 
    simplifies and clarifies the standards under which insured state 
    nonmember banks may conduct their investment activities while providing 
    comprehensive and flexible regulation of the dealings between a bank 
    and its subsidiaries.
        Certain standards under the regulation also pertain to the FDIC's 
    willingness to allow an eligible institution to commence the activity 
    after expedited notice to the FDIC, rather than a full application 
    process. Under the FDIC's regulation, if an institution and its real 
    estate investment operations meet the standards established, the 
    institution need only file notice with the FDIC as outlined in subpart 
    G of part 303. However, if the institution and its operations do not 
    meet the general standards set forth in this rule, or if the 
    institution so chooses, it may file application with the FDIC for the 
    FDIC's consent, in accordance with procedures set out in subpart G of 
    part 303.
        One commenter stated that establishing additional regulations on 
    insured state nonmember banks is excessive. Such banks are already 
    regulated by the state in which they are domiciled. The FDIC believes 
    that the risks associated with real estate investment activities are 
    such that it must establish standards for the conduct of that activity. 
    The notice of proposed rulemaking contained an extensive discussion of 
    these risks. In addition to the high degree of market variability, real 
    estate markets are, for the most part, localized; investments are 
    normally not securitized; financial information flow is often poor; and 
    the market is generally not very liquid. A financial institution--like 
    any other investor--faces substantial risks when it takes an equity 
    position in a real estate venture. Market participants face a general 
    trade-off: the riskier the project, the higher the required rate of 
    return. A key aspect of that trade-off is the notion that a riskier 
    project will entail a higher probability of significant losses for the 
    investor. Assessments of the degree of risk will depend on factors 
    affecting future returns such as cyclical economic developments, 
    technological advances, structural market changes, and the project's 
    sensitivity to financial market changes.
        The FDIC recognizes its ongoing responsibility to ensure the safe 
    and sound operation of insured state nonmember banks and their 
    subsidiaries. Although this subpart creates new regulation for insured 
    state nonmember banks, the FDIC does not believe that this burden is 
    too great in relation to the risks of real estate investment 
    activities.
        Another commenter expressed concern about consistency stating that 
    the unintended consequence of this approach may result in different 
    regulatory treatment applicable to insured state nonmember banks as 
    opposed to national banks and state member banks. Another comment 
    echoes this sentiment stating that it is likely that national banks 
    will be subject to case by case restrictions of the OCC but these 
    restrictions will not carry the weight and force of those set by 
    regulation. The commenter recommends parallel treatment between 
    national and state banks. The FDIC does not believe it is in the best 
    interest of insured state nonmember banks to automatically follow the 
    safety and soundness restrictions of an interpretation, order, circular 
    or official bulletin issued by the OCC regarding real estate investment 
    activities that are permissible for the subsidiary of a national bank 
    but are not permissible for a national bank itself. The process 
    established in this subpart gives insured state nonmember banks the 
    option to apply to the FDIC to engage in real estate investment 
    activities suggesting whatever criteria the applicant believes to be 
    appropriate for the risk involved with the activity. The standards set 
    forth in this regulation allow applicants to use an expedited notice 
    procedure. These standards are not absolute criteria that the FDIC 
    cannot vary. If the FDIC adopted the regulatory and interpretive 
    standards set by the OCC, insured state nonmember banks would have no 
    flexibility to request variance from these standards. The FDIC believes 
    that the risks may be different for different real estate investment 
    activities. Therefore, the flexible approach established in this 
    regulation is important in finding appropriate standards for the risks 
    presented. State nonmember banks are treated consistently with national 
    banks in that each must submit a request to their primary Federal 
    regulator to engage in real estate investment activities through a 
    subsidiary.
        Another comment states that the regulatory differences between 
    state and national institutions harm the dual banking system especially 
    during a period of rapid interstate expansion. The FDIC is a strong 
    supporter of the dual banking system. For insured state nonmember banks 
    to compete effectively, the supervisory system should be expeditious in 
    its response to the industry. This regulation establishes procedures in 
    which insured state nonmember banks may use a notice procedure and 
    follow standards established in this regulation or may file an 
    application and request variance from these standards. The FDIC 
    believes that a system that allows an insured state nonmember bank to 
    directly petition its primary federal regulator to conduct real estate 
    investment activities in a subsidiary is more appropriate than a 
    situation in which these activities of insured state nonmember banks 
    are restricted by regulations, orders and interpretations of the OCC.
        Section 362.8(a) of the regulation addresses the FDIC's ongoing 
    supervisory concerns regarding real estate investment activities and 
    imposes procedures to address the FDIC's concerns about the safety and 
    soundness of these activities. Depending upon the facts, the potential 
    risks inherent in a bank subsidiary's involvement in real estate 
    investment activities may make restrictions and limitations necessary 
    to protect the bank and ultimately the deposit insurance funds from 
    losses associated with the significant risks inherent in real estate 
    investment activities.
        To address its safety and soundness concerns about real estate 
    investment activities not permissible for a national bank, the FDIC has 
    adopted the same standards when insured state banks conduct those real 
    estate investment activities regardless of whether those real estate 
    investment activities are permissible for a national bank subsidiary. 
    This subpart addresses the impact on insured state nonmember banks if 
    the OCC were to approve applications submitted by national banks to 
    conduct real estate investment activities through operating 
    subsidiaries.
        Unless the FDIC has previously given its approval for the bank to 
    engage in the particular real estate investment activity that is not 
    permissible for a national bank, an insured state nonmember bank must 
    file a notice or
    
    [[Page 66314]]
    
    application with the FDIC in order to directly or indirectly undertake 
    a real estate investment activity, even if the real estate investment 
    activity is permissible for the subsidiary of a national bank. To 
    qualify for the notice provision under this new regulation, the insured 
    state nonmember bank and its subsidiary must meet the standards 
    established in Sec. 362.4(b)(5)(i). After filing a notice as provided 
    for in subpart G of part 303 to which the FDIC does not object, the 
    institution may then proceed with its investment activities. If the 
    insured state nonmember bank and its subsidiary do not meet the 
    standards established under the rule, or if the institution so chooses, 
    an application for the FDIC's consent may be filed under the procedures 
    set out in subpart G of part 303.
        Affiliation With Securities Companies. Section 362.8(b) reflects 
    the FDIC's longstanding view that an unrestricted affiliation with a 
    securities company may have adverse effects on the safety and soundness 
    of insured state nonmembers banks. This section reiterates the 
    Sec. 337.4 prohibition against any affiliation by an insured state 
    nonmember bank with any company that directly engages in the 
    underwriting of stocks, bonds, debentures, notes, or other securities 
    which is not permissible for a national bank unless certain conditions 
    are met. The final rule permits the affiliation only if:
        (1) The securities business of the affiliate is physically separate 
    and distinct in its operations from the operations of the bank, 
    provided that this requirement shall not be construed to prohibit the 
    bank and its affiliate from sharing the same facility if the area where 
    the affiliate conducts retail sales activity with the public is 
    physically distinct from the routine deposit taking area of the bank;
        (2) The affiliate has a chief executive officer who is not an 
    employee of the bank;
        (3) A majority of the affiliate's board of directors are not 
    directors, officers, or employees of the bank;
        (4) The affiliate conducts business pursuant to independent 
    policies and procedures designed to inform customers and prospective 
    customers of the affiliate that the affiliate is a separate 
    organization from the bank and the state-chartered depository 
    institution is not responsible for and does not guarantee the 
    obligations of the affiliate;
        (5) The bank adopts policies and procedures, including appropriate 
    limits on exposure, to govern their participation in financing 
    transactions underwritten by an underwriting affiliate;
        (6) The bank does not express an opinion on the value or the 
    advisability of the purchase or sale of securities underwritten or 
    dealt in by an affiliate unless it notifies the customer that the 
    entity underwriting, making a market, distributing or dealing in the 
    securities is an affiliate of the bank;
        (7) The bank does not purchase as principal or fiduciary during the 
    existence of any underwriting or selling syndicate any securities 
    underwritten by the affiliate unless the purchase is approved by the 
    bank's board of directors before the securities are initially offered 
    for sale to the public;
        (8) The bank did not condition any extension of credit to any 
    company on the requirement that the company contract with, or agree to 
    contract with, the bank's affiliate to underwrite or distribute the 
    company's securities;
        (9) The bank did not condition any extension of credit or the 
    offering of any service to any person or company on the requirement 
    that the person or company purchase any security underwritten or 
    distributed by the affiliate; and
        (10) The bank complies with the investment and transaction 
    limitations of Sec. 362.4(d). These standards have been adopted as 
    proposed although the language of Sec. 362.8(b)(4) has been changed to 
    be consistent with that proposed in subpart A.
        Many of the restrictions and prohibitions listed above are 
    contained currently in Sec. 337.4. Additionally, the conditions that 
    are imposed, under Sec. 362.4(b)(5)(ii), on subsidiaries which engage 
    in the sale, distribution, or underwriting of securities such as 
    adopting independent policies and procedures governing participation in 
    financing transactions underwritten by an affiliate, expressing 
    opinions on the advisability of the purchase or sale of particular 
    securities, and purchasing securities as principal or fiduciary only 
    with prior board approval have been added. As indicated earlier, the 
    prohibition against shared officers has been eased and now only refers 
    to the chief executive officer. Comments did not object to these 
    standards and they are not being adopted as proposed.
        As written, the regulation only applies these restrictions to an 
    insured state nonmember bank affiliated with a company not treated as a 
    bank holding company pursuant to section 4(f) of the Bank Holding 
    Company Act (12 U.S.C. 1843(f)), that directly engages in the 
    underwriting of stocks, bonds, debentures, notes, or other securities 
    which are not permissible for a national bank. Other affiliates now 
    covered by the safeguards of Sec. 337.4 would no longer be covered 
    under the FDIC's regulations. Other affiliates are adequately separated 
    from the banks by the restrictions imposed by the FRB. Therefore, the 
    final regulation has been streamlined to eliminate duplicative coverage 
    of these affiliates.
        Because of the bank/affiliate relationship covered by this subpart, 
    the term ``investment'' also includes the bank's investment in the 
    equity securities of the affiliate. This treatment is consistent with 
    section 23A. No comment was received on this treatment and the 
    definition of investment for subpart B is adopted as proposed.
        Disclosure provisions contained in Sec. 337.4 are not contained in 
    this rule. If securities underwritten, distributed or sold by the 
    affiliate are sold on bank premises, are sold by employees of the bank, 
    or are sold subject to the bank receiving remuneration for the 
    transaction, the sale is covered by the disclosures contained in the 
    Interagency Statement on Retail Sales of Nondeposit Investment 
    Products. Sales occurring outside these parameters are not likely to 
    generate customer confusion; however, the affiliate is responsible for 
    informing its customers that the affiliate is a separate organization 
    from the bank and the bank is not responsible for and does not 
    guarantee the obligations of the affiliate whenever confusion is likely 
    to occur.
    
    C. Subpart C--Activities of Insured State Savings Associations
    
    Section 362.9  Purpose and Scope
        The intent of Sec. 362.9 is to clarify that the purpose and scope 
    of subpart C is to ensure that activities and investments undertaken by 
    insured state savings associations and their service corporations do 
    not present a significant risk to the deposit insurance funds, are not 
    unsafe and are not unsound, are consistent with the purposes of federal 
    deposit insurance, and are otherwise consistent with law. This subpart, 
    together with the notice and application procedures of subpart H of 
    part 303, implements the provisions of section 28 of the FDI Act that 
    restrict and prohibit insured state savings associations and their 
    service corporations from engaging in activities and investments of a 
    type that are not permissible for federal savings associations and 
    their service corporations. The phrase ``activity permissible for a 
    federal savings association'' means any activity authorized for federal 
    savings associations under any statute including the Home Owners Loan 
    Act (HOLA), as well as activities recognized as
    
    [[Page 66315]]
    
    permissible for a federal savings association in regulations, official 
    thrift bulletins, orders or written interpretations issued by the OTS, 
    or its predecessor, the Federal Home Loan Bank Board.
        Regarding insured state savings associations, this subpart governs 
    only activities conducted ``as principal'' and therefore does not 
    govern activities conducted as agent for a customer, conducted in a 
    brokerage, custodial, advisory, or administrative capacity, conducted 
    as trustee, or conducted in any substantially similar capacity. In the 
    final rule, the FDIC has added a list of examples of what types of 
    activities are not ``as principal.'' This change is consistent with the 
    addition of such material to the purpose and scope section of subpart 
    A. However, this subpart covers all activities regardless of whether 
    conducted ``as principal'' or in another capacity at the service 
    corporation level. This subpart does not restrict any interest in real 
    estate in which the real property is (a) used or intended in good faith 
    to be used within a reasonable time by an insured state savings 
    association or its service corporations as offices or related 
    facilities for the conduct of its business or future expansion of its 
    business or (b) used as public welfare investments of a type and in an 
    amount permissible for federal savings associations. Equity investments 
    acquired in connection with debts previously contracted that are held 
    within the shorter of the time limits prescribed by state or federal 
    law are not subject to the limitations of this subpart.
        The FDIC intends to allow insured state savings associations and 
    their service corporations to undertake only safe and sound activities 
    and investments that do not present a significant risk to the deposit 
    insurance funds and that are consistent with the purposes of federal 
    deposit insurance and other applicable law. This subpart does not 
    authorize any insured state savings association to make investments or 
    conduct activities that are not authorized or that are prohibited by 
    either federal or state law.
    Section 362.10  Definitions
        Section 362.10 of the final regulation contains the definitions 
    used in this subpart. Rather than repeating terms defined in subpart A, 
    the definitions contained in Sec. 362.2 are incorporated into subpart C 
    by reference. Included in the definitions are most of the terms 
    currently defined in subpart G of Part 303, effective October 1, 1998, 
    (formerly Sec. 303.13) of the FDIC's regulations. The proposed rule 
    made editing changes primarily to enhance clarity without changing the 
    meaning. However, certain changes were made to alter the meaning of the 
    terms and these changes are identified in this discussion. The final 
    rule adopts the proposed definitions without further change.
        The terms ``corporate debt securities not of investment grade'' and 
    ``qualified affiliate'' have been directly imported into subpart C from 
    subpart G (Sec. 303.141) without substantive change. Substantially the 
    same ``control'' and ``equity security'' definitions are incorporated 
    by reference to subpart A. The last sentence of the current ``equity 
    security'' definition, which excludes equity securities acquired 
    through foreclosure or settlement in lieu of foreclosure, was deleted 
    for the same reason that similar language was deleted from several 
    definitions in subpart A. Language is now included in the purpose and 
    scope paragraph explaining that equity investments acquired through 
    such actions are not subject to the regulation. No substantive change 
    from current rules is intended by this modification.
        Consistent with the proposal, modified versions of ``activity'', 
    ``equity investment'', ``significant risk to the fund'', and 
    ``subsidiary'' were also carried forward by reference to subpart A. As 
    proposed, the definition of activity was expanded to encompass all 
    activities including acquiring or retaining equity investments. This 
    change was made to conform the ``activity'' definition used in the 
    regulation to that provided in the governing statutes. Both sections 24 
    and 28 of the FDI Act define activity to include acquiring or retaining 
    any investment. Sections of this part governing activities other than 
    acquiring or retaining equity investments include statements 
    specifically excluding the activity of acquiring or retaining equity 
    investments.
        Consistent with the proposal, the ``equity investment'' definition 
    was modified to better identify its components. The definition includes 
    any ownership interest in any company. This change was made to clarify 
    that ownership interests in limited liability companies, business 
    trusts, associations, joint ventures and other entities separately 
    defined as a ``company'' are considered equity investments. 
    Additionally, as proposed, the definition was expanded to include any 
    membership interest that includes a voting right in any company, and a 
    sentence was added excluding from the definition any of the identified 
    items when taken as security for a loan. The intended effect of these 
    changes is not to broaden the scope of the regulation, but instead to 
    clarify the FDIC's position that such investments are all considered 
    equity investments notwithstanding the form of business organization.
        Consistent with the proposal, the definition of ``significant 
    risk'' was effectively retitled ``significant risk to the fund'' by the 
    reference to subpart A. As proposed, a second sentence was added to the 
    definition explaining that a significant risk to the fund may be 
    present either when an activity or an equity investment contributes or 
    may contribute to the decline in condition of a particular state-
    chartered depository institution or when a type of activity or equity 
    investment is found by the FDIC to contribute or potentially contribute 
    to the deterioration of the overall condition of the banking system. 
    This sentence is intended to elaborate on the FDIC's position that the 
    absolute size of a projected loss in comparison to the deposit 
    insurance funds is not determinative of the issue. Additionally, it 
    clarifies the FDIC's position that risk to the fund may be present even 
    if a particular activity or investment may not result in the imminent 
    failure of an institution. The FDIC received four comments addressing 
    this definition which are detailed in the discussion of the applicable 
    definition in subpart A.
        With the exception of substituting the separately defined term 
    ``company'' for the list of entities such as corporations, business 
    trusts, associations, and joint ventures currently in the 
    ``subsidiary'' definition, the final rule makes little change from the 
    current definition. It is noted that limited liability companies are 
    now included in the company definition and, by extension, are included 
    in the subsidiary definition. The only other change from current rules 
    is that in the definition of subsidiary, the exclusion of ``insured 
    depository institutions'' for purposes of Sec. 303.146 (as effective 
    October 1, 1998, formerly Sec. 303.13(f)) has been moved to the purpose 
    and scope section of proposed subpart D. No substantive changes are 
    intended by these modifications. The FDIC received no comments on these 
    definitions which are adopted as proposed.
        While proposed subpart C retained substantially the same ``service 
    corporation'' definition as the current rule, the proposal deleted the 
    word ``only'' from the phrase ``available for purchase only by savings 
    associations''. This change was intended to make it clear that a 
    service corporation of an insured state savings association may invest 
    in lower-tier service corporations if allowed by this part or FDIC 
    order, and it is consistent with the recently
    
    [[Page 66316]]
    
    amended part 559 of the OTS' regulations (12 CFR part 559). The change 
    was not intended to alter the nature of the requirements governing the 
    savings association's equity investment in the first-tier service 
    corporation. No comments were received on this change and the final 
    rule adopts it as proposed.
        As in subpart A and consistent with the proposal, the definition of 
    ``equity interest in real estate'' was deleted in the final regulation. 
    The exceptions detailed in Sec. 303.141(e) (as effective October 1, 
    1998, formerly Sec. 303.13(a)(5)) of the current definition were moved 
    to the purpose and scope paragraph. As a result, readers are now 
    informed that these excepted real estate investments are not subject to 
    this regulation. The FDIC believes that the remaining content of the 
    current definition fails to provide any meaningful clarity or 
    understanding. Therefore, the FDIC will instead rely on the ``equity 
    investment'' definition to include relevant real estate investments. A 
    related change was made to the ``equity investment'' definition by 
    deleting the reference to ``equity interest in real estate'' and 
    replacing it with language to include any interest in real estate 
    (excluding real estate that is not within the scope of this part). No 
    substantive changes are intended by these modifications.
        Consistent with the proposal, a definition for the term ``insured 
    state savings association'' is added to the final rule. Because this 
    term is not explicitly defined in section 3 of the FDI Act, this 
    definition was added to ensure readers clearly understand that an 
    insured state savings association means any state chartered savings 
    association insured by the FDIC.
        Other terms that were previously undefined, but that are added by 
    the general incorporation of the definitions in subpart A should not 
    result in any substantive changes to the meanings of those terms as 
    currently used in subpart G of part 303, effective October 1, 1998, 
    (formerly Sec. 303.13) of the FDIC's regulations.
    Section 362.11  Activities of Insured State Savings Associations
        Equity investment prohibition. Section 362.11(a)(1) of the final 
    regulation replaces the provisions of Sec. 303.144(a) (as effective 
    October 1, 1998, formerly Sec. 303.13(d)) of the FDIC's current 
    regulations and restates the statutory prohibition preventing insured 
    state savings associations from making or retaining any equity 
    investment of a type, or in an amount, not permissible for a federal 
    savings association. The prohibition does not apply if the statutory 
    exception (restated in the current regulation and carried forward in 
    the proposal) contained in section 28 of the FDI Act applies. With the 
    exception of deleting items no longer applicable due to the passage of 
    time, this provision is retained as currently in effect without any 
    substantive changes.
        Exception for service corporations. The final regulation retains 
    the exception now in Sec. 303.144(b) (as effective October 1, 1998, 
    formerly Sec. 303.13(d)(2)) which allows investments in service 
    corporations as currently in effect without any substantive change. 
    However, consistent with the proposal, the FDIC has modified the 
    language of this section using a structure paralleling that found in 
    proposed subpart A permitting insured state banks to invest in 
    majority-owned subsidiaries. Similar to the treatment accorded insured 
    state banks, an insured state savings association must meet and 
    continue to be in compliance with the capital requirements prescribed 
    by the appropriate federal banking agency and the FDIC must determine 
    that the activities to be conducted by the service corporation do not 
    present a significant risk to the relevant deposit insurance fund. 
    However, unlike the treatment accorded banks, the FDIC must also 
    determine that the amount of the investment does not present a 
    significant risk to the relevant deposit insurance fund. The criteria 
    identified in the preceding sentences are derived directly from the 
    underlying statutory language. For an insured state savings association 
    to invest in service corporations engaging in activities that are not 
    permissible for a service corporation of a federal savings association, 
    the service corporation must be engaging in activities or acquiring and 
    retaining investments described in Sec. 362.12(b) as regulatory 
    exceptions to the general prohibition.
        We moved language currently in Sec. 303.144(b)(2) (as effective 
    October 1, 1998, formerly Sec. 303.13(d)) concerning the filing of 
    applications to acquire an equity investment in a service corporation 
    to Sec. 303.141 of the amended subpart H of part 303.
        Activities other than equity investments. Section 362.11(b) of the 
    final regulation replaces the sections now found at Secs. 303.142, 
    303.143 and 303.144 (as effective October 1, 1998, formerly 
    Secs. 303.13(b), 303.13(c), and 303.13(e), respectively) of the FDIC's 
    regulations. As proposed, some portions of the existing sections have 
    been eliminated because they are no longer necessary due to the passage 
    of time, and other portions have been edited and reformatted in a 
    manner consistent with the corresponding sections of subpart A. 
    Language currently in the referenced sections of part 303 concerning 
    notices and applications has been edited, reformatted, and moved to the 
    amended subpart H of part 303.
        Prohibited activities. Section 362.11(b)(1) of the final regulation 
    restates the statutory prohibition that insured state savings 
    associations may not directly engage as principal in any activity of a 
    type, or in an amount, that is not permissible for a federal savings 
    association unless the activity meets a statutory or regulatory 
    exception. Similar to language found in subpart A for insured state 
    banks, the proposed rule added language to clarify that this 
    prohibition does not supersede the equity investment exception of 
    Sec. 362.11(a)(2). The FDIC added this language because acquiring or 
    retaining any investment is defined as an activity. The language has 
    been adopted in the final rule without change from the proposal.
        The statutory prohibition preventing state and federal savings 
    associations from directly, or indirectly through a subsidiary (other 
    than a subsidiary that is a qualified affiliate), acquiring or 
    retaining any corporate debt that is not of investment grade after 
    August 9, 1989, is also carried forward from what is now Sec. 303.145 
    (as effective October 1, 1998, formerly Sec. 303.13(e)) of the FDIC's 
    regulations. However, consistent with the proposal, the Sec. 303.145 
    requirement was deleted. The referenced section required savings 
    institutions to file divestiture plans concerning corporate debt that 
    was not of investment grade and that was held in a capacity other than 
    through a qualified affiliate. Divestiture was required by no later 
    than July 1, 1994, rendering that provision unnecessary due to the 
    passage of time.
        Exceptions to the other activities prohibition. The statutory 
    exception to the other activities prohibition contained in section 28 
    of the FDI Act continues to function in a manner similar to the 
    relevant provisions of what is now found in subpart H of part 303. The 
    regulation continues to permit an insured state savings association to 
    retain any asset (including a nonresidential real estate loan) acquired 
    prior to August 9, 1989. However, corporate debt securities that are 
    not of investment grade may only be purchased or held by a qualified 
    affiliate. Whether or not the security is of investment grade is 
    measured only at the time of acquisition.
        Additionally, the FDIC has provided regulatory exceptions to the 
    other
    
    [[Page 66317]]
    
    activities prohibition. The first exception retains the application 
    process now found at Sec. 303.142 (as effective October 1, 1998, 
    formerly Secs. 303.13(b)(1)) and provides insured state savings 
    associations with the option of applying to the FDIC for approval to 
    engage in an activity of a type that is not permissible for a federal 
    savings association. Additionally, the notice process currently found 
    at Sec. 303.143 (as effective October 1, 1998, formerly 
    Sec. 303.13(c)(1)) is carried forward for insured state savings 
    associations that want to engage in activities of a type permissible 
    for a federal savings association, but in an amount exceeding that 
    permissible for federal savings associations. The final regulation adds 
    a regulatory exception enabling insured state savings associations to 
    acquire and retain adjustable rate, money market preferred stock, and 
    instruments determined by the FDIC to have similar characteristics 
    without submitting an application to the FDIC if the acquisition is 
    done within the prescribed limits.
        The final regulation deletes a proposed exception that would have 
    allowed an insured state savings association to engage as principal in 
    any activity that is not permissible for a federal savings association 
    provided that the FRB has found the activity to be closely related to 
    banking pursuant to 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 
    1843(c)(8)). Upon further analysis, the FDIC determined that this 
    exception would have little utility because most of the activities 
    authorized by the FRB under the referenced authority are already 
    permissible for federal savings associations or are otherwise addressed 
    in this regulation. In the preamble to the proposal, the FDIC requested 
    comment from savings associations on whether the proposed standard was 
    appropriate and beneficial. The FDIC received only one comment, 
    indicating that state savings associations were generally unaware of 
    what is authorized by the 4(c)(8) list and that the FDIC should be more 
    specific. The FDIC has decided to eliminate the reference and 
    specifically address those activities that are allowed. The elimination 
    of this proposed authority is consistent with the FDIC's elimination of 
    the corresponding authority for state banks in subpart A.
        Consent obtained through application. Section 28 prohibits insured 
    state savings associations from directly engaging in activities of a 
    type or in an amount not permissible for a federal savings association 
    unless: (1) The association meets and continues to meet the capital 
    standards prescribed by the appropriate federal financial institution 
    regulator; and (2) the FDIC determines that conducting the activity in 
    the additional amount will not present a significant risk to the 
    relevant deposit insurance fund. Section 362.11(b)(2)(i) establishes an 
    application option for savings associations that meet the relevant 
    capital standards and that seek the FDIC's consent to engage in 
    activities that are otherwise prohibited. The substance of this process 
    is unchanged from the relevant sections of part 303 of the FDIC's 
    current regulations. The regulation is being adopted without change 
    from its proposed form.
        Nonresidential realty loans permissible for a federal savings 
    association conducted in an amount not permissible. Consistent with the 
    proposal, the final regulation carries forward and modifies the 
    provision now found at Sec. 303.142 (as effective October 1, 1998, 
    formerly Sec. 303.13(b)(1)) of this chapter requiring an insured state 
    savings association that wants to hold nonresidential real estate loans 
    in an amount exceeding the limits described in section 5(c)(2)(B) of 
    HOLA (12 U.S.C. 1464 (c)(2)(B)) to apply for the FDIC's consent. Unlike 
    the current regulation, the final regulation enables the insured state 
    savings association to submit a notice to seek the FDIC's approval 
    instead of an application. This change is nonsubstantive and is made to 
    expedite the process for insured state savings associations wanting to 
    exceed the referenced limits. None of the comments submitted addressed 
    this change.
        Acquiring and retaining adjustable rate and money market preferred 
    stock. The final regulation extends to insured state savings 
    associations a revised version of the proposed regulatory exception 
    allowing an insured state bank to invest in up to 15 percent of its 
    tier one capital in adjustable rate preferred stock and money market 
    (auction rate) preferred stock without filing an application with the 
    FDIC. By statute, however, insured savings associations are restricted 
    in their ability to purchase debt that is not of investment grade. This 
    regulatory exception does not override that statutory prohibition and 
    any instruments purchased must comply with that statutory constraint. 
    Additionally, this exception is only extended to savings associations 
    meeting and continuing to meet the applicable capital standards 
    prescribed by the appropriate federal financial institution regulator.
        When this regulatory exception was adopted for insured state banks 
    in 1992, the FDIC found that adjustable rate preferred stock and money 
    market (auction rate) preferred stock were essentially substitutes for 
    money market investments such as commercial paper and that their 
    characteristics are closer to debt than to equity securities. 
    Therefore, money market preferred stock and adjustable rate preferred 
    stock were excluded from the definition of equity security. As a 
    result, these investments are not subject to the equity investment 
    prohibitions of the statute and the regulation, and they are considered 
    an ``other activity'' for the purposes of this regulation.
        This exception focuses on two categories of preferred stock. This 
    first category, adjustable rate preferred stock refers to shares where 
    dividends are established by contract through the use of a formula 
    based on Treasury rates or some other readily available interest rate 
    levels. Money market preferred stock refers to those issues where 
    dividends are established through a periodic auction process that 
    establishes yields in relation to short term rates paid on commercial 
    paper issued by the same or a similar company. The credit quality of 
    the issuer determines the value of the security, and money market 
    preferred shares are sold at auction.
        The FDIC continues to believe that the activity of investing up to 
    15 percent of an institution's tier one capital in the referenced 
    instruments does not represent a significant risk to the deposit 
    insurance funds. Furthermore, the FDIC believes the same funding option 
    should be available to insured state savings associations and extends a 
    similar exception to savings associations subject to the same revised 
    limits.
        Additionally, like a similar provision in subpart A, the final 
    regulation allows the state savings associations to acquire and retain 
    other instruments of a type determined by the FDIC to have the 
    character of debt securities provided the instruments do not represent 
    a significant risk to the deposit insurance funds. A recent example of 
    such an instrument is trust preferred stock. Trust preferred stock is a 
    hybrid instrument possessing characteristics typically associated with 
    debt obligations. Trust preferred securities are issued by an issuer 
    trust that uses the proceeds to purchase subordinated deferrable 
    interest debentures in a corporation. The corporation guarantees the 
    obligations of the issuer trust and agrees to indemnify third parties 
    for other expenses and liabilities incurred by the issuer trust. Taken 
    together, the debentures, guarantee, and expense indemnity agreement 
    constitute a full, irrevocable, and unconditional guarantee of the 
    obligations of the issuer
    
    [[Page 66318]]
    
    trust by the issuer corporation. With the exception of credit risk, 
    investors in trust preferred stock are protected from changes in the 
    value of the instruments. Like investors in debt securities, trust 
    preferred stock investors do not share any appreciation in the value of 
    the issuer and have no voting rights in the management or ordinary 
    course of business of the issuer. Additionally, trust preferred stock 
    is not perpetual and distributions on the stock resemble the periodic 
    interest payments on debt. In essence, such investments are 
    functionally equivalent to investments in the underlying debentures. 
    Investments in such instruments are aggregated with investments in 
    adjustable rate and money market preferred stock for purposes of 
    applying the limit of 15 percent of tier one capital.
        Guarantee activities. When drafting the proposal, the FDIC 
    considered adding an exception for guarantee activities including 
    credit card guarantee programs and comparable arrangements that would 
    have been similar to that which we proposed to delete from subpart A. 
    These programs typically involve a situation where an institution 
    guarantees the credit obligations of its retail customers. Although the 
    FDIC continues to believe that these activities present no significant 
    risk to the deposit insurance funds, the FDIC proposed deleting this 
    activity from subpart A because it was determined that national banks, 
    and therefore insured state banks, may already engage in the 
    activities. The FDIC determined that federal savings associations, and 
    by extension insured state savings associations, may engage in these 
    activities as well. The FDIC received no comments advocating the 
    addition of an exception for these activities and, as a result, no 
    exception was crafted.
    Section 362.12  Service Corporations of Insured State Savings 
    Associations
        Section 362.12 of the final regulation governs the activities of 
    service corporations of insured state savings associations and 
    generally replaces what is now found at Sec. 303.144(b) (as effective 
    October 1, 1998, formerly Sec. 303.13(d)(2)) of the FDIC's regulations. 
    The section reorganizes the substance of the current regulation and 
    consolidates all provisions concerning the activities of service 
    corporations into the same section. Language currently in 
    Sec. 303.144(b) (as effective October 1, 1998, formerly 
    Sec. 303.13(d)(2)) concerning applications was revised and moved to 
    Secs. 303.141 and 303.142 of subpart H of part 303. Additionally, the 
    FDIC extended several regulatory exceptions closely resembling similar 
    exceptions provided to subsidiaries of insured state banks in subpart A 
    of this final regulation. The FDIC notes that if the service 
    corporation is a new subsidiary or is a subsidiary conducting a new 
    activity, all of the exceptions in Sec. 362.12 remain subject to the 
    notice provisions contained in section 18(m) of the FDI Act which are 
    now being implemented in subpart D of this regulation.
        General prohibition. A service corporation of an insured state 
    savings association may not engage in any activity that is not 
    permissible for a service corporation of a federal savings association 
    unless the savings association submits an application and receives the 
    FDIC's consent or the activity qualifies for a regulatory exception. 
    This provision does not represent a substantive change from the current 
    regulation. The regulatory language implementing this prohibition has 
    been separated from the restrictions in Sec. 362.11 prohibiting an 
    insured state savings association from directly engaging in activities 
    which are not permissible for a federal savings association. By 
    separating the savings association's activities and those of a service 
    corporation, Sec. 362.12 deals exclusively with activities that may be 
    conducted by a service corporation of an insured state savings 
    association.
        Consent obtained through application. Consistent with the proposal, 
    the final regulation continues to allow insured state savings 
    associations to submit applications seeking the FDIC's consent to 
    engage in activities through a service corporation that are otherwise 
    prohibited. Section 362.12(b)(1) carries forward the substance of the 
    application option in Sec. 303.144(b) (as effective October 1, 1998, 
    formerly Sec. 303.13(d)(2)) of the FDIC's current regulations. Approval 
    will be granted only if: (1) The savings association meets and 
    continues to meet the applicable capital standards prescribed by the 
    appropriate federal banking agency; and (2) the FDIC determines that 
    conducting the activity in the requested amount will not present a 
    significant risk to the relevant deposit insurance fund.
        Service corporations conducting unrestricted activities.
        The FDIC has found that it is not a significant risk to the deposit 
    insurance fund if a service corporation engages in certain activities 
    as long as the insured state savings association continues to meet the 
    applicable capital standards prescribed by the appropriate federal 
    banking agency. One of these activities, authorized by 
    Sec. 362.12(b)(2)(i) of the final rule, is owning a control interest in 
    a company that engages in securities activities authorized by 
    Sec. 362.12(b)(4), provided the activity is conducted pursuant to the 
    limitations and requirements of Sec. 362.12(b)(4), including the 
    requirement that the insured state savings association files a notice 
    with the FDIC to which the FDIC does not object. The regulation 
    specifies that both the service corporation and the lower tier company 
    must meet the investment and transaction limits, and the capital 
    deduction, that would apply if the service corporation engaged in the 
    securities activities directly under Sec. 362.12(b)(4), to ensure that 
    the service corporation is not used as a conduit to the lower tier 
    company in derogation of these requirements. The savings association 
    must also meet the same core eligibility requirements that would apply 
    if the service corporation engaged in the activity directly, and the 
    savings association and the lower tier company must meet certain 
    additional requirements in Sec. 362.12(b)(4). However, with regard to 
    the core eligibility requirements applicable to a service corporation 
    conducting the activity under Sec. 362.12(b)(4), these may be observed 
    by the service corporation, or in the alternative by the lower tier 
    company if the company takes corporate form.
        The FDIC also extended a regulatory exception enabling service 
    corporations to acquire and retain equity securities of a company 
    engaged in the following activities: (1) Activities permissible for a 
    federal savings association; (2) any activity permissible for the 
    savings association itself under Sec. 362.11(b)(2)(iii); or (3) 
    insurance agency activities. The service corporation must either own a 
    controlling interest in a company engaging in these activities, or the 
    company must be controlled by insured depository institutions. The FDIC 
    provided similar exceptions to majority-owned subsidiaries of insured 
    state banks in subpart A. Sections 362.12(b)(2) (i) through (ii) are 
    intended to cover a service corporation's investment in lower level 
    subsidiaries engaged in activities that the FDIC has found to present 
    no significant risk to the deposit insurance fund.
        The final version differs from the proposal in that, as is the case 
    in the corresponding provision of subpart A, the FDIC created a limited 
    exception to the control requirement under Sec. 362.12(b)(2)(ii) if the 
    company is controlled by a group of insured depository institutions. 
    This accommodates community associations
    
    [[Page 66319]]
    
    wishing to form a consortium of associations to provide financial 
    services for their customers that one association cannot provide on a 
    cost effective basis.
        The final version also differs from the proposal in that, as is the 
    case in the corresponding provision of subpart A, the activities 
    authorized for the lower-level company are not identical to the 
    activities proposed.15 The FDIC made this change to remain 
    consistent with subpart A. The rule as adopted does not eliminate any 
    authorization granted by current rules, and the FDIC received no 
    comments on the proposal, so the change from the proposed activities 
    will have no impact on state savings associations.
    ---------------------------------------------------------------------------
    
        \15\ The proposal would have authorized the lower tier company 
    to engage in any activity permissible for a federal savings 
    association; hold adjustable rate or money market preferred stock up 
    to 15 percent of tier one capital; engage in activities (subject to 
    certain exceptions) authorized by the FRB under section 4(c)(8) of 
    the Bank Holding Company Act; or engage in activity not as 
    principal.
    ---------------------------------------------------------------------------
    
        Section 28 of the FDI Act requires the FDIC's consent before a 
    service corporation may engage in any activity that is not permissible 
    for a service corporation of a federal savings association. While the 
    language of section 28 governs only activities conducted ``as 
    principal'' by insured state savings associations, the ``as principal'' 
    language was not extended to service corporations in the governing 
    statute. This means that even if the activity is not conducted ``as 
    principal'', the subpart C prohibition applies if the activity is not 
    permissible for a service corporation of a federal savings association.
        Because the FDIC believes that activities conducted other than ``as 
    principal'' present no significant risk to the relevant deposit 
    insurance fund, we provided an exception in Sec. 362.12(b)(2)(iii) 
    allowing a service corporation of an insured state savings association 
    to act other than ``as principal,'' if the savings association meets 
    and continues to meet the applicable capital standards prescribed by 
    its appropriate federal banking agency. The FDIC received no comments 
    on this exception. The final regulation also requires a savings 
    association to own a control interest in a service corporation 
    conducting the activities. The control requirement was added to more 
    closely approximate the treatment accorded to insured state banks and 
    their subsidiaries. Insured state bank subsidiaries can act other than 
    ``as principal.'' However, a subsidiary is defined as being a company 
    controlled by a depository institution. Therefore, the control standard 
    imposed in this section equates the ownership interest requirements of 
    insured state savings associations and insured state banks. 
    Additionally, it helps differentiate between an insured state savings 
    association controlling a company and simply investing in the shares of 
    a company.
        The FDIC also provided, at Sec. 362.12(b)(2)(iv) of the final rule, 
    an exception allowing service corporations of qualifying savings 
    associations to invest in adjustable rate preferred stock, money market 
    (auction rate) preferred stock, and other instruments of a type 
    determined by the FDIC to have the character of debt securities 
    provided the instruments do not represent a significant risk to the 
    deposit insurance funds. Investments by a service corporation in these 
    instruments are combined with and subject to the same limits applicable 
    to the parent savings association. The FDIC did not receive any 
    comments on extending this exception to insured state savings 
    associations and the exception is adopted as proposed.
        Owning equity securities that do not represent a control interest. 
    For the same reasons previously stated in the preamble discussion of 
    subpart A, no notice procedure is being adopted at this time. Staff has 
    been instructed to undertake further study of the proposal.
        Securities underwriting. Section 362.12(b)(4) of the final 
    regulation allows an insured state savings association to acquire or 
    retain an investment in a service corporation that underwrites or 
    distributes securities that would not be permissible for a federal 
    savings association to underwrite or distribute if notice is filed with 
    the FDIC, the FDIC does not object to the notice before the end of the 
    notice period, and a number of conditions are and continue to be met.
        This exception enabling service corporations to underwrite or 
    distribute securities is patterned on the exception found in subpart A 
    (see Sec. 362.4(b)(5)(ii)). In both cases, the state-chartered 
    depository institution must conduct the securities activity in 
    compliance with the core eligibility requirements, the same additional 
    requirements listed for this activity in subpart A, and the investment 
    and transaction limits. The savings association also must meet the 
    capital requirements and the service corporation must meet the 
    ``eligible subsidiary'' requirements as an ``eligible service 
    corporation''. Since the requirements are the same as those imposed in 
    subpart A and the risks of the activity are identical, the discussion 
    in subpart A is not repeated here.
        Notice of change in circumstance. Like subpart A, the final rule 
    requires the insured state savings association to provide written 
    notice to the appropriate Regional Office of the FDIC within 10 
    business days of a change in circumstances concerning its securities 
    subsidiary authorized by Sec. 362.12(b)(4). Under the regulation, a 
    change in circumstances is described as a material change in the 
    service corporation's business plan or management. Together with the 
    insured state savings association's primary federal financial 
    institution regulator, the FDIC believes that it may address a savings 
    association's falling out of compliance with any of the other 
    conditions of approval through the normal supervision and examination 
    process.
        The FDIC is concerned about changes in circumstances which result 
    from changes in management or changes in a service corporation's 
    business plan. If material changes to either condition occur, the 
    regulation requires the association to submit a notice of such changes 
    to the appropriate FDIC regional director (DOS) within 10 days of the 
    material change. The material change standard includes such events as a 
    change in chief executive officer of the service corporation or a 
    change in investment strategy or type of business or activity engaged 
    in by the service corporation. The FDIC received two comments 
    concerning the change of circumstance notice. Both comments indicated 
    that the notice is burdensome and unnecessary. The comments argue that 
    a change in the chief executive office or investment strategies are 
    routine. The FDIC places significant reliance on the management 
    structure and business plan presented when an activity is approved for 
    a service corporation. The FDIC does not consider either change to be 
    routine and believes that it is important that the FDIC be aware of 
    material changes in the operations of service corporations engaging in 
    activities that are not permissible for a service corporation of a 
    federal savings association. One comment requested that the notice 
    period be extended from 10 to 30 days. The FDIC believes that both a 
    change in management and a change in the business plan of the service 
    corporation are matters that should receive significant consideration 
    before these events occur. The FDIC does not believe that it is 
    unreasonable to require notices of these events within 10 days. 
    Therefore, the final regulation retains the requirement that a notice 
    of change of circumstances be submitted to the
    
    [[Page 66320]]
    
    Regional Director within 10 business days after any such change.
        The FDIC will communicate its concerns regarding the continued 
    conduct of an activity after a change in circumstances with the 
    appropriate persons from the insured state savings association's 
    primary federal banking agency. The FDIC will work with the identified 
    persons from the primary federal banking agency to develop the 
    appropriate response to the new circumstances.
        The FDIC does not intend to require any savings association which 
    falls out of compliance with eligibility conditions to immediately 
    cease any activity in which the savings association had been engaged. 
    Instead, the FDIC will deal with each situation on a case-by-case basis 
    through its supervision and examination process. In short, the FDIC 
    intends to utilize its supervisory and regulatory tools in dealing with 
    any savings association's failure to meet the eligibility requirements 
    on a continuing basis. The issue of the savings association's ongoing 
    activities will be dealt with in the context of that effort. The FDIC 
    believes that the case-by-case approach to whether a savings 
    association will be permitted to continue an activity is preferable to 
    forcing a savings association to, in all instances, immediately cease 
    the activity. Such an inflexible approach could exacerbate an already 
    unfortunate situation that probably is receiving supervisory attention.
        Core eligibility requirements. The proposed regulation imports by 
    reference the core eligibility requirements listed in subpart A. Refer 
    to the discussion on this topic provided under subpart A for additional 
    information. When reading the referenced discussion, ``subsidiary'' and 
    ``majority-owned subsidiary'' should be replaced with ``service 
    corporation''. Additionally, ``eligible subsidiary'' should be replaced 
    with ``eligible service corporation''. Finally, ``insured state savings 
    association'' should be read to replace ``bank'' or ``insured state 
    bank''. Comments addressing these provisions and the FDIC's response 
    are discussed in the relevant section of the preamble for subpart A. 
    The FDIC received no comments directly relating to the application of 
    these requirements to insured state savings associations.
        Investment and transaction limits. The final regulation contains 
    investment limits and other requirements that apply to an insured state 
    savings association and its service corporations engaging in activities 
    that are not permissible for a federal savings association if the 
    requirements are imposed by FDIC order or expressly imposed by 
    regulation. In general, the provisions: (1) Impose an aggregate limit 
    on a savings association's investment in all service corporations that 
    engage in an activity that is covered by the investment limits; (2) 
    require extensions of credit from a savings association to these 
    service corporations to be fully-collateralized when made; (3) prohibit 
    low quality assets from being taken as collateral on such loans; and 
    (4) require that transactions between the savings association and its 
    service corporations be on an arm's length basis. The proposed limit 
    restricting a savings association's investment in any one service 
    corporation engaging in the same activity that is not permissible for a 
    service corporation of a federal savings association was deleted for 
    the same reason the requirement was dropped from subpart A.
        Like the treatment accorded insured state banks, the regulation 
    expands the definition of insured state savings association for the 
    purposes of the investment and transaction limitations. A savings 
    association includes not only the insured entity, but also any service 
    corporation or subsidiary that is engaged in activities that are not 
    subject to these investment and transaction limits. Sections 23A and 
    23B of the Federal Reserve Act combine a bank and all of its 
    subsidiaries in imposing investment limitations and transaction 
    restrictions between the bank and its affiliates. The FDIC is using the 
    same concept in separating subsidiaries and service corporations 
    conducting activities that are subject to investment and transaction 
    limits from the insured state savings association and any other service 
    corporations and subsidiaries engaging in activities not subject to the 
    investment and transaction limits.
        The only exception to these restrictions is for arm's length 
    extensions of credit made by the savings association to finance sales 
    of assets by the service corporation to third parties. These 
    transactions do not need to comply with the collateral requirements and 
    investment limitations, provided they meet certain arm's-length 
    standards. The imposition of section 23A-type restrictions is intended 
    to make sure that adequate safeguards are in place for the dealings 
    between the insured state savings association and its service 
    corporations.
        Investment limits. In a manner similar to that applied to insured 
    state banks in subpart A, the final rule imposes limits on certain of 
    the insured state savings association's investments in service 
    corporations conducting activities that are not permissible for a 
    service corporation of a federal savings association. These investments 
    are limited to 20 percent of the association's tier one capital for the 
    aggregate of all activities covered by the investment limits. As is the 
    case with the ``investment'' definition used in the relevant section of 
    subpart A, investments subject to the applicable limits include: (1) 
    Extensions of credit to any person or company for which an insured 
    state savings association accepts securities issued by the service 
    corporation as collateral; and (2) any extensions or commitments of 
    credit to a third party for investment in the subsidiary, investment in 
    a project in which the subsidiary has an interest, or extensions of 
    credit or commitments of credit which are used for the benefit of, or 
    transferred to, the subsidiary. These provisions also resemble items 
    included in covered transactions subject to the section 23A limits.
        However, the ``investment'' definition also is somewhat dissimilar 
    from that used in subpart A due to underlying statutory differences. 
    The definition of investment for insured state savings associations 
    excludes extensions of credit provided to the service corporation and 
    any of its debt securities owned by the savings association. While 
    these items are included in the investment definition in subpart A, 
    insured state banks are not, unlike state savings associations, 
    required by law to deduct these items from regulatory capital. The 
    investment definition coverage in subpart C has been limited because an 
    insured state savings association is required by the Home Owners' Loan 
    Act or OTS regulations to deduct from its regulatory capital any 
    extensions of credit provided to a service corporation and any debt 
    securities owned by the savings association that were issued by a 
    service corporation engaging in activities that are not permissible for 
    a national bank. 12 U.S.C. 1464(t)(5)(A). Since the regulatory 
    exceptions in subpart C that invoke the investment limits are not 
    activities permissible for a national bank, insured state savings 
    associations are required by the referenced statute to deduct these 
    items from regulatory capital. The FDIC finds no reason to impose 
    investment limits on amounts completely deducted from capital and 
    therefore imposes the investment limit only on items that are not 
    deducted from regulatory capital.
        Like subpart A, the regulation calculates the 20 percent limit 
    based on tier one capital while section 23A uses total capital. As was 
    discussed in reference to subpart A, the FDIC is using
    
    [[Page 66321]]
    
    tier one capital as its standard to create consistency throughout the 
    regulation.
        Transaction requirements. The arm's length transaction requirement, 
    prohibition on purchasing low quality assets, the insider transaction 
    restriction, and the anti-tying restriction are applicable between an 
    insured state savings association and a service corporation to the same 
    extent and in the same manner as that described in subpart A between an 
    insured state bank and certain majority-owned subsidiaries. The 
    discussion of this topic in subpart A discusses the comments and 
    changes from the proposal.
        Collateralization requirement. The collateralization requirement in 
    Sec. 362.4(d)(4) also is applicable between an insured state savings 
    association and a service corporation to the same extent and in the 
    same manner as described in subpart A. Refer to the discussion of this 
    topic in subpart A for the treatment of the comments.
        Capital requirements. Under the final rule, an insured state 
    savings association using the notice process to invest in a service 
    corporation engaging in certain activities not permissible for a 
    federal savings association must be ``well-capitalized'' after 
    deducting from its regulatory capital any investment in the service 
    corporation, both debt and equity, unless otherwise relieved of this 
    requirement. The bank's risk classification assessment under part 327 
    is also determined after making the same deduction. This standard 
    reflects the FDIC's belief that only well-capitalized institutions 
    should be allowed, either without notice or by using the notice 
    process, to engage through service corporations in activities that are 
    not permissible for service corporations of federal savings 
    associations. All savings associations failing to meet this standard 
    and wanting to engage in such activities should be subject to the 
    scrutiny of the application process. The FDIC received no comments 
    concerning this provision.
        Approvals previously granted. The final regulation, at Sec. 362.13, 
    does not require insured state savings associations that have 
    previously received consent by order or notice from this agency to 
    reapply to continue the activity provided the savings association and 
    service corporation, as applicable, continue to comply with the 
    conditions of the order of approval. The FDIC does not intend to 
    require insured state savings associations to request consent to engage 
    in an activity which has already been approved.
        Because previously granted approvals may contain conditions that 
    are different from the standards that are established in the final 
    rule, in certain circumstances, the insured state savings association 
    may elect to operate under the restrictions of the rule, instead of the 
    order. In that case, the insured state savings association may comply 
    with the investment and transaction limitations between the savings 
    association and its service corporations contained in Sec. 362.12(c), 
    the capital requirement detailed in Sec. 362.12(d), and the service 
    corporation restrictions as outlined in the term ``eligible service 
    corporation'' (by substitution) and contained in Sec. 362.4(c)(2) in 
    lieu of any similar requirements in its approval order. Any conditions 
    that are specific to a savings association's situation and do not fall 
    within the above limitations will continue to be effective. The FDIC 
    intends that once a savings association elects to follow these proposed 
    restrictions instead of those in the approval order, it may not elect 
    to revert to the applicable conditions of the order.
        Real estate investment activities. Comments describing the contents 
    of subpart A include an extensive discussion of the FDIC's concerns 
    with real estate investment activities. Subpart A of the final 
    regulation contains significant provisions regarding the real estate 
    investment activities of majority-owned subsidiaries of insured state 
    banks. Additionally, subpart B addresses real estate activities of 
    majority-owned subsidiaries that may become permissible for national 
    bank subsidiaries.
        The FDIC believes real estate investment activities present similar 
    risks when conducted by a service corporation of an insured state 
    savings association. However, subpart C of the proposal does not 
    incorporate any of the requirements imposed in subparts A and B on real 
    estate activities conducted by bank subsidiaries. While the FDIC 
    attempted to conform the treatment of insured state banks and their 
    subsidiaries and that of insured state savings associations and their 
    service corporations, differences in the governing statutes resulted in 
    some variances.
        Service corporations of federal savings associations may engage in 
    numerous real estate investment activities and, therefore, these 
    activities are permissible for service corporations of insured state 
    savings associations. However, because real estate investment 
    activities are not permissible for a national bank, insured state 
    savings associations are required by the Home Owners' Loan Act or 
    regulations issued by the OTS to deduct from their regulatory capital 
    any investment in a service corporation engaging in these activities. 
    This deduction includes both the savings association's investments in 
    debt and equity of, and extensions of credit to, the service 
    corporation. There are also statutory limitations on the amount of a 
    savings association's investments in and credit extensions to service 
    corporations.
        Given that: (1) Real estate investment activities are permissible 
    for service corporations of federal savings associations; (2) there are 
    statutory requirements regarding the capital deduction; and (3) there 
    are statutory limitations on investments and credit extensions, the 
    proposal did not contain any provisions concerning the real estate 
    investment activities of service corporations of insured savings 
    associations. As a result, the arm's length transaction requirements, 
    the prohibition on purchasing low quality assets, the insider 
    transaction restriction, and the collateralization requirements were 
    not applied to transactions between an insured savings association and 
    a service corporation engaging in real estate investment activities. 
    Additionally, neither the insured savings association nor the service 
    corporation was required to meet the eligibility standards; nor was a 
    notice required to be submitted to the FDIC (unless a notice is needed 
    pursuant to proposed subpart D).
        The FDIC specifically requested comment on whether provisions 
    should be added to part 362 subjecting service corporations of insured 
    savings state savings associations to the eligibility requirements and 
    various restrictions implemented in subparts A and B. Despite this 
    request, no comments were received addressing this issue. After further 
    consideration, the FDIC has decided not to impose any of the discussed 
    requirements at this time. The FDIC will instead continue to defer to 
    the statutory authority enabling service corporations to engage in the 
    subject real estate activities.
        Notice that a federal savings association is conducting activities 
    grandfathered under section 5(i)(4) of HOLA. Section 303.147 (as 
    effective October 1, 1998, formerly Sec. 303.13(g)) of the FDIC's 
    current regulations requires any federal savings association that is 
    authorized by section 5(i)(4) of HOLA to conduct activities that are 
    not normally permitted for federal savings associations to file a 
    notice of that fact with the FDIC. Section 5(i)(4) of HOLA provides 
    that any federal savings bank chartered as such prior to October 15, 
    1982, may continue to make investments and continue to conduct
    
    [[Page 66322]]
    
    activities it was permitted to conduct prior to October 15, 1982. It 
    also provides that any federal savings bank organized prior to October 
    15, 1982, that was formerly a state mutual savings bank may continue to 
    make investments and engage in activities that were authorized to it 
    under state law. Finally, the provision confers this grandfather on any 
    federal savings association that acquires by merger or consolidation 
    any federal savings bank that enjoys the grandfather.
        The notice requirement contained in Sec. 303.147 (as effective 
    October 1, 1998, formerly Sec. 303.13(g)) was deleted in the final 
    regulation. The notice was not required by law and was formerly imposed 
    by the FDIC as an information gathering tool. The FDIC determined that 
    eliminating the notice will reduce burden and will not materially 
    affect the FDIC's supervisory responsibilities.
    
    D. Subpart D of Part 362 Acquiring, Establishing, or Conducting New 
    Activities Through a Subsidiary by an Insured Savings Association
    
    Section 362.14  Purpose and Scope
        Subpart D implements the statutory requirement of section 18(m) of 
    the FDI Act. Section 18(m) requires that prior notice be given to the 
    FDIC when an insured savings association, either federal or state, 
    establishes or acquires a subsidiary or engages in any new activity in 
    a subsidiary. This requirement is based on the FDIC's role of ensuring 
    that activities and investments of insured savings associations do not 
    represent a significant risk to the affected deposit insurance fund. In 
    fulfilling that role, the FDIC needs to be aware of the activities 
    contemplated by subsidiaries of insured savings associations. It is 
    noted that for purposes of this subpart, a service corporation is a 
    subsidiary, but the term subsidiary does not include any insured 
    depository institution as that term is defined in the FDI Act. Because 
    this requirement applies to both federal and state savings 
    associations, the final regulation segregates the implementing 
    requirements of the FDIC's regulations into a separate subpart D. In 
    that manner, the requirement is highlighted for both federal and state 
    savings associations. The FDIC adopts Sec. 362.14 without change from 
    the proposal.
        Notice of the acquisition or establishment of a subsidiary, or 
    notice that an existing subsidiary will conduct new activities. Section 
    303.146 (as effective October 1, 1998, formerly Sec. 303.13(f)) of the 
    FDIC's current regulations establishes an abbreviated notice procedure 
    concerning subsidiaries created to hold real estate acquired pursuant 
    to DPC (after the first notice, additional real estate subsidiaries 
    created to hold real estate acquired through DPC could be established 
    after providing the FDIC with 14 days prior notice) and lists the 
    content of the notice. The second item is also deleted because the FDIC 
    seeks to conform all notice periods used in this regulation. While 
    Sec. 362.15 continues to require a prior notice, the required content 
    of the notice was revised in a manner consistent with that required for 
    other notices under this regulation and moved to Sec. 303.141 of 
    subpart H of part 303. The FDIC wants to make it clear that any notice 
    or application submitted to the FDIC pursuant to a provision of subpart 
    C of this regulation will satisfy the notice requirement of this 
    subpart D.
        The FDIC received no comments on either the proposed structure of 
    this subpart or the proposed treatment of the required notices. The 
    final regulation incorporates these changes as proposed, with one 
    exception. Consistent with the current rule, the savings association 
    must submit the notice at least 30 days before establishing the new 
    subsidiary or commencing the new activity.
    
    Part 303
    
    Subpart G--Activities of Insured State Banks
    
    Overview
        As a part of this rulemaking, Part 303--Filing Procedures and 
    Delegations of Authority, is amended to include a new subpart G 
    containing application procedures and delegations of authority for the 
    substantive matters covered by the regulation for insured state 
    banks.\16\ As discussed above, the FDIC has prepared a complete 
    revision of part 303 of the FDIC's rules and regulations containing the 
    FDIC's applications procedures and delegations of authority. As part of 
    these revisions to part 303, subpart G of part 303 has been reserved 
    for this purpose. The application procedures were detailed in subpart E 
    of the part 362 proposal but are now being relocated to subpart G of 
    part 303, to centralize all banking application and notice procedures 
    in one convenient place.
    ---------------------------------------------------------------------------
    
        \16\ Under the FDIC's current rules, these application 
    requirements are located in various sections of three different 
    regulations: 12 CFR 303, 12 CFR 337.4 and 12 CFR 362.
    ---------------------------------------------------------------------------
    
        The FDIC received four comments about its proposed application 
    procedures. One commenter generally applauded the FDIC's adoption of 
    expedited notice procedures as being consistent with congressional 
    intent to reduce regulatory burden on banks. The remaining three 
    comments are discussed in turn below. After careful consideration of 
    these comments, the FDIC has decided they raise no issues warranting 
    substantive changes to the proposed procedures. The FDIC has made 
    certain technical changes to the proposed procedures, but these consist 
    of minor revisions in order to make the procedures consistent with the 
    other subparts of part 303, as adopted in its final form and published 
    at 63 FR 44686 (August 20, 1998).
    Section 303.120  Scope
        This subpart contains the procedural and other information for any 
    application or notice that must be submitted under the requirements 
    specified for activities and investments of insured state banks and 
    their subsidiaries under subparts A and B of part 362, including the 
    format, information requirements, FDIC processing deadlines, and other 
    pertinent guidelines or instructions. The regulation also contains 
    delegations of authority from the Board of Directors to the director 
    and deputy director of the Division of Supervision.
        Definitions. The proposed subpart E of part 362 contained 
    definitions of the following terms: ``Appropriate regional director'', 
    ``appropriate deputy regional director'', ``appropriate regional 
    office'', ``associate director'', ``deputy director'', ``deputy 
    regional director'', ``DOS'', ``director'', and ``regional director''. 
    These definitions have been eliminated since these terms are defined in 
    part 303, and separate definitions are unnecessary.
        Although other subparts of part 303 rely on part 303's definition 
    of an ``eligible insured depository institution'' in connection with 
    granting expedited processing for certain FDIC applications, subpart G 
    does not rely on the part 303 definition. A bank's eligibility for 
    expedited notice processing in connection with an approval required 
    under subpart A or B of part 362 is determined under the criteria 
    contained in part 362.
    Section 303.121  Filing Procedures
        This section explains to insured state banks where they should 
    file, how they should file and the contents of any filing, including 
    any copies of any application or notice filed with another agency.
        This section also explains that the appropriate regional director 
    may request additional information. The FDIC does not anticipate that 
    there will
    
    [[Page 66323]]
    
    be a need routinely to request additional information; however, this 
    reservation is made in anticipation of differences in the way 
    activities are proposed to be conducted.
        One commenter expressed concerns regarding the regulation's 
    requirement that the bank submit a copy of the order or other document 
    from the appropriate regulatory authority granting approval for the 
    bank to conduct the activity, if such approval is necessary and has 
    already been granted. The commenter was concerned that this would 
    foreclose the bank from making simultaneous submissions to state 
    regulatory authorities and the FDIC. To the contrary, the language at 
    the end of the sentence, ``if such approval * * * has already been 
    granted'' will accommodate parallel processing. The bank need not wait 
    until the state has issued an approval before applying to the FDIC. The 
    regulatory language permits the bank to make necessary submissions to 
    the state and FDIC in whatever order the bank sees fit. Of course, 
    banks are reminded that an FDIC approval under subpart A or B of part 
    362 is not sufficient on its own; the activity in question must still 
    be authorized under state law, including any approvals thereunder, 
    before the bank may commence the activity. Where the pendency of state 
    approval creates uncertainty as to the manner or extent to which the 
    activity will be conducted, the appropriate regional director will 
    request additional information from the bank concerning the state 
    approval, and the notice or application may not be sufficiently 
    complete for the FDIC to be able to process it until such uncertainties 
    are resolved.
    Section 303.122  Processing
        This section sets out the procedures for the FDIC's processing of 
    notices and applications. The expedited processing period for notices 
    will normally be 30 days, subject to extension for an additional 15 
    days upon written notice to the bank. If the FDIC removes a notice from 
    expedited processing because of significant supervisory concerns, legal 
    or policy issues, or other good cause, as set out in the rule, standard 
    processing will be used. For notices removed in this manner, or for 
    activities requiring a full application rather than a notice, the FDIC 
    will normally review and act within 60 days after receipt of a 
    completed application, subject to extension for an additional 30 days 
    upon written notice to the bank. One comment supported the notice 
    process as regulatory burden reduction. Two comments questioned the 
    time periods for processing. One stated that the 30-and 60-day time 
    frames do not reflect business reality. The commenter requested that 
    institutions have advanced approval to invest up to 10 percent of 
    capital. The other questioned the notice process, stating that the FDIC 
    will not have sufficient opportunity to review the request. Because of 
    the differences among the activities presented, the FDIC does not feel 
    that advance approval is a viable alternative. Given normal lead times 
    for business planning appropriate to a bank's decision to enter into a 
    new field of business activity, and given that the regulation does not 
    require FDIC approval on a project-by-project basis, the FDIC does not 
    believe the proposed time periods will impede banks' ability to compete 
    effectively. The notice and application procedures provide an expedited 
    processing time, but the FDIC feels the time constraints are sufficient 
    for appropriate supervisory consideration. Therefore, no changes have 
    been made to the proposed processing times.
    Section 303.123  Delegation of Authority
        The authority to review and act upon applications and notices is 
    delegated in this section. One substantive change to the existing 
    delegation is the addition of the deputy director of the Division of 
    Supervision. Another change authorizes the Director (DOS) to make 
    determinations concerning instruments having the character of debt 
    securities. This authority is granted to allow the FDIC to efficiently 
    respond to market changes. Section 24 prohibits insured state banks 
    from investing in equity securities. The FDIC has found that certain 
    instruments have sufficient characteristics of debt securities that 
    they may be excluded from the prohibition of investment in equity 
    securities. If the capital markets create similar such instruments in 
    the future, this provision permits the Director (DOS), either upon 
    request or at the FDIC's instigation, to identify them as such and 
    designate them as being eligible investments for state nonmember banks, 
    subject to the 15 percent of tier one capital limit set under 
    Sec. 362.3. The FDIC would notify state banks of such determination by 
    issuing a Financial Institution Letter, or through other appropriate 
    means.
    
    Subpart H--Activities of Insured Savings Associations
    
    Overview
        As a part of this rulemaking, part 303--Filing Procedures and 
    Delegations of Authority, is amended to include a revised subpart H 
    containing application procedures and delegations of authority for the 
    substantive matters covered by the regulation for insured state savings 
    associations. As discussed above, the FDIC has prepared a complete 
    revision of part 303 of the FDIC's rules and regulations containing the 
    FDIC's applications procedures and delegations of authority. As part of 
    these revisions to part 303, subpart H of part 303 has been reserved 
    for this purpose. The application procedures were detailed in subpart F 
    of the part 362 proposal but are now being relocated to subpart H of 
    part 303 to centralize all savings association application and notice 
    procedures in one convenient place.
        The FDIC received no comments about its proposed application 
    procedures. The FDIC has made certain technical changes to the proposed 
    procedures, but these changes consist of minor revisions to make the 
    procedures consistent with the other subparts of part 303, as adopted 
    in its final form.
    Section 303.140  Scope
        This subpart contains the procedural and other information for any 
    application or notice that must be submitted under the requirements 
    specified for activities and investments of insured state savings 
    associations and their subsidiaries under subparts C and D or part 362, 
    including the format, information requirements, FDIC processing 
    deadlines, and other pertinent guidelines or instructions. The 
    regulation also contains delegations of authority from the Board of 
    Directors to the director and deputy director of the Division of 
    Supervision.
    Section 303.141  Definitions
        The proposed subpart F contained definitions of the following 
    terms: ``Appropriate regional director'', ``appropriate deputy regional 
    director'', ``appropriate regional office'', ``associate director'', 
    ``deputy director'', ``deputy regional director'', ``DOS'', 
    ``director'', and ``regional director''. These definitions have been 
    eliminated since these terms are defined in part 303 and separate 
    definitions are unnecessary.
        Although other subparts of part 303 rely on part 303's definition 
    of an ``eligible insured depository institution'' in connection with 
    granting expedited processing for certain FDIC applications, subpart H 
    does not rely on the part 303 definition. A savings association's 
    eligibility for expedited notice processing in connection with an 
    approval required under subpart C or D of part 362 is determined under 
    the criteria contained in part 362.
    
    [[Page 66324]]
    
    Section 303.141  Filing Procedures
        This section explains to insured savings associations where they 
    should file, how they should file and the contents of any filing, 
    including any copies of any application or notice filed with another 
    agency.
        This section also explains that the appropriate regional director 
    may request additional information. The FDIC does not anticipate that 
    there will be a need routinely to request additional information; 
    however, this reservation is made in anticipation of differences in the 
    way activities are proposed to be conducted.
    Section 303.142  Processing
        This section sets out the procedures for the FDIC's processing of 
    notices and applications. The expedited processing period for notices 
    will normally be 30 days, subject to extension for an additional 15 
    days upon written notice to the bank. If the FDIC removes a notice from 
    expedited processing because of significant supervisory concerns, legal 
    or policy issues, or other good cause, as set out in the rule, standard 
    processing will be used. For notices removed in this manner, or for 
    activities requiring a full application rather than a notice, the FDIC 
    will normally review and act within 60 days after receipt of a 
    completed application, subject to extension for an additional 30 days 
    upon written notice to the savings association.
    Section 303.148  Delegation of Authority
        The authority to review and act upon applications and notices is 
    delegated in this section. One substantive change to the existing 
    delegation is the addition of the deputy director of the Division of 
    Supervision. Another change authorizes the Director (DOS) to make 
    determinations concerning instruments having the character of debt 
    securities. This authority is granted to allow the FDIC to efficiently 
    respond to market changes. Section 28 prohibits insured state 
    associations from investing in equity securities. The FDIC has found 
    that certain instruments have characteristics of debt securities and 
    may be excluded from the prohibition of investment in equity 
    securities. If the capital markets create similar such instruments in 
    the future, this provision permits the Director (DOS), either upon 
    request or at the FDIC's instigation, to identify them as such and 
    designate them as being eligible investments for state nonmember banks, 
    up to the 15 percent of tier one capital limit set under Sec. 362.3. 
    The FDIC would notify state banks of such determination by issuing a 
    Financial Institution Letter, or other appropriate means.
    
    V. Paperwork Reduction Act
    
        In accordance with the requirements of the Paperwork Reduction Act 
    of 1995 (PRA) (44 U.S.C. 3501 et seq.), the FDIC may not conduct or 
    sponsor, and a person is not required to respond to, a collection of 
    information unless it displays a currently valid OMB control number. 
    Public comment was invited on two collections of information contained 
    in the part 362 notice of proposed rulemaking and the two collections 
    were submitted to the Office of Management and Budget (OMB) for review. 
    No comment was received regarding either collection. OMB approved the 
    first collection, Activities and Investments of Insured State Banks, 
    under control number 3064-0111, which will expire November 30, 2000. 
    OMB approved the second collection, Activities and Investments of 
    Insured Savings Associations, under control number 3064-0104, which 
    will expire November 30, 2000. The FDIC continues to welcome comment 
    about the PRA aspects of this regulation. Such comment should identify 
    the particular subpart and information collection for which 
    consideration is desired and should be sent to Steven F. Hanft, 
    Assistant Executive Secretary (Regulatory Analysis), Federal Deposit 
    Insurance Corporation, Room F-4062, 550 17th Street NW, Washington, DC 
    20429.
    
    VI. Regulatory Flexibility Act Analysis
    
        Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
    FDIC certifies that this rule will not have a significant economic 
    impact on a substantial number of small entities. The rule streamlines 
    requirements for all insured state banks and insured state savings 
    associations. The requirements for insured federal savings associations 
    are statutory and remain unchanged by this rule. It simplifies the 
    requirements that apply when insured state banks and insured state 
    savings associations create, invest in, or conduct new activities 
    through majority-owned corporate subsidiaries and service corporations, 
    respectively, by eliminating requirements for any filing or reducing 
    the burden from filing an application to filing a notice in other 
    instances. The rule also simplifies the information required for both 
    notices and applications. Whenever possible, the rule clarifies the 
    expectations of the FDIC when it requires notices or applications to 
    consent to activities by insured state banks and insured state savings 
    associations. The rule will make it easier for small insured state 
    banks and insured state savings associations to locate the rules that 
    apply to their investments.
    
    VII. Small Business Regulatory Enforcement Fairness Act
    
        The Small Business Regulatory Enforcement Fairness Act of 1996 
    (SBREFA) (Title II, Public Law 1004-121) provides generally for 
    agencies to report rules to Congress for review. The reporting 
    requirement is triggered when a federal agency issues a final rule. 
    Accordingly, the FDIC will file the appropriate reports with Congress 
    as required by SBREFA.
        The Office of Management and Budget has determined that this final 
    rule does not constitute a ``major rule'' as defined by SBREFA.
    
    List of Subjects
    
    12 CFR Part 303
    
        Administrative practice and procedure, Authority delegations 
    (Government agencies), Bank deposit insurance, Banks, banking, Bank 
    merger, Branching, Foreign branches, Golden parachute payments, Insured 
    branches, Interstate branching, Reporting and recordkeeping 
    requirements, Savings associations.
    
    12 CFR Part 337
    
        Banks, banking, Reporting and recordkeeping requirements, 
    Securities.
    
    12 CFR Part 362
    
        Administrative practice and procedure, Authority delegations 
    (Government agencies), Bank deposit insurance, Banks, banking, Insured 
    depository institutions, Investments, Reporting and recordkeeping 
    requirements.
    
    Authority and Issuance
    
        For the reasons set forth above and under the authority of 12 
    U.S.C. 1819(a)(Tenth), the FDIC Board of Directors hereby amends 12 CFR 
    chapter III as follows:
    
    PART 303--FILING PROCEDURES AND DELEGATIONS OF AUTHORITY
    
        1. The authority citation for part 303 is revised to read as 
    follows:
    
        Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817, 1818, 1819 
    (Seventh and Tenth), 1820, 1823, 1828, 1831a, 1831e, 1831o, 1831p-1, 
    1835a, 3104, 3105, 3108, 3207; 15 U.S.C. 1601-1607.
    
        2. Revise the subpart G heading and add subpart G, consisting of 
    Secs. 303.120 through 303.123, to read as follows:
    
    [[Page 66325]]
    
    Subpart G--Activities of Insured State Banks
    
    Sec.
    303.120  Scope.
    303.121  Filing procedures.
    303.122  Processing.
    303.123  Delegation of authority.
    
    Subpart G--Activities of Insured State Banks
    
    
    Sec. 303.120  Scope.
    
        This subpart sets forth procedures for complying with notice and 
    application requirements contained in subpart A of part 362 of this 
    chapter, governing insured state banks and their subsidiaries engaging 
    in activities which are not permissible for national banks and their 
    subsidiaries. This subpart also sets forth procedures for complying 
    with notice and application requirements contained in subpart B of part 
    362 of this chapter, governing certain activities of insured state 
    nonmember banks, their subsidiaries, and certain affiliates.
    
    
    Sec. 303.121  Filing procedures.
    
        (a) Where to file. A notice or application required by subpart A or 
    subpart B of part 362 of this chapter shall be submitted in writing to 
    the appropriate regional director (DOS).
        (b) Contents of filing--(1) Filings generally. A complete letter 
    notice or letter application shall include the following information:
        (i) A brief description of the activity and the manner in which it 
    will be conducted;
        (ii) The amount of the bank's existing or proposed direct or 
    indirect investment in the activity as well as calculations sufficient 
    to indicate compliance with any specific capital ratio or investment 
    percentage limitation detailed in subpart A or B of part 362 of this 
    chapter;
        (iii) A copy of the bank's business plan regarding the conduct of 
    the activity;
        (iv) A citation to the state statutory or regulatory authority for 
    the conduct of the activity;
        (v) A copy of the order or other document from the appropriate 
    regulatory authority granting approval for the bank to conduct the 
    activity if such approval is necessary and has already been granted;
        (vi) A brief description of the bank's policy and practice with 
    regard to any anticipated involvement in the activity by a director, 
    executive office or principal shareholder of the bank or any related 
    interest of such a person; and
        (vii) A description of the bank's expertise in the activity.
        (2) [Reserved]
        (3) Copy of application or notice filed with another agency. If an 
    insured state bank has filed an application or notice with another 
    federal or state regulatory authority which contains all of the 
    information required by paragraph (b) (1) of this section, the insured 
    state bank may submit a copy to the FDIC in lieu of a separate filing.
        (4) Additional information. The appropriate regional director (DOS) 
    may request additional information to complete processing.
    
    
    Sec. 303.122  Processing.
    
        (a) Expedited processing. A notice filed by an insured state bank 
    seeking to commence or continue an activity under Sec. 362.4(b)(3)(i), 
    Sec. 362.4(b)(5), or Sec. 362.8(a)(2) of this chapter will be 
    acknowledged in writing by the FDIC and will receive expedited 
    processing, unless the applicant is notified in writing to the contrary 
    and provided a basis for that decision. The FDIC may remove the notice 
    from expedited processing for any of the reasons set forth in 
    Sec. 303.11(c)(2). Absent such removal, a notice processed under 
    expedited processing is deemed approved 30 days after receipt of a 
    complete notice by the FDIC (subject to extension for an additional 15 
    days upon written notice to the bank) or on such earlier date 
    authorized by the FDIC in writing.
        (b) Standard processing for applications and notices that have been 
    removed from expedited processing. For an application filed by an 
    insured state bank seeking to commence or continue an activity under 
    Sec. 362.3(a)(2)(iii)(A), Sec. 362.3(b)(2)(i), Sec. 362.3(b)(2)(ii)(A), 
    Sec. 362.3(b)(2)(ii)(C), Sec. 362.4(b)(1), Sec. 362.4(b)(2), 
    Sec. 362.4(b)(4), Sec. 362.5(b)(2), Sec. 362.8(a)(2), or Sec. 362.8(b) 
    of this chapter or for notices which are not processed pursuant to the 
    expedited processing procedures, the FDIC will provide the insured 
    state bank with written notification of the final action as soon as the 
    decision is rendered. The FDIC will normally review and act in such 
    cases within 60 days after receipt of a completed application or notice 
    (subject to extension for an additional 30 days upon written notice to 
    the bank), but failure of the FDIC to act prior to the expiration of 
    these periods does not constitute approval.
    
    
    Sec. 303.123  Delegations of authority.
    
        (a) Instruments having the character of debt securities. Authority 
    is delegated to the Director (DOS) to make determinations contemplated 
    under Secs. 362.2(h) and 362.3(b)(2)(iii)(B) of this chapter.
        (b) Other applications, notices, and actions. The authority to 
    review and act upon applications and notices filed pursuant to this 
    subpart G and to take any other action authorized by this subpart G or 
    subparts A and B of part 362 of this chapter is delegated to the 
    Director (DOS), and except as limited by paragraph (a) of this section, 
    to the Deputy Director and where confirmed in writing by the Director 
    to an associate director and the appropriate regional director and 
    deputy regional director.
        3. Revise subpart H to read as follows:
    
    Subpart H--Activities of Insured Savings Associations
    
    Sec.
    303.140  Scope.
    303.141  Filing procedures.
    303.142  Processing.
    303.143  Delegation of authority.
    
    Subpart H--Activities of Insured Savings Associations
    
    
    Sec. 303.140  Scope.
    
        This subpart sets forth procedures for complying with the notice 
    and application requirements contained in subpart C of part 362 of this 
    chapter, governing insured state savings associations and their service 
    corporations engaging in activities which are not permissible for 
    federal savings associations and their service corporations. This 
    subpart also sets forth procedures for complying with the notice 
    requirements contained in subpart D of part 362 of this chapter, 
    governing insured savings associations which establish or engage in new 
    activities through a subsidiary.
    
    
    Sec. 303.141  Filing procedures.
    
        (a) Where to file. All applications and notices required by subpart 
    C or subpart D of part 362 of this chapter are to be in writing and 
    filed with the appropriate regional director.
        (b) Contents of filing--(1) Filings generally. A complete letter 
    notice or letter application shall include the following information:
        (i) A brief description of the activity and the manner in which it 
    will be conducted;
        (ii) The amount of the association's existing or proposed direct or 
    indirect investment in the activity as well as calculations sufficient 
    to indicate compliance with any specific capital ratio or investment 
    percentage limitation detailed in subpart C or D of this chapter;
        (iii) A copy of the association's business plan regarding the 
    conduct of the activity;
        (iv) A citation to the state statutory or regulatory authority for 
    the conduct of the activity;
    
    [[Page 66326]]
    
        (v) A copy of the order or other document from the appropriate 
    regulatory authority granting approval for the association to conduct 
    the activity if such approval is necessary and has already been 
    granted;
        (vi) A brief description of the association's policy and practice 
    with regard to any anticipated involvement in the activity by a 
    director, executive officer or principal shareholder of the association 
    or any related interest of such a person; and
        (vii) A description of the association's expertise in the activity.
        (2) [Reserved]
        (3) Copy of application or notice filed with another agency. If an 
    insured savings association has filed an application or notice with 
    another federal or state regulatory authority which contains all of the 
    information required by paragraph (b) (1) of this section, the insured 
    state bank may submit a copy to the FDIC in lieu of a separate filing.
        (4) Additional information. The appropriate regional director (DOS) 
    may request additional information to complete processing.
    
    
    Sec. 303.142  Processing.
    
        (a) Expedited processing. A notice filed by an insured state 
    savings association seeking to commence or continue an activity under 
    Sec. 362.11(b)(2)(i), Sec. 362.12(b)(2)(i), or Sec. 362.12(b)(4) of 
    this chapter will be acknowledged in writing by the FDIC and will 
    receive expedited processing, unless the applicant is notified in 
    writing to the contrary and provided a basis for that decision. The 
    FDIC may remove the notice from expedited processing for any of the 
    reasons set forth in Sec. 303.11(c)(2). Absent such removal, a notice 
    processed under expedited processing is deemed approved 30 days after 
    receipt of a complete notice by the FDIC (subject to extension for an 
    additional 15 days upon written notice to the bank) or on such earlier 
    date authorized by the FDIC in writing.
        (b) Standard processing for applications and notices that have been 
    removed from expedited processing. For an application filed by an 
    insured state savings association seeking to commence or continue an 
    activity under Sec. 362.11(a)(2), Sec. 362.11(b)(2), Sec. 362.12(b)(1) 
    of this chapter or for notices which are not processed pursuant to the 
    expedited processing procedures, the FDIC will provide the insured 
    state savings association with written notification of the final action 
    as soon as the decision is rendered. The FDIC will normally review and 
    act in such cases within 60 days after receipt of a completed 
    application or notice (subject to extension for an additional 30 days 
    upon written notice to the bank), but failure of the FDIC to act prior 
    to the expiration of these periods does not constitute approval.
        (c) Notices of activities in excess of an amount permissible for a 
    federal savings association; subsidiary notices. Receipt of a notice 
    filed by an insured state savings association as required by 
    Sec. 362.11(b)(3) or Sec. 362.15 of this chapter will be acknowledged 
    in writing by the appropriate regional director (DOS). The notice will 
    be reviewed at the appropriate regional office, which will take such 
    action as it deems necessary and appropriate.
    
    
    Sec. 303.143  Delegations of authority.
    
        (a) Instruments having the character of debt securities. Authority 
    is delegated to the Director (DOS) to make determinations contemplated 
    under Secs. 362.2(h) and 362.3(b)(2)(iii)(B) of this chapter.
        (b) Other applications, notices, and actions. The authority to 
    review and act upon applications and notices filed pursuant to this 
    subpart H and to take any other action authorized by this subpart H or 
    subparts C and D of part 362 of this chapter is delegated to the 
    Director (DOS), and except as limited by paragraph (a) of this section, 
    to the Deputy Director and where confirmed in writing by the Director 
    to an associate director and the appropriate regional director and 
    deputy regional director.
    
    PART 337--UNSAFE AND UNSOUND BANKING PRACTICES
    
        4. The authority citation for part 337 continues to read as 
    follows:
    
        Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b), 
    1819, 1820(d)(10), 1821(f), 1828(j)(2), 1831f, 1831f-1.
    
        5. In Sec. 337.4, a new paragraph (i) is added to read as follows:
    
    
    Sec. 337.4  Securities activities of subsidiaries of insured nonmember 
    banks; bank transactions with affiliated securities companies.
    
    * * * * *
        (i) Coordination with part 362 of this chapter--(1) New subsidiary 
    or affiliate relationships. Beginning January 1, 1999, every insured 
    state nonmember bank that establishes a new subsidiary relationship 
    subject to the provisions of Sec. 362.4(b)(4) or Sec. 362.4(b)(5)(ii) 
    of this chapter or a new affiliate relationship that is subject to 
    Sec. 362.8(b) of this chapter shall comply with Sec. 362.4(b)(4), 
    Sec. 362.4(b)(5)(ii) or Sec. 362.8(b) of this chapter, respectively, or 
    to the extent the insured state nonmember bank's planned subsidiary or 
    affiliate will not comply with all requirements thereunder, submit an 
    application to the FDIC under Sec. 362.4(b)(1) or Sec. 362.8(b) of this 
    chapter, respectively. This section shall not apply to such subsidiary 
    or affiliate.
        (2) Existing insured state nonmember bank subsidiaries subject to 
    Sec. 362.4. Applicable transition rules for insured state nonmember 
    bank subsidiaries engaged, before January 1, 1999, in securities 
    activities pursuant to this section and also subject to Sec. 362.4 of 
    this chapter are set out in Sec. 362.5 of this chapter.
        (3) Continued effectiveness of this section. Insured state 
    nonmember banks establishing or holding subsidiaries or affiliates 
    subject to this section, but not covered by Sec. 362.4 or Sec. 362.8 of 
    this chapter, remain subject to the requirements of this section, 
    except that to the extent such subsidiaries or affiliates engage only 
    in activities permissible for a national bank directly, including such 
    permissible activities that may require the subsidiary or affiliate to 
    register as a securities broker, no notice under paragraph (d) of this 
    section is required.
        6. Part 362 is revised to read as follows:
    
    PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS 
    ASSOCIATIONS
    
    Subpart A--Activities of Insured State Banks
    
    Sec.
    362.1  Purpose and scope.
    362.2  Definitions.
    362.3  Activities of insured state banks.
    362.4  Subsidiaries of insured state banks.
    362.5  Approvals previously granted.
    
    Subpart B--Safety and Soundness Rules Governing Insured State 
    Nonmember Banks
    
    362.6  Purpose and scope.
    362.7  Definitions.
    362.8  Restrictions on activities of insured state nonmember banks.
    
    Subpart C--Activities of Insured State Savings Associations
    
    362.9 Purpose and scope.
    362.10  Definitions.
    362.11  Activities of insured state savings associations.
    362.12  Service corporations of insured state savings associations.
    362.13  Approvals previously granted.
    
    [[Page 66327]]
    
    Subpart D--Acquiring, Establishing, or Conducting New Activities 
    Through a Subsidiary by an Insured Savings Association
    
    362.14  Purpose and scope.
    362.15  Acquiring or establishing a subsidiary; conducting new 
    activities through a subsidiary.
    
        Authority: 12 U.S.C. 1816, 1818, 1819(a)(Tenth), 1828(m), 1831a, 
    1831e.
    
    Subpart A--Activities of Insured State Banks
    
    
    Sec. 362.1  Purpose and scope.
    
        (a) This subpart, along with the notice and application procedures 
    in subpart G of part 303 of this chapter, implements the provisions of 
    section 24 of the Federal Deposit Insurance Act (12 U.S.C. 1831a) that 
    restrict and prohibit insured state banks and their subsidiaries from 
    engaging in activities and investments that are not permissible for 
    national banks and their subsidiaries. The phrase ``activity 
    permissible for a national bank'' means any activity authorized for 
    national banks under any statute including the National Bank Act (12 
    U.S.C. 21 et seq.), as well as activities recognized as permissible for 
    a national bank in regulations, official circulars, bulletins, orders 
    or written interpretations issued by the Office of the Comptroller of 
    the Currency (OCC).
        (b) This subpart does not cover the following activities:
        (1) Activities conducted other than ``as principal,'' defined for 
    purposes of this subpart as activities conducted as agent for a 
    customer, conducted in a brokerage, custodial, advisory, or 
    administrative capacity, or conducted as trustee, or in any 
    substantially similar capacity. For example, this subpart does not 
    cover acting solely as agent for the sale of insurance, securities, 
    real estate, or travel services; nor does it cover acting as trustee, 
    providing personal financial planning advice, or safekeeping services;
        (2) Interests in real estate in which the real property is used or 
    intended in good faith to be used within a reasonable time by an 
    insured state bank or its subsidiaries as offices or related facilities 
    for the conduct of its business or future expansion of its business or 
    used as public welfare investments of a type permissible for national 
    banks; and (3) Equity investments acquired in connection with debts 
    previously contracted (DPC) if the insured state bank does not hold the 
    property for speculation and takes only such actions as would be 
    permissible for a national bank's DPC. The bank must dispose of the 
    property within the shorter of the period set by federal law for 
    national banks or the period allowed under state law. For real estate, 
    national banks may not hold DPC for more than 10 years. For equity 
    securities, national banks must generally divest DPC as soon as 
    possible consistent with obtaining a reasonable return.
        (c) A subsidiary of an insured state bank may not engage in real 
    estate investment activities that are not permissible for a subsidiary 
    of a national bank unless the bank does so through a subsidiary of 
    which the bank is a majority owner, is in compliance with applicable 
    capital standards, and the FDIC has determined that the activity poses 
    no significant risk to the appropriate deposit insurance fund. This 
    subpart provides standards for majority-owned subsidiaries of insured 
    state banks engaging in real estate investment activities that are not 
    permissible for a subsidiary of a national bank. Because of safety and 
    soundness concerns relating to real estate investment activities, 
    subpart B of this part reflects special rules for subsidiaries of 
    insured state nonmember banks that engage in real estate investment 
    activities of a type that are not permissible for a national bank, but 
    may be otherwise permissible for a subsidiary of a national bank.
        (d) The FDIC intends to allow insured state banks and their 
    subsidiaries to undertake only safe and sound activities and 
    investments that do not present significant risks to the deposit 
    insurance funds and that are consistent with the purposes of federal 
    deposit insurance and other applicable law. This subpart does not 
    authorize any insured state bank to make investments or to conduct 
    activities that are not authorized or that are prohibited by either 
    state or federal law.
    
    
    Sec. 362.2  Definitions.
    
        For the purposes of this subpart, the following definitions will 
    apply:
        (a) Bank, state bank, savings association, state savings 
    association, depository institution, insured depository institution, 
    insured state bank, federal savings association, and insured state 
    nonmember bank shall each have the same respective meaning contained in 
    section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
        (b) Activity means the conduct of business by a state-chartered 
    depository institution, including acquiring or retaining an equity 
    investment or other investment.
        (c) Change in control means any transaction:
        (1) By a state bank or its holding company for which a notice is 
    required to be filed with the FDIC, or the Board of Governors of the 
    Federal Reserve System (FRB), pursuant to section 7(j) of the Federal 
    Deposit Insurance Act (12 U.S.C. 1817(j)) except a transaction that is 
    presumed to be an acquisition of control under the FDIC's or FRB's 
    regulations implementing section 7(j);
        (2) As a result of which a state bank eligible for the exception 
    described in Sec. 362.3(a)(2)(iii) is acquired by or merged into a 
    depository institution that is not eligible for the exception, or as a 
    result of which its holding company is acquired by or merged into a 
    holding company which controls one or more bank subsidiaries not 
    eligible for the exception; or
        (3) In which control of the state bank is acquired by a bank 
    holding company in a transaction requiring FRB approval under section 3 
    of the Bank Holding Company Act (12 U.S.C. 1842), other than a one bank 
    holding company formation in which all or substantially all of the 
    shares of the holding company will be owned by persons who were 
    shareholders of the bank.
        (d) Company means any corporation, partnership, limited liability 
    company, business trust, association, joint venture, pool, syndicate or 
    other similar business organization.
        (e) Control means the power to vote, directly or indirectly, 25 
    percent or more of any class of the voting securities of a company, the 
    ability to control in any manner the election of a majority of a 
    company's directors or trustees, or the ability to exercise a 
    controlling influence over the management and policies of a company.
        (f) Convert its charter means an insured state bank undergoes any 
    transaction that causes the bank to operate under a different form of 
    charter than it had as of December 19, 1991, except a change from 
    mutual to stock form shall not be considered a charter conversion.
        (g) Equity investment means an ownership interest in any company; 
    any membership interest that includes a voting right in any company; 
    any interest in real estate; any transaction which in substance falls 
    into any of these categories even though it may be structured as some 
    other form of business transaction; and includes an equity security. 
    The term ``equity investment'' does not include any of the foregoing if 
    the interest is taken as security for a loan.
        (h) Equity security means any stock (other than adjustable rate 
    preferred stock, money market (auction rate) preferred stock, or other 
    newly developed instrument determined by the FDIC to have the character 
    of debt
    
    [[Page 66328]]
    
    securities), certificate of interest or participation in any profit-
    sharing agreement, collateral-trust certificate, preorganization 
    certificate or subscription, transferable share, investment contract, 
    or voting-trust certificate; any security immediately convertible at 
    the option of the holder without payment of substantial additional 
    consideration into such a security; any security carrying any warrant 
    or right to subscribe to or purchase any such security; and any 
    certificate of interest or participation in, temporary or interim 
    certificate for, or receipt for any of the foregoing.
        (i) Extension of credit, executive officer, director, principal 
    shareholder, and related interest each has the same respective meaning 
    as is applicable for the purposes of section 22(h) of the Federal 
    Reserve Act (12 U.S.C. 375b) and Sec. 337.3 of this chapter.
        (j) Institution shall have the same meaning as ``state-chartered 
    depository institution.''
        (k) Majority-owned subsidiary means any corporation in which the 
    parent insured state bank owns a majority of the outstanding voting 
    stock.
        (l) National securities exchange means a securities exchange that 
    is registered as a national securities exchange by the Securities and 
    Exchange Commission pursuant to section 6 of the Securities Exchange 
    Act of 1934 (15 U.S.C. 78f) and the National Market System, i.e., the 
    top tier of the National Association of Securities Dealers Automated 
    Quotation System.
        (m) Real estate investment activity means any interest in real 
    estate (other than as security for a loan) held directly or indirectly 
    that is not permissible for a national bank.
        (n) Residents of the state includes individuals living in the 
    state, individuals employed in the state, any person to whom the 
    company provided insurance as principal without interruption since such 
    person resided in or was employed in the state, and companies or 
    partnerships incorporated in, organized under the laws of, licensed to 
    do business in, or having an office in the state.
        (o) Security has the same meaning as it has in part 344 of this 
    chapter.
        (p) Significant risk to the deposit insurance fund shall be 
    understood to be present whenever the FDIC determines there is a high 
    probability that any insurance fund administered by the FDIC may suffer 
    a loss. Such risk may be present either when an activity contributes or 
    may contribute to the decline in condition of a particular state-
    chartered depository institution or when a type of activity is found by 
    the FDIC to contribute or potentially contribute to the deterioration 
    of the overall condition of the banking system.
        (q) State-chartered depository institution means any state bank or 
    state savings association insured by the FDIC.
        (r) Subsidiary means any company controlled by an insured 
    depository institution.
        (s) Tier one capital has the same meaning as set forth in part 325 
    of this chapter for an insured state nonmember bank. For other state-
    chartered depository institutions, the term ``tier one capital'' has 
    the same meaning as set forth in the capital regulations adopted by the 
    appropriate federal banking agency.
        (t) Well-capitalized has the same meaning set forth in part 325 of 
    this chapter for an insured state nonmember bank. For other state-
    chartered depository institutions, the term ``well-capitalized'' has 
    the same meaning as set forth in the capital regulations adopted by the 
    appropriate federal banking agency.
    
    
    Sec. 362.3  Activities of insured state banks.
    
        (a) Equity investments. (1) Prohibited equity investments. No 
    insured state bank may directly or indirectly acquire or retain as 
    principal any equity investment of a type that is not permissible for a 
    national bank unless one of the exceptions in paragraph (a)(2) of this 
    section applies.
        (2) Exceptions. (i) Equity investment in majority-owned 
    subsidiaries. An insured state bank may acquire or retain an equity 
    investment in a subsidiary of which the bank is a majority owner, 
    provided that the subsidiary is engaging in activities that are allowed 
    pursuant to the provisions of or by application under Sec. 362.4(b).
        (ii) Investments in qualified housing projects. An insured state 
    bank may invest as a limited partner in a partnership, or as a 
    noncontrolling interest holder of a limited liability company, the sole 
    purpose of which is to invest in the acquisition, rehabilitation, or 
    new construction of a qualified housing project, provided that the 
    bank's aggregate investment (including legally binding commitments) 
    does not exceed, when made, 2 percent of total assets as of the date of 
    the bank's most recent consolidated report of condition prior to making 
    the investment. For the purposes of this paragraph (a)(2)(ii), 
    Aggregate investment means the total book value of the bank's 
    investment in the real estate calculated in accordance with the 
    instructions for the preparation of the consolidated report of 
    condition. Qualified housing project means residential real estate 
    intended to primarily benefit lower income persons throughout the 
    period of the bank's investment including any project that has received 
    an award of low income housing tax credits under section 42 of the 
    Internal Revenue Code (26 U.S.C. 42) (such as a reservation or 
    allocation of credits) from a state or local housing credit agency. A 
    residential real estate project that does not qualify for the tax 
    credit under section 42 of the Internal Revenue Code will qualify under 
    this exception if 50 percent or more of the housing units are to be 
    occupied by lower income persons. A project will be considered 
    residential despite the fact that some portion of the total square 
    footage of the project is utilized for commercial purposes, provided 
    that such commercial use is not the primary purpose of the project. 
    Lower income has the same meaning as ``low income'' and ``moderate 
    income'' as defined for the purposes of Sec. 345.12(n) (1) and (2) of 
    this chapter.
        (iii) Grandfathered investments in common or preferred stock; 
    shares of investment companies. (A) General. An insured state bank that 
    is located in a state which as of September 30, 1991, authorized 
    investment in:
        (1)(i) Common or preferred stock listed on a national securities 
    exchange (listed stock); or
        (ii) Shares of an investment company registered under the 
    Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) (registered 
    shares); and
        (2) Which during the period beginning on September 30, 1990, and 
    ending on November 26, 1991, made or maintained an investment in listed 
    stock or registered shares, may retain whatever lawfully acquired 
    listed stock or registered shares it held and may continue to acquire 
    listed stock and/or registered shares, provided that the bank files a 
    notice in accordance with section 24(f)(6) of the Federal Deposit 
    Insurance Act in compliance with Sec. 303.121 of this chapter and the 
    FDIC processes the notice without objection under Sec. 303.122 of this 
    chapter. Approval will be granted only if the FDIC determines that 
    acquiring or retaining the stock or shares does not pose a significant 
    risk to the appropriate deposit insurance fund. Approval may be subject 
    to whatever conditions or restrictions the FDIC determines are 
    necessary or appropriate.
        (B) Loss of grandfather exception. The exception for grandfathered 
    investments under paragraph (a)(2)(iii)(A) of this section shall no 
    longer apply if the bank converts its charter or the bank or its parent 
    holding company undergoes a change in control. If any of these events 
    occur, the bank may retain its existing
    
    [[Page 66329]]
    
    investments unless directed by the FDIC or other applicable authority 
    to divest the listed stock or registered shares.
        (C) Maximum permissible investment. A bank's aggregate investment 
    in listed stock and registered shares under paragraph (a)(2)(iii)(A) of 
    this section shall in no event exceed, when made, 100 percent of the 
    bank's tier one capital as measured on the bank's most recent 
    consolidated report of condition (call report) prior to making any such 
    investment. The lower of the bank's cost as determined in accordance 
    with call report instructions or the market value of the listed stock 
    and shares shall be used to determine compliance. The FDIC may 
    determine when acting upon a notice filed in accordance with paragraph 
    (a)(2)(iii)(A)(2) of this section that the permissible limit for any 
    particular insured state bank is something less than 100 percent of 
    tier one capital.
        (iv) Stock investment in insured depository institutions owned 
    exclusively by other banks and savings associations. An insured state 
    bank may acquire or retain the stock of an insured depository 
    institution if the insured depository institution engages only in 
    activities permissible for national banks; the insured depository 
    institution is subject to examination and regulation by a state bank 
    supervisor; the voting stock is owned by 20 or more insured depository 
    institutions, but no one institution owns more than 15 percent of the 
    voting stock; and the insured depository institution's stock (other 
    than directors' qualifying shares or shares held under or acquired 
    through a plan established for the benefit of the officers and 
    employees) is owned only by insured depository institutions.
        (v) Stock investment in insurance companies--(A) Stock of director 
    and officer liability insurance company. An insured state bank may 
    acquire and retain up to 10 percent of the outstanding stock of a 
    corporation that solely provides or reinsures directors', trustees', 
    and officers' liability insurance coverage or bankers' blanket bond 
    group insurance coverage for insured depository institutions.
        (B) Stock of savings bank life insurance company. An insured state 
    bank located in Massachusetts, New York, or Connecticut may own stock 
    in a savings bank life insurance company, provided that the savings 
    bank life insurance company provides written disclosures to purchasers 
    or potential purchasers of life insurance policies, other insurance 
    products, and annuities that are consistent with the disclosures 
    described in the Interagency Statement on the Retail Sale of Nondeposit 
    Investment Products (FIL-9-94,1 February 17, 1994) or any 
    successor requirement which indicates that the policies, products, and 
    annuities are not FDIC insured deposits, are not guaranteed by the bank 
    and are subject to investment risks, including possible loss of the 
    principal amount invested.
    ---------------------------------------------------------------------------
    
        \ 1\ Financial institution letters (FILs) are available in the 
    FDIC Public Information Center, room 100, 801 17th Street, N.W., 
    Washington, D.C. 20429.
    ---------------------------------------------------------------------------
    
        (b) Activities other than equity investments--(1) Prohibited 
    activities. An insured state bank may not directly or indirectly engage 
    as principal in any activity, that is not an equity investment, and is 
    of a type not permissible for a national bank unless one of the 
    exceptions in paragraph (b)(2) of this section applies.
        (2) Exceptions--(i) Consent obtained through application. An 
    insured state bank that meets and continues to meet the applicable 
    capital standards set by the appropriate federal banking agency may 
    conduct activities prohibited by paragraph (b)(1) of this section if 
    the bank obtains the FDIC's prior written consent. Consent will be 
    given only if the FDIC determines that the activity poses no 
    significant risk to the affected deposit insurance fund. Applications 
    for consent should be filed in accordance with Sec. 303.121 of this 
    chapter and will be processed under Sec. 303.122(b) of this chapter. 
    Approvals granted under Sec. 303.122(b) of this chapter may be made 
    subject to any conditions or restrictions found by the FDIC to be 
    necessary to protect the deposit insurance funds from risk, to prevent 
    unsafe or unsound banking practices, and/or to ensure that the activity 
    is consistent with the purposes of federal deposit insurance and other 
    applicable law.
        (ii) Insurance underwriting--(A) Savings bank life insurance. An 
    insured state bank that is located in Massachusetts, New York or 
    Connecticut may provide as principal savings bank life insurance 
    through a department of the bank, provided that the department meets 
    the core standards of paragraph (c) of this section or submits an 
    application in compliance with Sec. 303.121 of this chapter and the 
    FDIC grants its consent under the procedures in Sec. 303.122(b) of this 
    chapter, and the department provides purchasers or potential purchasers 
    of life insurance policies, other insurance products and annuities 
    written disclosures that are consistent with the disclosures described 
    in the Interagency Statement on the Retail Sale of Nondeposit 
    Investment Products (FIL-9-94, February 17, 1994) and any successor 
    requirement which indicates that the policies, products and annuities 
    are not FDIC insured deposits, are not guaranteed by the bank, and are 
    subject to investment risks, including the possible loss of the 
    principal amount invested.
        (B) Federal crop insurance. Any insured state bank that was 
    providing insurance as principal on or before September 30, 1991, which 
    was reinsured in whole or in part by the Federal Crop Insurance 
    Corporation, may continue to do so.
        (C) Grandfathered insurance underwriting. A well-capitalized 
    insured state bank that on November 21, 1991, was lawfully providing 
    insurance as principal through a department of the bank may continue to 
    provide the same types of insurance as principal to the residents of 
    the state or states in which the bank did so on such date provided that 
    the bank's department meets the core standards of paragraph (c) of this 
    section, or submits an application in compliance with Sec. 303.121 of 
    this chapter and the FDIC grants its consent under the procedures in 
    Sec. 303.122(b) of this chapter.
        (iii) Acquiring and retaining adjustable rate and money market 
    preferred stock. (A) An insured state bank's investment of up to 15 
    percent of the bank's tier one capital in adjustable rate preferred 
    stock or money market (auction rate) preferred stock does not represent 
    a significant risk to the deposit insurance funds. An insured state 
    bank may conduct this activity without first obtaining the FDIC's 
    consent, provided that the bank meets and continues to meet the 
    applicable capital standards as prescribed by the appropriate federal 
    banking agency. The fact that prior consent is not required by this 
    subpart does not preclude the FDIC from taking any appropriate action 
    with respect to the activities if the facts and circumstances warrant 
    such action.
        (B) An insured state bank may acquire or retain other instruments 
    of a type determined by the FDIC to have the character of debt 
    securities and not to represent a significant risk to the deposit 
    insurance funds. Such instruments shall be included in the 15 percent 
    of tier one capital limit imposed in paragraph (b)(2)(iii)(A) of this 
    section. An insured state bank may conduct this activity without first 
    obtaining the FDIC's consent, provided that the bank meets and 
    continues to meet the applicable capital standards as prescribed by the 
    appropriate federal banking agency. The fact that prior consent is not 
    required by this subpart does not preclude the FDIC from taking any 
    appropriate action with respect to
    
    [[Page 66330]]
    
    the activities if the facts and circumstances warrant such action.
        (c) Core standards. For any insured state bank to be eligible to 
    conduct insurance activities listed in paragraph (b)(2)(ii)(A) or (C) 
    of this section, the bank must conduct the activities in a department 
    that meets the following core separation and operating standards:
        (1) The department is physically distinct from the remainder of the 
    bank;
        (2) The department maintains separate accounting and other records;
        (3) The department has assets, liabilities, obligations and 
    expenses that are separate and distinct from those of the remainder of 
    the bank;
        (4) The department is subject to state statute that requires its 
    obligations, liabilities and expenses be satisfied only with the assets 
    of the department; and
        (5) The department informs its customers that only the assets of 
    the department may be used to satisfy the obligations of the 
    department.
    
    
    Sec. 362.4  Subsidiaries of insured state banks.
    
        (a) Prohibition. A subsidiary of an insured state bank may not 
    engage as principal in any activity that is not of a type permissible 
    for a subsidiary of a national bank, unless it meets one of the 
    exceptions in paragraph (b) of this section.
        (b) Exceptions--(1) Consent obtained through application. A 
    subsidiary of an insured state bank may conduct otherwise prohibited 
    activities if the bank obtains the FDIC's prior written consent and the 
    insured state bank meets and continues to meet the applicable capital 
    standards set by the appropriate federal banking agency. Consent will 
    be given only if the FDIC determines that the activity poses no 
    significant risk to the affected deposit insurance fund. Applications 
    for consent should be filed in accordance with Sec. 303.121 of this 
    chapter and will be processed under Sec. 303.122(b) of this chapter. 
    Approvals granted under Sec. 303.122(b) of this chapter may be made 
    subject to any conditions or restrictions found by the FDIC to be 
    necessary to protect the deposit insurance funds from risk, to prevent 
    unsafe or unsound banking practices, and/or to ensure that the activity 
    is consistent with the purposes of federal deposit insurance and other 
    applicable law.
        (2) Grandfathered insurance underwriting subsidiaries. A subsidiary 
    of an insured state bank may:
        (i) Engage in grandfathered insurance underwriting if the insured 
    state bank or its subsidiary on November 21, 1991, was lawfully 
    providing insurance as principal. The subsidiary may continue to 
    provide the same types of insurance as principal to the residents of 
    the state or states in which the bank or subsidiary did so on such date 
    provided that:
        (A)(1) The bank meets the capital requirements of paragraph (e) of 
    this section; and
        (2) The subsidiary is an ``eligible subsidiary'' as described in 
    paragraph (c)(2) of this section; or
        (B) The bank submits an application in compliance with Sec. 303.121 
    of this chapter and the FDIC grants its consent under the procedures in 
    Sec. 303.122(b) of this chapter.
        (ii) Continue to provide as principal title insurance, provided the 
    bank was required before June 1, 1991, to provide title insurance as a 
    condition of the bank's initial chartering under state law and neither 
    the bank nor its parent holding company undergoes a change in control.
        (iii) May continue to provide as principal insurance which is 
    reinsured in whole or in part by the Federal Crop Insurance Corporation 
    if the subsidiary was engaged in the activity on or before September 
    30, 1991.
        (3) Majority-owned subsidiaries' ownership of equity investments 
    that represent a control interest in a company. The FDIC has determined 
    that investment in the following by a majority-owned subsidiary of an 
    insured state bank does not represent a significant risk to the deposit 
    insurance funds:
        (i) Equity investment in a company engaged in real estate or 
    securities activities authorized in paragraph (b)(5) of this section if 
    the bank complies with the following restrictions and files a notice in 
    compliance with Sec. 303.121 of this chapter and the FDIC processes the 
    notice without objection under Sec. 303.122(a) of this chapter. The 
    FDIC is not precluded from taking any appropriate action or imposing 
    additional requirements with respect to the activity if the facts and 
    circumstances warrant such action. If changes to the management or 
    business plan of the company at any time result in material changes to 
    the nature of the company's business or the manner in which its 
    business is conducted, the insured state bank shall advise the 
    appropriate regional director (DOS) in writing within 10 business days 
    after such change. Investment under this paragraph is authorized if:
        (A) The majority-owned subsidiary controls the company;
        (B) The bank meets the core eligibility criteria of paragraph 
    (c)(1) of this section;
        (C) The majority-owned subsidiary meets the core eligibility 
    criteria of paragraph (c)(2) of this section (including any 
    modifications thereof applicable under paragraph (b)(5)(i) of this 
    section), or the company is a corporation meeting such criteria;
        (D) The bank's transactions with the majority-owned subsidiary, and 
    the bank's transactions with the company, comply with the investment 
    and transaction limits of paragraph (d) of this section;
        (E) The bank complies with the capital requirements of paragraph 
    (e) of this section with respect to the majority-owned subsidiary and 
    the company; and
        (F) To the extent the company is engaged in securities activities 
    authorized by paragraph (b)(5)(ii) of this section, the bank and the 
    company comply with the additional requirements therein as if the 
    company were a majority-owned subsidiary.
        (ii) Equity securities of a company engaged in the following 
    activities, if the majority-owned subsidiary controls the company or 
    the company is controlled by insured depository institutions, and the 
    bank meets and continues to meet the applicable capital standards as 
    prescribed by the appropriate federal banking agency. The FDIC consents 
    that a majority-owned subsidiary may conduct such activity without 
    first obtaining the FDIC's consent. The fact that prior consent is not 
    required by this subpart does not preclude the FDIC from taking any 
    appropriate action with respect to the activity if the facts and 
    circumstances warrant such action:
        (A) Any activity that is permissible for a national bank, including 
    such permissible activities that may require the company to register as 
    a securities broker;
        (B) Acting as an insurance agency;
        (C) Engaging in any activity permissible for an insured state bank 
    under Sec. 362.3(b)(2)(iii) to the same extent permissible for the 
    insured bank thereunder, so long as instruments held under this 
    paragraph (b)(3)(ii)(C), paragraph (b)(7) of this section, and 
    Sec. 362.3(b)(2)(iii) in the aggregate do not exceed the limit set by 
    Sec. 362.3(b)(2)(iii);
        (D) Engaging in any activity permissible for a majority-owned 
    subsidiary of an insured state bank under paragraph (b)(6) of this 
    section to the same extent and manner permissible for the majority-
    owned subsidiary thereunder; and
        (4) Majority-owned subsidiary's ownership of certain securities 
    that do not represent a control interest. (i) Grandfathered investments 
    in common or preferred stock and shares of
    
    [[Page 66331]]
    
    investment companies. Any insured state bank that has received approval 
    to invest in common or preferred stock or shares of an investment 
    company pursuant to Sec. 362.3(a)(2)(iii) may conduct the approved 
    investment activities through a majority-owned subsidiary of the bank 
    without any additional approval from the FDIC provided that any 
    conditions or restrictions imposed with regard to the approval granted 
    under Sec. 362.3(a)(2)(iii) are met.
        (ii) Bank stock. An insured state bank may indirectly through a 
    majority-owned subsidiary organized for such purpose invest in up to 
    ten percent of the outstanding stock of another insured bank.
        (5) Majority-owned subsidiaries conducting real estate investment 
    activities and securities underwriting. The FDIC has determined that 
    the following activities do not represent a significant risk to the 
    deposit insurance funds, provided that the activities are conducted by 
    a majority-owned subsidiary of an insured state bank in compliance with 
    the core eligibility requirements listed in paragraph (c) of this 
    section; any additional requirements listed in paragraph (b)(5) (i) or 
    (ii) of this section; the bank complies with the investment and 
    transaction limitations of paragraph (d) of this section; and the bank 
    meets the capital requirements of paragraph (e) of this section. The 
    FDIC consents that these listed activities may be conducted by a 
    majority-owned subsidiary of an insured state bank if the bank files a 
    notice in compliance with Sec. 303.121 of this chapter and the FDIC 
    processes the notice without objection under Sec. 303.122(a) of this 
    chapter. The FDIC is not precluded from taking any appropriate action 
    or imposing additional requirements with respect to the activities if 
    the facts and circumstances warrant such action. If changes to the 
    management or business plan of the majority-owned subsidiary at any 
    time result in material changes to the nature of the majority-owned 
    subsidiary's business or the manner in which its business is conducted, 
    the insured state bank shall advise the appropriate regional director 
    (DOS) in writing within 10 business days after such change. Such a 
    majority-owned subsidiary may:
        (i) Real estate investment activities. Engage in real estate 
    investment activities. However, the requirements of paragraph (c)(2) 
    (ii), (v), (vi), and (xi) of this section need not be met if the bank's 
    investment in the equity securities of the subsidiary does not exceed 2 
    percent of the bank's tier one capital; the bank has only one 
    subsidiary engaging in real estate investment activities; and the 
    bank's total investment in the subsidiary does not include any 
    extensions of credit from the bank to the subsidiary, any debt 
    instruments issued by the subsidiary, or any other transaction 
    originated by the bank that is used to benefit the subsidiary.
        (ii) Securities activities. Engage in the public sale, distribution 
    or underwriting of securities that are not permissible for a national 
    bank under section 16 of the Banking Act of 1933 (12 U.S.C. 24 
    Seventh), provided that the following additional conditions are, and 
    continue to be, met:
        (A) The state-chartered depository institution adopts policies and 
    procedures, including appropriate limits on exposure, to govern the 
    institution's participation in financing transactions underwritten or 
    arranged by an underwriting majority-owned subsidiary;
        (B) The state-chartered depository institution may not express an 
    opinion on the value or the advisability of the purchase or sale of 
    securities underwritten or dealt in by a majority-owned subsidiary 
    unless the state-chartered depository institution notifies the customer 
    that the majority-owned subsidiary is underwriting or distributing the 
    security;
        (C) The majority-owned subsidiary is registered with the Securities 
    and Exchange Commission, is a member in good standing with the 
    appropriate self-regulatory organization, and promptly informs the 
    appropriate regional director (DOS) in writing of any material actions 
    taken against the majority-owned subsidiary or any of its employees by 
    the state, the appropriate self-regulatory organizations or the 
    Securities and Exchange Commission; and
        (D) The state-chartered depository institution does not knowingly 
    purchase as principal or fiduciary during the existence of any 
    underwriting or selling syndicate any securities underwritten by the 
    majority-owned subsidiary unless the purchase is approved by the state-
    chartered depository institution's board of directors before the 
    securities are initially offered for sale to the public.
        (6) Real estate leasing. A majority-owned subsidiary of an insured 
    state bank acting as lessor under a real property lease which is the 
    equivalent of a financing transaction, meeting the lease criteria of 
    paragraph (b)(6)(i) of this section and the underlying real estate 
    requirements of paragraph (b)(6)(ii) of this section, does not 
    represent a significant risk to the deposit insurance funds. A 
    majority-owned subsidiary may conduct this activity without first 
    obtaining the FDIC's consent, provided that the bank meets and 
    continues to meet the applicable capital standards as prescribed by the 
    appropriate federal banking agency. The fact that prior consent is not 
    required by this subpart does not preclude the FDIC from taking any 
    appropriate action with respect to the activity if the facts and 
    circumstances warrant such action.
        (i) Lease criteria--(A) Capital lease. The lease must qualify as a 
    capital lease as to the lessor under generally accepted accounting 
    principles.
        (B) Nonoperating basis. The bank and the majority-owned subsidiary 
    shall not, directly or indirectly, provide or be obligated to provide 
    servicing, repair, or maintenance to the property, except that the 
    lease may include provisions permitting the subsidiary to protect the 
    value of the leased property in the event of a change in circumstances 
    that increases the subsidiary's exposure to loss, or the subsidiary may 
    take reasonable and appropriate action to salvage or protect the value 
    of the leased property in such circumstances.
        (ii) Underlying real property requirements--(A) Acquisition. The 
    majority-owned subsidiary may acquire specific real estate to be leased 
    only after the subsidiary has entered into:
        (1) A lease meeting the requirements of paragraph (b)(6)(i) of this 
    section;
        (2) A legally binding written commitment to enter into such a 
    lease; or
        (3) A legally binding written agreement that indemnifies the 
    subsidiary against loss in connection with its acquisition of the 
    property.
        (B) Improvements. Any expenditures by the majority-owned subsidiary 
    to make reasonable repairs, renovations, and improvements necessary to 
    render the property suitable to the lessee shall not exceed 25 percent 
    of the majority-owned subsidiary's full investment in the real estate.
        (C) Divestiture. At the expiration of the initial lease (including 
    any renewals or extensions thereof), the majority-owned subsidiary 
    shall, as soon as practicable but in any event no less than two years, 
    either:
        (1) Re-lease the property under a lease meeting the requirement of 
    paragraph (b)(6)(i)(B) of this section; or
        (2) Divest itself of all interest in the property.
        (7) Acquiring and retaining adjustable rate and money market 
    preferred stock and similar instruments. The FDIC has determined it 
    does not present a significant risk to the deposit insurance
    
    [[Page 66332]]
    
    funds for a majority-owned subsidiary of an insured state bank to 
    engage in any activity permissible for an insured state bank under 
    Sec. 362.3(b)(2)(iii), so long as instruments held under this 
    paragraph, paragraph (b)(3)(ii)(C) of this section, and 
    Sec. 362.3(b)(2)(iii) in the aggregate do not exceed the limit set by 
    Sec. 362.3(b)(2)(iii). A majority-owned subsidiary may conduct this 
    activity without first obtaining the FDIC's consent, provided that the 
    bank meets and continues to meet the applicable capital standards as 
    prescribed by the appropriate federal banking agency. The fact that 
    prior consent is not required by this subpart does not preclude the 
    FDIC from taking any appropriate action with respect to the activity if 
    the facts and circumstances warrant such action.
        (c) Core eligibility requirements. If specifically required by this 
    part or by FDIC order, any state-chartered depository institution that 
    wishes to be eligible and continue to be eligible to conduct as 
    principal activities through a subsidiary that are not permissible for 
    a subsidiary of a national bank must be an ``eligible depository 
    institution'' and the subsidiary must be an ``eligible subsidiary''.
        (1) A state-chartered depository institution is an ``eligible 
    depository institution'' if it:
        (i) Has been chartered and operating for three or more years, 
    unless the appropriate regional director (DOS) finds that the state-
    chartered depository institution is owned by an established, well-
    capitalized, well-managed holding company or is managed by seasoned 
    management;
        (ii) Has an FDIC-assigned composite rating of 1 or 2 assigned under 
    the Uniform Financial Institutions Rating System (UFIRS) (or such other 
    comparable rating system as may be adopted in the future) as a result 
    of its most recent federal or state examination for which the FDIC 
    assigned a rating;
        (iii) Received a rating of 1 or 2 under the ``management'' 
    component of the UFIRS as assigned by the institution's appropriate 
    federal banking agency;
        (iv) Has a satisfactory or better Community Reinvestment Act rating 
    at its most recent examination conducted by the institution's 
    appropriate federal banking agency;
        (v) Has a compliance rating of 1 or 2 at its most recent 
    examination conducted by the institution's appropriate federal banking 
    agency; and
        (vi) Is not subject to a cease and desist order, consent order, 
    prompt corrective action directive, formal or informal written 
    agreement, or other administrative agreement with its appropriate 
    federal banking agency or chartering authority.
        (2) A subsidiary of a state-chartered depository institution is an 
    ``eligible subsidiary'' if it:
        (i) Meets applicable statutory or regulatory capital requirements 
    and has sufficient operating capital in light of the normal obligations 
    that are reasonably foreseeable for a business of its size and 
    character within the industry;
        (ii) Is physically separate and distinct in its operations from the 
    operations of the state-chartered depository institution, provided that 
    this requirement shall not be construed to prohibit the state-chartered 
    depository institution and its subsidiary from sharing the same 
    facility if the area where the subsidiary conducts business with the 
    public is clearly distinct from the area where customers of the state-
    chartered depository institution conduct business with the institution. 
    The extent of the separation will vary according to the type and 
    frequency of customer contact;
        (iii) Maintains separate accounting and other business records;
        (iv) Observes separate business entity formalities such as separate 
    board of directors' meetings;
        (v) Has a chief executive officer of the subsidiary who is not an 
    employee of the institution;
        (vi) Has a majority of its board of directors who are neither 
    directors nor officers of the state-chartered depository institution;
        (vii) Conducts business pursuant to independent policies and 
    procedures designed to inform customers and prospective customers of 
    the subsidiary that the subsidiary is a separate organization from the 
    state-chartered depository institution and that the state-chartered 
    depository institution is not responsible for and does not guarantee 
    the obligations of the subsidiary;
        (viii) Has only one business purpose within the types described in 
    paragraphs (b)(2) and (b)(5) of this section;
        (ix) Has a current written business plan that is appropriate to the 
    type and scope of business conducted by the subsidiary;
        (x) Has qualified management and employees for the type of activity 
    contemplated, including all required licenses and memberships, and 
    complies with industry standards; and
        (xi) Establishes policies and procedures to ensure adequate 
    computer, audit and accounting systems, internal risk management 
    controls, and has necessary operational and managerial infrastructure 
    to implement the business plan.
        (d) Investment and transaction limits--(1) General. If specifically 
    required by this part or FDIC order, the following conditions and 
    restrictions apply to an insured state bank and its subsidiaries that 
    engage in and wish to continue to engage in activities which are not 
    permissible for a national bank subsidiary.
        (2) Investment limits--(i) Aggregate investment in subsidiaries. An 
    insured state bank's aggregate investment in all subsidiaries 
    conducting activities subject to this paragraph (d) shall not exceed 20 
    percent of the insured state bank's tier one capital.
        (ii) Definition of investment. (A) For purposes of this paragraph 
    (d), the term ``investment'' means:
        (1) Any extension of credit to the subsidiary by the insured state 
    bank;
        (2) Any debt securities, as such term is defined in part 344 of 
    this chapter, issued by the subsidiary held by the insured state bank;
        (3) The acceptance by the insured state bank of securities issued 
    by the subsidiary as collateral for an extension of credit to any 
    person or company; and
        (4) Any extensions of credit by the insured state bank to any third 
    party for the purpose of making a direct investment in the subsidiary, 
    making any investment in which the subsidiary has an interest, or which 
    is used for the benefit of, or transferred to, the subsidiary.
        (B) For the purposes of this paragraph (d), the term ``investment'' 
    does not include:
        (1) Extensions of credit by the insured state bank to finance sales 
    of assets by the subsidiary which do not involve more than the normal 
    degree of risk of repayment and are extended on terms that are 
    substantially similar to those prevailing at the time for comparable 
    transactions with or involving unaffiliated persons or companies;
        (2) An extension of credit by the insured state bank to the 
    subsidiary that is fully collateralized by government securities, as 
    such term is defined in Sec. 344.3 of this chapter; or
        (3) An extension of credit by the insured state bank to the 
    subsidiary that is fully collateralized by a segregated deposit in the 
    insured state bank.
        (3) Transaction requirements--(i) Arm's length transaction 
    requirement. With the exception of giving the subsidiary immediate 
    credit for uncollected items received in the ordinary course of 
    business, an insured state bank may not carry out any of the following 
    transactions with a subsidiary subject to this paragraph (d) unless the
    
    [[Page 66333]]
    
    transaction is on terms and conditions that are substantially the same 
    as those prevailing at the time for comparable transactions with 
    unaffiliated parties:
        (A) Make an investment in the subsidiary;
        (B) Purchase from or sell to the subsidiary any assets (including 
    securities);
        (C) Enter into a contract, lease, or other type of agreement with 
    the subsidiary;
        (D) Pay compensation to a majority-owned subsidiary or any person 
    or company who has an interest in the subsidiary; or
        (E) Engage in any such transaction in which the proceeds thereof 
    are used for the benefit of, or are transferred to, the subsidiary.
        (ii) Prohibition on purchase of low quality assets. An insured 
    state bank is prohibited from purchasing a low quality asset from a 
    subsidiary subject to this paragraph (d). For purposes of this 
    subsection, ``low quality asset'' means:
        (A) An asset classified as ``substandard'', ``doubtful'', or 
    ``loss'' or treated as ``other assets especially mentioned'' in the 
    most recent report of examination of the bank;
        (B) An asset in a nonaccrual status;
        (C) An asset on which principal or interest payments are more than 
    30 days past due; or
        (D) An asset whose terms have been renegotiated or compromised due 
    to the deteriorating financial condition of the obligor.
        (iii) Insider transaction restriction. Neither the insured state 
    bank nor the subsidiary subject to this paragraph (d) may enter into 
    any transaction (exclusive of those covered by Sec. 337.3 of this 
    chapter) with the bank's executive officers, directors, principal 
    shareholders or related interests of such persons which relate to the 
    subsidiary's activities unless:
        (A) The transactions are on terms and conditions that are 
    substantially the same as those prevailing at the time for comparable 
    transactions with persons not affiliated with the insured state bank; 
    or
        (B) The transactions are pursuant to a benefit or compensation 
    program that is widely available to employees of the bank, and that 
    does not give preference to the bank's executive officers, directors, 
    principal shareholders or related interests of such persons over other 
    bank employees.
        (iv) Anti-tying restriction. Neither the insured state bank nor the 
    majority-owned subsidiary may require a customer to either buy any 
    product or use any service from the other as a condition of entering 
    into a transaction.
        (4) Collateralization requirements. (i) An insured state bank is 
    prohibited from making an investment in a subsidiary subject to this 
    paragraph (d) unless such transaction is fully-collateralized at the 
    time the transaction is entered into. No insured state bank may accept 
    a low quality asset as collateral. An extension of credit is fully 
    collateralized if it is secured at the time of the transaction by 
    collateral having a market value equal to at least:
        (A) 100 percent of the amount of the transaction if the collateral 
    is composed of:
        (1) Obligations of the United States or its agencies;
        (2) Obligations fully guaranteed by the United States or its 
    agencies as to principal and interest;
        (3) Notes, drafts, bills of exchange or bankers acceptances that 
    are eligible for rediscount or purchase by the Federal Reserve Bank; or
        (4) A segregated, earmarked deposit account with the insured state 
    bank;
        (B) 110 percent of the amount of the transaction if the collateral 
    is composed of obligations of any state or political subdivision of any 
    state;
        (C) 120 percent of the amount of the transaction if the collateral 
    is composed of other debt instruments, including receivables; or
        (D) 130 percent of the amount of the transaction if the collateral 
    is composed of stock, leases, or other real or personal property.
        (ii) An insured state bank may not release collateral prior to 
    proportional payment of the extension of credit; however, collateral 
    may be substituted if there is no diminution of collateral coverage.
        (5) Investment and transaction limits extended to insured state 
    bank subsidiaries. For purposes of applying paragraphs (d)(2) through 
    (d)(4) of this section, any reference to ``insured state bank'' means 
    the insured state bank and any subsidiaries of the insured state bank 
    which are not themselves subject under this part or FDIC order to the 
    restrictions of this paragraph (d).
        (e) Capital requirements. If specifically required by this part or 
    by FDIC order, any insured state bank that wishes to conduct or 
    continue to conduct as principal activities through a subsidiary that 
    are not permissible for a subsidiary of a national bank must:
        (1) Be well-capitalized after deducting from its tier one capital 
    the investment in equity securities of the subsidiary as well as the 
    bank's pro rata share of any retained earnings of the subsidiary;
        (2) Reflect this deduction on the appropriate schedule of the 
    bank's consolidated report of income and condition; and
        (3) Use such regulatory capital amount for the purposes of the 
    bank's assessment risk classification under part 327 of this chapter 
    and its categorization as a ``well-capitalized'', an ``adequately 
    capitalized'', an ``undercapitalized'', or a ``significantly 
    undercapitalized'' institution as defined in Sec. 325.103(b) of this 
    chapter, provided that the capital deduction shall not be used for 
    purposes of determining whether the bank is ``critically 
    undercapitalized'' under part 325 of this chapter.
    
    
    Sec. 362.5  Approvals previously granted.
    
        (a) FDIC consent by order or notice. An insured state bank that 
    previously filed an application or notice under part 362 in effect 
    prior to January 1, 1999 (see 12 CFR part 362 revised as of January 1, 
    1998), and obtained the FDIC's consent to engage in an activity or to 
    acquire or retain a majority-owned subsidiary engaging as principal in 
    an activity or acquiring and retaining any investment that is 
    prohibited under this subpart may continue that activity or retain that 
    investment without seeking the FDIC's consent, provided that the 
    insured state bank and its subsidiary, if applicable, continue to meet 
    the conditions and restrictions of the approval. An insured state bank 
    which was granted approval based on conditions which differ from the 
    requirements of Sec. 362.4(c)(2), (d) and (e) will be considered to 
    meet the conditions and restrictions of the approval relating to being 
    an eligible subsidiary, meeting investment and transactions limits, and 
    meeting capital requirements if the insured state bank and subsidiary 
    meet the requirements of Sec. 362.4(c)(2), (d) and (e). If the 
    majority-owned subsidiary is engaged in real estate investment 
    activities not exceeding 2 percent of the tier one capital of a bank 
    and meeting the other conditions of Sec. 362.4(b)(5)(i), the majority-
    owned subsidiary's compliance with Sec. 362.4(c)(2) under the preceding 
    sentence may be pursuant to the modifications authorized by 
    Sec. 362.4(b)(5)(i). Once an insured state bank elects to comply with 
    Sec. 362.4 (c)(2), (d), and (e), it may not revert to the corresponding 
    provisions of the approval order.
        (b) Approvals by regulation--(1) Securities underwriting. If an 
    insured state nonmember bank engages in securities activities covered 
    by Sec. 362.4(b)(5)(ii), and prior to January 1, 1999, engaged in 
    securities activities under and in compliance with the restrictions of 
    Sec. 337.4 (b) through (c), Sec. 337.4(e), or Sec. 337.4(h) of this 
    chapter,
    
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    having filed the required notice under Sec. 337.4(d) of this chapter, 
    the insured state bank may continue those activities if the bank and 
    its majority-owned subsidiaries comply with the restrictions set forth 
    in Secs. 362.4(b)(5)(ii) and 362.4 (c), (d), and (e) by January 1, 
    2000. During the one-year period of transition between January 1, 1999, 
    and January 1, 2000, the bank and its majority-owned subsidiary must 
    meet the restrictions set forth in Sec. 337.4 of this chapter until the 
    requirements of Secs. 362.4(b)(5)(ii) and 362.4 (c), (d) and (e) are 
    met. If the bank will not meet these requirements, the bank must obtain 
    the FDIC's consent to continue those activities under Sec. 362.4(b)(1).
        (2) Grandfathered insurance underwriting. An insured state bank 
    which is directly providing insurance as principal pursuant to 
    Sec. 362.4(c)(2)(i) in effect prior to January 1, 1999 (see 12 CFR part 
    362 revised as of January 1, 1998), may continue that activity if it 
    complies with the provisions of Sec. 362.3(b)(2)(ii)(C) by April 1, 
    1999. An insured state bank indirectly providing insurance as principal 
    through a subsidiary pursuant to Sec. 362.3(b)(7) in effect prior to 
    January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998), 
    may continue that activity if it complies with the provisions of 
    Sec. 362.4(b)(2)(i) by April 1, 1999. During the ninety-day period of 
    transition between January 1, 1999 and April 1, 1999, the bank and its 
    majority-owned subsidiary must meet the restrictions set forth in 
    Sec. 362.4(c)(2)(i) or Sec. 362.3(b)(7) in effect prior to January 1, 
    1999 (see 12 CFR part 362 revised as of January 1, 1998), as 
    applicable, until the requirements of Sec. 362.3(b)(2)(ii)(C) or 
    Sec. 362.4(b)(2)(i) are met. If the insured state bank or its 
    subsidiary will not meet these requirements, as applicable, the insured 
    state bank must submit an application in compliance with Sec. 303.121 
    of this chapter and obtain the FDIC's consent in accordance with 
    Sec. 303.122(b) of this chapter.
        (3) Stock of certain corporations. An insured state bank owning 
    indirectly through a majority-owned subsidiary stock of a corporation 
    that engages solely in activities permissible for a bank service 
    corporation pursuant to Sec. 362.4(c)(3)(iv)(C) in effect prior to 
    January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998), or 
    stock of a corporation which engages solely in activities which are not 
    ``as principal'' pursuant to Sec. 362.4(c)(3)(iv)(D) in effect prior to 
    January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998), 
    may continue that activity if it complies with the provisions of 
    Sec. 362.4(b)(3) by April 1, 1999. During the ninety-day period of 
    transition between January 1, 1999 and April 1, 1999, the bank and its 
    majority-owned subsidiary must meet the restrictions set forth in 
    Sec. 362.4(c)(3)(iv)(C) or Sec. 362.4(c)(3)(iv)(D) in effect prior to 
    January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998), as 
    applicable, until the requirements of Sec. 362.4(b)(3) are met. If the 
    insured state bank or its subsidiary will not meet these requirements, 
    as applicable, the insured state bank must apply for the FDIC's consent 
    under Sec. 362.4(b)(1).
        (4) [Reserved]
        (5) [Reserved]
        (6) Adjustable rate or money market preferred stock. An insured 
    state bank owning adjustable rate or money market (auction rate) 
    preferred stock pursuant to Sec. 362.4(c)(3)(v) in effect prior to 
    January 1, 1999 (see 12 CFR part 362 revised as of January 1, 1998), in 
    excess of the amount limit in Sec. 362.3(b)(2)(iii) may continue to 
    hold any overlimit shares of such stock acquired before January 1, 
    1999, until redeemed or repurchased by the issuer, but such stock shall 
    be included as part of the amount limit in Sec. 362.3(b)(2)(iii) when 
    determining whether the bank may acquire new stock thereunder.
        (c) Charter conversions. (1) An insured state bank that has 
    converted its charter from an insured state savings association may 
    continue activities through a majority-owned subsidiary that were 
    permissible prior to the time it converted its charter only if the 
    insured state bank receives the FDIC's consent. Except as provided in 
    paragraph (c)(2) of this section, the insured state bank should apply 
    under Sec. 362.4(b)(1), submit any notice required under Sec. 362.4(b) 
    (4) or (5), or comply with the provisions of Sec. 362.4(b) (3), (6), or 
    (7) if applicable, to continue the activity.
        (2) Exception for prior consent. If the FDIC had granted consent to 
    the savings association under section 28 of the Federal Deposit 
    Insurance Act (12 U.S.C. 1831(e)) prior to the time the savings 
    association converted its charter, the insured state bank may continue 
    the activities without providing notice or making application to the 
    FDIC, provided that the bank and its subsidiary as applicable are in 
    compliance with:
        (i) The terms of the FDIC approval order; and
        (ii) The provisions of Sec. 362.4(c)(2), (d), and (e) regarding 
    operating as an ``eligible subsidiary'', ``investment and transaction 
    limits'', and ``capital requirements'.
        (3) Divestiture. An insured state bank that does not receive FDIC 
    consent shall divest of the nonconforming investment as soon as 
    practical but in no event later than two years from the date of charter 
    conversion.
    
    Subpart B--Safety and Soundness Rules Governing Insured State 
    Nonmember Banks
    
    
    Sec. 362.6  Purpose and scope.
    
        This subpart, along with the notice and application procedures in 
    subpart G of part 303 of this chapter apply to certain banking 
    practices that may have adverse effects on the safety and soundness of 
    insured state nonmember banks. The FDIC intends to allow insured state 
    nonmember banks and their subsidiaries to undertake only safe and sound 
    activities and investments that would not present a significant risk to 
    the deposit insurance fund and that are consistent with the purposes of 
    federal deposit insurance and other law. The following standards shall 
    apply for insured state nonmember banks to conduct real estate 
    investment activities through a subsidiary if those activities are 
    permissible for a national bank subsidiary but are not permissible for 
    the national bank parent itself. Additionally, the following standards 
    shall apply to affiliates of insured state nonmember banks that are not 
    affiliated with a bank holding company if those affiliates engage in 
    the public sale, distribution or underwriting of stocks, bonds, 
    debentures, notes or other securities.
    
    
    Sec. 362.7  Definitions.
    
        For the purposes of this subpart, the following definitions apply:
        (a) Affiliate shall mean any company that directly or indirectly, 
    through one or more intermediaries, controls or is under common control 
    with an insured state nonmember bank, but does not include a subsidiary 
    of an insured state nonmember bank.
        (b) Activity, company, control, equity security, insured state 
    nonmember bank, real estate investment activity, security, and 
    subsidiary have the same meaning as provided in subpart A of this part.
    
    
    Sec. 362.8  Restrictions on activities of insured state nonmember 
    banks.
    
        (a) Real estate investment activities by subsidiaries of insured 
    state nonmember banks. The FDIC has found that real estate investment 
    activities may have adverse effects on the safety and soundness of 
    insured state nonmember banks. Notwithstanding any interpretations, 
    orders, circulars or official bulletins issued by the Office of the 
    Comptroller of the Currency regarding activities permissible for
    
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    subsidiaries of a national bank that are not permissible for the parent 
    national bank itself under 12 CFR 5.34(f), insured state nonmember 
    banks may not establish or acquire a subsidiary that engages in such 
    real estate investment activities unless the insured state nonmember 
    bank:
        (1) Has an approval previously granted by the FDIC and continues to 
    meet the conditions and restrictions of the approval; or
        (2) Meets the requirements for engaging in real estate investment 
    activities as set forth in Sec. 362.4(b)(5), and submits a 
    corresponding notice in compliance with Sec. 303.121 of this chapter 
    and the FDIC processes the notice without objection under 
    Sec. 303.122(a) of this chapter; or submits an application in 
    compliance with Sec. 303.121 of this chapter and the FDIC grants its 
    consent under the procedure in Sec. 303.122(b) of this chapter.
        (b) Affiliation with securities companies. The FDIC has found that 
    an unrestricted affiliation between an insured state nonmember bank and 
    a securities company may have adverse effects on the safety and 
    soundness of insured state nonmember banks. An insured state nonmember 
    bank which is affiliated with a company that is not treated as a bank 
    holding company pursuant to section 4(f) of the Bank Holding Company 
    Act (12 U.S.C. 1843(f)) is prohibited from becoming or remaining 
    affiliated with any company that directly engages in the public sale, 
    distribution or underwriting of stocks, bonds, debentures, notes, or 
    other securities which is not permissible for a national bank unless it 
    submits an application in compliance with Sec. 303.121 of this chapter 
    and the FDIC grants its consent under the procedure in Sec. 303.122(b) 
    of this chapter, or:
        (1) The securities business of the affiliate is physically separate 
    and distinct in its operations from the operations of the bank, 
    provided that this requirement shall not be construed to prohibit the 
    bank and its affiliate from sharing the same facility if the area where 
    the affiliate conducts retail sales activity with the public is 
    physically distinct from the routine deposit taking area of the bank;
        (2) The affiliate has a chief executive officer who is not an 
    employee of the bank;
        (3) A majority of the affiliate's board of directors are not 
    directors, officers, or employees of the bank;
        (4) The affiliate conducts business pursuant to independent 
    policies and procedures designed to inform customers and prospective 
    customers of the affiliate that the affiliate is a separate 
    organization from the bank and the state-chartered depository 
    institution is not responsible for and does not guarantee the 
    obligations of the affiliate;
        (5) The bank adopts policies and procedures, including appropriate 
    limits on exposure, to govern its participation in financing 
    transactions underwritten by an underwriting affiliate;
        (6) The bank does not express an opinion on the value or the 
    advisability of the purchase or sale of securities underwritten or 
    dealt in by an affiliate unless it notifies the customer that the 
    entity underwriting, making a market, distributing or dealing in the 
    securities is an affiliate of the bank;
        (7) The bank does not purchase as principal or fiduciary during the 
    existence of any underwriting or selling syndicate any securities 
    underwritten by the affiliate unless the purchase is approved by the 
    bank's board of directors before the securities are initially offered 
    for sale to the public;
        (8) The bank does not condition any extension of credit to any 
    company on the requirement that the company contract with, or agree to 
    contract with, the bank's affiliate to underwrite or distribute the 
    company's securities;
        (9) The bank does not condition any extension of credit or the 
    offering of any service to any person or company on the requirement 
    that the person or company purchase any security underwritten or 
    distributed by the affiliate; and
        (10) The bank complies with the investment and transaction 
    limitations of Sec. 362.4(d). For the purposes of applying these 
    restrictions, references to the term ``subsidiary'' in 
    Sec. 362.4(d)(2), (3), and (4) shall be deemed to refer to the 
    affiliate. For the purposes of applying these limitations, the term 
    ``investment'' as defined in Sec. 362.4(d)(2)(ii) shall also include 
    any equity securities of the affiliate held by the insured state bank.
    
    Subpart C--Activities of Insured State Savings Associations
    
    
    Sec. 362.9  Purpose and scope.
    
        (a) This subpart, along with the notice and application procedures 
    in subpart H of part 303 of this chapter, implements the provisions of 
    section 28 of the Federal Deposit Insurance Act (12 U.S.C. 1831e) that 
    restrict and prohibit insured state savings associations and their 
    service corporations from engaging in activities and investments of a 
    type that are not permissible for federal savings associations and 
    their service corporations. The phrase ``activity permissible for a 
    federal savings association'' means any activity authorized for federal 
    savings associations under any statute including the Home Owners' Loan 
    Act (HOLA, 12 U.S.C. 1464 et seq.), as well as activities recognized as 
    permissible for a federal savings association in regulations, official 
    thrift bulletins, orders or written interpretations issued by the 
    Office of Thrift Supervision (OTS), or its predecessor, the Federal 
    Home Loan Bank Board.
        (b) This subpart does not cover the following activities:
        (1) Activities conducted by the insured state savings association 
    other than ``as principal'', defined for purposes of this subpart as 
    activities conducted as agent for a customer, conducted in a brokerage, 
    custodial, advisory, or administrative capacity, or conducted as 
    trustee, or in any substantially similar capacity. For example, this 
    subpart does not cover acting solely as agent for the sale of 
    insurance, securities, real estate, or travel services; nor does it 
    cover acting as trustee, providing personal financial planning advice, 
    or safekeeping services.
        (2) Interests in real estate in which the real property is used or 
    intended in good faith to be used within a reasonable time by an 
    insured savings association or its service corporations as offices or 
    related facilities for the conduct of its business or future expansion 
    of its business or used as public welfare investments of a type and in 
    an amount permissible for federal savings associations.
        (3) Equity investments acquired in connection with debts previously 
    contracted (DPC) if the insured savings association or its service 
    corporation takes only such actions as would be permissible for a 
    federal savings association's or its service corporation's DPC 
    holdings.
        (c) The FDIC intends to allow insured state savings associations 
    and their service corporations to undertake only safe and sound 
    activities and investments that do not present significant risks to the 
    deposit insurance funds and that are consistent with the purposes of 
    federal deposit insurance and other applicable law. This subpart does 
    not authorize any insured state savings association to make investments 
    or conduct activities that are not authorized or that are prohibited by 
    either federal or state law.
    
    
    Sec. 362.10  Definitions.
    
        For the purposes of this subpart, the definitions provided in 
    Sec. 362.2 apply. Additionally, the following definitions apply to this 
    subpart:
        (a) Affiliate shall mean any company that directly or indirectly, 
    through one
    
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    or more intermediaries, controls or is under common control with an 
    insured state savings association.
        (b) Corporate debt securities not of investment grade means any 
    corporate debt security that when acquired was not rated among the four 
    highest rating categories by at least one nationally recognized 
    statistical rating organization. The term shall not include any 
    obligation issued or guaranteed by a corporation that may be held by a 
    federal savings association without limitation as to percentage of 
    assets under subparagraphs (D), (E), or (F) of section 5(c)(1) of HOLA 
    (12 U.S.C. 1464(c)(1) (D), (E), (F)).
        (c) Insured state savings association means any state-chartered 
    savings association insured by the FDIC.
        (d) Qualified affiliate means, in the case of a stock insured state 
    savings association, an affiliate other than a subsidiary or an insured 
    depository institution. In the case of a mutual savings association, 
    ``qualified affiliate'' means a subsidiary other than an insured 
    depository institution provided that all of the savings association's 
    investments in, and extensions of credit to, the subsidiary are 
    deducted from the savings association's capital.
        (e) Service corporation means any corporation the capital stock of 
    which is available for purchase by savings associations.
    
    
    Sec. 362.11  Activities of insured state savings associations.
    
        (a) Equity investments--(1) Prohibited investments. No insured 
    state savings association may directly acquire or retain as principal 
    any equity investment of a type, or in an amount, that is not 
    permissible for a federal savings association unless the exception in 
    paragraph (a)(2) of this section applies.
        (2) Exception: Equity investment in service corporations. An 
    insured state savings association that is and continues to be in 
    compliance with the applicable capital standards as prescribed by the 
    appropriate federal banking agency may acquire or retain an equity 
    investment in a service corporation:
        (i) Not permissible for a federal savings association to the extent 
    the service corporation is engaging in activities that are allowed 
    pursuant to the provisions of or an application under Sec. 362.12(b); 
    or
        (ii) Of a type permissible for a federal savings association, but 
    in an amount exceeding the investment limits applicable to federal 
    savings associations, if the insured state savings association obtains 
    the FDIC's prior consent. Consent will be given only if the FDIC 
    determines that the amount of the investment in a service corporation 
    engaged in such activities does not present a significant risk to the 
    affected deposit insurance fund. Applications should be filed in 
    accordance with Sec. 303.141 of this chapter and will be processed 
    under Sec. 303.142(b) of this chapter. Approvals granted under 
    Sec. 303.142(b) of this chapter may be made subject to any conditions 
    or restrictions found by the FDIC to be necessary to protect the 
    deposit insurance funds from significant risk, to prevent unsafe or 
    unsound practices, and/or to ensure that the activity is consistent 
    with the purposes of federal deposit insurance and other applicable 
    law.
        (b) Activities other than equity investments--(1) Prohibited 
    activities. An insured state savings association may not directly 
    engage as principal in any activity, that is not an equity investment, 
    of a type not permissible for a federal savings association, and an 
    insured state savings association shall not make nonresidential real 
    property loans in an amount exceeding that described in section 
    5(c)(2)(B) of HOLA (12 U.S.C. 1464(c)(2)(B)), unless one of the 
    exceptions in paragraph (b)(2) of this section applies. This section 
    shall not be read to require the divestiture of any asset (including a 
    nonresidential real estate loan), if the asset was acquired prior to 
    August 9, 1989; however, any activity conducted with such asset must be 
    conducted in accordance with this subpart. After August 9, 1989, an 
    insured state savings association directly or through a subsidiary 
    (other than, in the case of a mutual savings association, a subsidiary 
    that is a qualified affiliate), may not acquire or retain any corporate 
    debt securities not of investment grade.
        (2) Exceptions--(i) Consent obtained through application. An 
    insured state savings association that meets and continues to meet the 
    applicable capital standards set by the appropriate federal banking 
    agency may directly conduct activities prohibited by paragraph (b)(1) 
    of this section if the savings association obtains the FDIC's prior 
    consent. Consent will be given only if the FDIC determines that 
    conducting the activity designated poses no significant risk to the 
    affected deposit insurance fund. Applications should be filed in 
    accordance with Sec. 303.141 of this chapter and will be processed 
    under Sec. 303.142(b) of this chapter. Approvals granted under 
    Sec. 303.142(b) of this chapter may be made subject to any conditions 
    or restrictions found by the FDIC to be necessary to protect the 
    deposit insurance funds from significant risk, to prevent unsafe or 
    unsound practices, and/or to ensure that the activity is consistent 
    with the purposes of federal deposit insurance and other applicable 
    law.
        (ii) Nonresidential realty loans permissible for a federal savings 
    association conducted in an amount not permissible. An insured state 
    savings association that meets and continues to meet the applicable 
    capital standards set by the appropriate federal banking agency may 
    make nonresidential real property loans in an amount exceeding the 
    amount described in section 5(c)(2)(B) of HOLA, if the savings 
    association files a notice in compliance with Sec. 303.141 of this 
    chapter and the FDIC processes the notice without objection under 
    Sec. 303.142(a) of this chapter. Consent will be given only if the FDIC 
    determines that engaging in such lending in the amount designated poses 
    no significant risk to the affected deposit insurance fund.
        (iii) Acquiring and retaining adjustable rate and money market 
    preferred stock. (A) An insured state savings association's investment 
    of up to 15 percent of the association's tier one capital in adjustable 
    rate preferred stock or money market (auction rate) preferred stock 
    does not represent a significant risk to the deposit insurance funds. 
    An insured state savings association may conduct this activity without 
    first obtaining the FDIC's consent, provided that the association meets 
    and continues to meet the applicable capital standards as prescribed by 
    the appropriate federal banking agency. The fact that prior consent is 
    not required by this subpart does not preclude the FDIC from taking any 
    appropriate action with respect to the activities if the facts and 
    circumstances warrant such action.
        (B) An insured state savings association may acquire or retain 
    other instruments of a type determined by the FDIC to have the 
    character of debt securities and not to represent a significant risk to 
    the deposit insurance funds. Such instruments shall be included in the 
    15 percent of tier one capital limit imposed in paragraph 
    (b)(2)(iii)(A) of this section. An insured state savings association 
    may conduct this activity without first obtaining the FDIC's consent, 
    provided that the association meets and continues to meet the 
    applicable capital standards as prescribed by the appropriate federal 
    banking agency. The fact that prior consent is not required by this 
    subpart does not preclude the FDIC from taking any appropriate action 
    with respect to the activities if the facts and circumstances warrant 
    such action.
    
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        (3) Activities permissible for a federal savings association 
    conducted in an amount not permissible. Except as provided in paragraph 
    (b)(2)(ii) of this section, an insured state savings association may 
    engage as principal in any activity, which is not an equity investment 
    of a type permissible for a federal savings association, in an amount 
    in excess of that permissible for a federal savings association, if the 
    savings association meets and continues to meet the applicable capital 
    standards set by the appropriate federal banking agency, the 
    institution has advised the appropriate regional director (DOS) under 
    the procedure in Sec. 303.142(c) of this chapter within thirty days 
    before engaging in the activity, and the FDIC has not advised the 
    insured state savings association that conducting the activity in the 
    amount indicated poses a significant risk to the affected deposit 
    insurance fund. This section shall not be read to require the 
    divestiture of any asset if the asset was acquired prior to August 9, 
    1989; however, any activity conducted with such asset must be conducted 
    in accordance with this subpart.
    
    
    Sec. 362.12  Service corporations of insured state savings 
    associations.
    
        (a) Prohibition. A service corporation of an insured state savings 
    association may not engage in any activity that is not permissible for 
    a service corporation of a federal savings association, unless it meets 
    one of the exceptions in paragraph (b) of this section.
        (b) Exceptions--(1) Consent obtained through application. A service 
    corporation of an insured state savings association may conduct 
    activities prohibited by paragraph (a) of this section if the savings 
    association obtains the FDIC's prior written consent and the insured 
    state savings association meets and continues to meet the applicable 
    capital standards set by the appropriate federal banking agency. 
    Consent will be given only if the FDIC determines that the activity 
    poses no significant risk to the affected deposit insurance fund. 
    Applications for consent should be filed in accordance with 
    Sec. 303.141 of this chapter and will be processed under 
    Sec. 303.142(b) of this chapter. Approvals granted under 
    Sec. 303.142(b) of this chapter may be made subject to any conditions 
    or restrictions found by the FDIC to be necessary to protect the 
    deposit insurance funds from risk, to prevent unsafe or unsound banking 
    practices, and/or to ensure that the activity is consistent with the 
    purposes of federal deposit insurance and other applicable law.
        (2) Service corporations conducting unrestricted activities. The 
    FDIC has determined that the following activities do not represent a 
    significant risk to the deposit insurance funds:
        (i) A service corporation of an insured state savings association 
    may acquire and retain equity securities of a company engaged in 
    securities activities authorized in paragraph (b)(4) of this section if 
    the bank complies with the following restrictions and files a notice in 
    compliance with Sec. 303.141 of this chapter and the FDIC processes the 
    notice without objection under Sec. 303.142(a) of this chapter. The 
    FDIC is not precluded from taking any appropriate action or imposing 
    additional requirements with respect to the activity if the facts and 
    circumstances warrant such action. If changes to the management or 
    business plan of the company at any time result in material changes to 
    the nature of the company's business or the manner in which its 
    business is conducted, the insured state savings association shall 
    advise the appropriate regional director (DOS) in writing within 10 
    business days after such change. Investment under this paragraph is 
    authorized if:
        (A) The service corporation controls the company;
        (B) The savings association meets the core eligibility criteria of 
    Sec. 362.4(c)(1);
        (C) The service corporation meets the core eligibility criteria of 
    Sec. 362.4(c)(2) (with references to the term ``subsidiary'' deemed to 
    refer to the service corporation), or the company is a corporation 
    meeting such criteria;
        (D) The savings association's transactions with the service 
    corporation comply with the investment and transaction limits of 
    paragraph (c) of this section, and the savings association's 
    transactions with the company comply with such limits as if it were a 
    service corporation;
        (E) The savings association complies with the capital requirements 
    of paragraph (d) of this section with respect to the service 
    corporation and the company; and
        (F) The savings association and the company comply with the 
    additional requirements of Sec. 362.4(b)(5)(ii) (with references to the 
    term ``majority-owned subsidiary'' deemed to refer to the company).
        (ii) A service corporation of an insured state savings association 
    may acquire and retain equity securities of a company engaged in the 
    following activities, if the service corporation controls the company 
    or the company is controlled by insured depository institutions, and 
    the association continues to meet the applicable capital standards as 
    prescribed by the appropriate federal banking agency. The FDIC consents 
    that such activity may be conducted by a service corporation of an 
    insured state savings association without first obtaining the FDIC's 
    consent. The fact that prior consent is not required by this subpart 
    does not preclude the FDIC from taking any appropriate action with 
    respect to the activities if the facts and circumstances warrant such 
    action.
        (A) Equity securities of a company that engages in permissible 
    activities. A service corporation may own the equity securities of a 
    company that engages in any activity permissible for a federal savings 
    association.
        (B) Equity securities of a company that acquires and retains 
    adjustable-rate and money market preferred stock. A service corporation 
    may own the equity securities of a company that engages in any activity 
    permissible for an insured state savings association under 
    Sec. 362.11(b)(2)(iii) so long as instruments held under this paragraph 
    (b)(2)(ii)(B), paragraph (b)(2)(iv) of this section, and 
    Sec. 362.11(b)(2)(iii) in the aggregate do not exceed the limit set by 
    Sec. 362.11(b)(2)(iii).
        (C) Equity securities of a company acting as an insurance agency. A 
    service corporation may own the equity securities of a company that 
    acts as an insurance agency.
        (iii) Activities that are not conducted ``as principal''. A service 
    corporation controlled by the insured state savings association may 
    engage in activities which are not conducted ``as principal'' such as 
    acting as an agent for a customer, acting in a brokerage, custodial, 
    advisory, or administrative capacity, or acting as trustee, or in any 
    substantially similar capacity.
        (iv) Acquiring and retaining adjustable-rate and money market 
    preferred stock. A service corporation may engage in any activity 
    permissible for an insured state savings association under 
    Sec. 362.11(b)(2)(iii) so long as instruments held under this paragraph 
    (b)(2)(iv), paragraph (b)(2)(ii)(B) of this section, and 
    Sec. 362.11(b)(2)(iii) in the aggregate do not exceed the limit set by 
    Sec. 362.11(b)(2)(iii).
        (3) [Reserved]
        (4) Service corporations conducting securities underwriting. The 
    FDIC has determined that it does not represent a significant risk to 
    the deposit insurance funds for a service corporation to engage in the 
    public sale, distribution or underwriting of securities provided that 
    the activity is conducted by a service corporation of an insured state 
    savings association in compliance with the core eligibility 
    requirements listed in
    
    [[Page 66338]]
    
    Sec. 362.4(c); any additional requirements listed in 
    Sec. 362.4(b)(5)(ii); the savings association complies with the 
    investment and transaction limitations of paragraph (c) of this 
    section; and the savings association meets the capital requirements of 
    paragraph (d) of this section. The FDIC consents that these listed 
    activities may be conducted by a service corporation of an insured 
    state savings association if the savings association files a notice in 
    compliance with Sec. 303.141 of this chapter and the FDIC processes the 
    notice without objection under Sec. 303.142(a) of this chapter. The 
    FDIC is not precluded from taking any appropriate action or imposing 
    additional requirements with respect to the activities if the facts and 
    circumstances warrant such action. If changes to the management or 
    business plan of the service corporation at any time result in material 
    changes to the nature of the service corporation's business or the 
    manner in which its business is conducted, the insured state savings 
    association shall advise the appropriate regional director (DOS) in 
    writing within 10 business days after such change. For purposes of 
    applying Sec. 362.4 (b)(5)(ii) and (c) to this paragraph (b)(4), 
    references to the terms ``subsidiary'' and ``majority-owned 
    subsidiary'' in Secs. 362.4(b)(5)(ii) and (c) shall be deemed to refer 
    to the service corporation. For the purposes of applying Sec. 362.4(c), 
    references to the term ``eligible subsidiary'' in Sec. 362.4(c) shall 
    be deemed to refer to the eligible service corporation.
        (c) Investment and transaction limits. The restrictions detailed in 
    Sec. 362.4(d) apply to transactions between an insured state savings 
    association and any service corporation engaging in activities which 
    are not permissible for a service corporation of a federal savings 
    association if specifically required by this part or FDIC order. For 
    purposes of applying the investment limits in Sec. 362.4(d)(2), the 
    term ``investment'' includes only those items described in 
    Sec. 362.4(d)(2)(ii)(A) (3) and (4). For purposes of applying 
    Sec. 362.4(d) (2), (3), and (4) to this paragraph (c), references to 
    the terms ``insured state bank'' and ``subsidiary'' in 
    Sec. 362.4(d)(2), (3), and (4), shall be deemed to refer, respectively, 
    to the insured state savings association and the service corporation. 
    For purposes of applying Sec. 362.4(d)(5), references to the terms 
    ``insured state bank'' and ``subsidiary'' in Sec. 362.4(d)(5) shall be 
    deemed to refer, respectively, to the insured state savings association 
    and the service corporations or subsidiaries.
        (d) Capital requirements. If specifically required by this part or 
    by FDIC order, an insured state savings association that wishes to 
    conduct as principal activities through a service corporation which are 
    not permissible for a service corporation of a federal savings 
    association must:
        (1) Be well-capitalized after deducting from its capital any 
    investment in the service corporation, both equity and debt.
        (2) Use such regulatory capital amount for the purposes of the 
    insured state savings association's assessment risk classification 
    under part 327 of this chapter.
    
    
    Sec. 362.13  Approvals previously granted.
    
        FDIC consent by order or notice. An insured state savings 
    association that previously filed an application and obtained the 
    FDIC's consent to engage in an activity or to acquire or retain an 
    investment in a service corporation engaging as principal in an 
    activity or acquiring and retaining any investment that is prohibited 
    under this subpart may continue that activity or retain that investment 
    without seeking the FDIC's consent, provided the insured state savings 
    association and the service corporation, if applicable, continue to 
    meet the conditions and restrictions of approval. An insured state 
    savings association which was granted approval based on conditions 
    which differ from the requirements of Secs. 362.4(c)(2) and 362.12 (c) 
    and (d) will be considered to meet the conditions and restrictions of 
    the approval if the insured state savings association and any 
    applicable service corporation meet the requirements of 
    Secs. 362.4(c)(2) and 362.12 (c) and (d). For the purposes of applying 
    Sec. 362.4(c)(2), references to the terms ``eligible subsidiary'' and 
    ``subsidiary'' in Sec. 362.4(c)(2) shall be deemed to refer, 
    respectively, to the eligible service corporation and the service 
    corporation.
    
    Subpart D--Acquiring, Establishing, or Conducting New Activities 
    Through a Subsidiary by an Insured Savings Association
    
    
    Sec. 362.14  Purpose and scope.
    
        This subpart implements section 18(m) of the Federal Deposit 
    Insurance Act (12 U.S.C. 1828(m)) which requires that prior notice be 
    given the FDIC when an insured savings association establishes or 
    acquires a subsidiary or engages in any new activity in a subsidiary. 
    For the purposes of this subpart, the term ``subsidiary'' does not 
    include any insured depository institution as that term is defined in 
    the Federal Deposit Insurance Act. Unless otherwise indicated, the 
    definitions provided in Sec. 362.2 apply to this subpart.
    
    
    Sec. 362.15  Acquiring or establishing a subsidiary; conducting new 
    activities through a subsidiary.
    
        No state or federal insured savings association may establish or 
    acquire a subsidiary, or conduct any new activity through a subsidiary, 
    unless it files a notice in compliance with Sec. 303.142(c) of this 
    chapter at least 30 days prior to establishment of the subsidiary or 
    commencement of the activity and the FDIC does not object to the 
    notice. This requirement does not apply to any federal savings bank 
    that was chartered prior to October 15, 1982, as a savings bank under 
    state law or any savings association that acquired its principal assets 
    from such an institution.
    
        By order of the Board of Directors.
    
        Dated at Washington, D.C. this 5th day of November, 1998.
    
    Federal Deposit Insurance Corporation.
    Robert E. Feldman,
    Executive Secretary.
    [FR Doc. 98-31152 Filed 11-30-98; 8:45 am]
    BILLING CODE 6714-01-P
    
    
    

Document Information

Effective Date:
1/1/1999
Published:
12/01/1998
Department:
Federal Deposit Insurance Corporation
Entry Type:
Rule
Action:
Final rule.
Document Number:
98-31152
Dates:
January 1, 1999.
Pages:
66276-66338 (63 pages)
RINs:
3064-AC12: Activities of Insured State Banks and Insured Savings Associations
RIN Links:
https://www.federalregister.gov/regulations/3064-AC12/activities-of-insured-state-banks-and-insured-savings-associations
PDF File:
98-31152.pdf
CFR: (91)
12 CFR 303.13)
12 CFR 303.13)
12 CFR 337.4(a)(2)
12 CFR 362.11(a)(2)
12 CFR 303.122(a)
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