[Federal Register Volume 61, Number 216 (Wednesday, November 6, 1996)]
[Rules and Regulations]
[Pages 57287-57289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28359]
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FEDERAL RESERVE SYSTEM
12 CFR Parts 218 and 250
[Regulation R; Docket No. R-0931]
Relations With Dealers in Securities Under Section 32, Banking
Act of 1933; Miscellaneous Interpretations
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is rescinding Regulation R, which the Board believes
is no longer necessary. The Board also is amending its regulations to
remove an interpretation of section 32 of the Glass-Steagall Act, which
the Board believes is no longer necessary. This interpretation explains
the position of the Board regarding the application of the prohibitions
of section 32 to bank holding companies.
EFFECTIVE DATE: December 6, 1996.
FOR FURTHER INFORMATION CONTACT: Richard M. Ashton, Associate General
Counsel (202/452-3750), Thomas M. Corsi, Senior Attorney (202/452-
3275), or Tina Woo, Attorney (202/452-3890), Legal Division. For the
hearing impaired only, Telecommunications Device for the Deaf (TDD),
Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
Section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (CDRI Act)
Section 303(a) of the CDRI Act (12 U.S.C. 4803(a)) requires the
Board, as well as the other federal banking agencies, to review its
regulations and written policies in order to streamline and modify
these regulations and policies to improve efficiency, reduce
unnecessary costs, and eliminate unwarranted constraints on credit
availability. The Board has reviewed its interpretations of section 32
of the Glass-Steagall Act (12 U.S.C. 78) with this purpose in mind,
and, as is explained in greater detail in the text that follows, is
amending these interpretations in a way designed to meet the goals of
section 303(a).
Substantive Provisions of Regulation R
Regulation R implements section 32 of the Glass-Steagall Act,1
which prohibits officer, director and employee interlocks between
member banks and firms ``primarily engaged'' in underwriting and
dealing in securities. Section 32 authorizes the Board to exempt from
this prohibition, under limited circumstances, certain interlocks by
regulation. Currently, Regulation R merely restates the statutory
language of section 32, and sets forth the only exemption adopted by
the Board since passage of the Glass-Steagall Act. The Board also has
codified in the CFR a series of 14 interpretations of the substantive
provisions of section 32 and the regulation.2 In July, the Board
sought public comment on removing Regulation R from the CFR and
removing from the CFR an interpretation that applies the restrictions
of section 32 to bank holding companies.3
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\1\ 12 U.S.C. 78.
\2\ 12 CFR 218.101-218.114. The Board and staff have issued
other interpretations of section 32 that are contained in the FRRS.
\3\ See 61 FR 34749, July 3, 1996.
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The exemption in Regulation R, adopted by the Board in 1969,
permits interlocks between member banks and securities firms whose
securities underwriting and dealing activities are limited to those
permissible for national banks. The adoption of the express exemption
was apparently based on the assumption that the literal language of the
section 32 prohibition could at least arguably cover bank-eligible
securities activities.
Subsequently, in approving other applications under the Bank
Holding Company Act, the Board interpreted the prohibitions of section
20 of the Glass-Steagall Act as not applying on their face to
securities underwriting and dealing activities authorized for member
banks.4 At that time, the Board also expressed the view that
section 32 did not cover an interlock between a member bank and a firm
that was not engaged in securities activities covered by section
20.5 Accordingly, in light of the Board's more recent view of the
scope of section 32, the express exemption from the provisions of
section 32 for bank-eligible securities activities is no longer
necessary.6 The Board has never adopted any other exemption to the
interlocks provision and historically, requests that the Board create
new exemptions have been infrequent and have been uniformly
denied.7 In seeking public comment on removing Regulation R, the
Board noted that the exemption in the regulation is no longer
necessary, and it is not necessary to have a substantive regulation
solely to restate a statutory provision.
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\4\ Section 20 of the Glass-Steagall Act (12 U.S.C. 377)
prohibits a member bank from being affiliated with a firm engaged
principally in underwriting and dealing in securities.
\5\ This interpretation has been upheld by the courts.
Securities Industry Association v. Board of Governors of the Federal
Reserve System, 839 F.2d 47, 62 (2d Cir. 1988), cert. denied, 486
U.S. 1059 (1988).
\6\ To avoid any confusion on this matter, the Board is
inserting an additional interpretation into the CFR to clarify that
the prohibitions of section 32 do not apply to bank-eligible
securities activities. This interpretation will be set out at 12 CFR
250.413.
\7\ A footnote to Regulation R that dates to 1936 makes clear
the Board's interpretation that a broker who is engaged solely in
executing orders for the purchase and sale of securities on behalf
of others in the open market is not engaged in the business referred
to in section 32. The Board has since authorized bank holding
companies to engage in this activity directly, reiterating that
securities brokerage is not a proscribed activity under either
sections 32 or 20 of the Glass-Steagall Act. BankAmerica
Corporation, 69 Federal Reserve Bulletin 105 (1983). The courts
upheld the Board's interpretation. Securities Industry Assn. v.
Board of Governors, 468 U.S. 207 (1984). The removal of Regulation R
does not affect this interpretation.
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Extension of Section 32 Prohibitions to Bank Holding Companies
The Board also sought public comment on removing a 1969
interpretation that extended the prohibitions of section 32 to a bank
holding company where the principal activity of the bank holding
company is the ownership and control of member banks.8 The Board
based its 1969 interpretation not so much on the literal language of
section 32, but on its belief that where the ownership and control of
member banks is the principal activity
[[Page 57288]]
of a bank holding company, the same possibilities of abuse that section
32 was designed to prevent would be present in the case of a director
of the holding company as in the case of the member bank.9
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\8\ 12 CFR 218.114.
\9\ As noted in the Board's interpretation, section 32 is
directed to the probability or likelihood that a bank director
interested in the underwriting business may use his or her influence
in the bank to involve it or its customers in securities sold by his
or her underwriting house.
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The Board now believes that it could rescind this interpretation
and give some measure of regulatory burden relief to bank holding
companies in a manner consistent with section 32, and without
frustrating the Congressional purpose underlying the section. As noted
above, section 32 specifically restricts only those interlocks
involving member banks. It could be argued that the bank holding
company structure was not in widespread use when section 32 was
adopted, and that Congress did not contemplate issues that could arise
from interlocks involving bank holding companies. Congress has amended
section 32 since the section was adopted and since bank holding
companies have become commonplace, but never has extended the
prohibitions in the section to bank holding companies. Notably, in
1987, Congress extended the prohibitions of section 32 to cover
interlocks involving nonmember banks and thrift institutions but not
interlocks involving bank holding companies.10
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\10\ The provisions extending the prohibitions of section 32 to
nonmember banks and thrifts expired in 1988.
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The potential that removal of the interpretation could frustrate
Congressional purpose in enacting section 32 is mitigated by the fact
that the prohibitions of section 32 would continue to apply to member
banks. In a specific case where an interlock between a bank holding
company and a securities firm were to result in unsafe or unsound
practices, the Board could impose corrective measures by use of its
formal enforcement authority. Accordingly, the directors, officers and
employees of these banks, none of whom would be interlocked with a
securities firm, could serve as a check against the possibilities of
abuse that section 32 is intended to prohibit. Finally, by rescinding
this interpretation, the Board would be granting regulatory relief to
bank holding companies by giving them access to a larger pool of
persons from which to choose their officers, directors, and
employees.11
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\11\ The remaining interpretations of section 32 will be
retained in the CFR and transferred to Part 250, which contains
miscellaneous Board interpretations.
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Summary of Public Comments
The Board received a total of 17 public comments in response to its
proposed amendments.12 In general, the commenters stated their
support for the reduction in regulatory burden that would result from
the removal of the regulation and holding company interpretation. Some
of the commenters offered additional suggestions as to how the Board
could reduce the regulatory burden associated with the Glass-Steagall
Act.
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\12\ Comments were received from eight banks and bank holding
companies, five trade associations, two individuals, one investment
adviser, and one law firm.
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The public commenters overwhelmingly supported the Board's proposal
to remove Regulation R, and agreed with the Board that it was
unnecessary to reiterate the statutory language of section 32 in a
regulation. One commenter opposed the removal of Regulation R and the
renumbering of the retained interpretations contending that this would
cause confusion and would remove the Board's flexibility in creating
exemptions to section 32 in the future.13 All commenters generally
agreed that in light of the Board's precedent and the proposed addition
of section 250.413, it is unnecessary to have the exemption permitting
interlocks between member banks and securities firms whose securities
underwriting and dealing activities are limited to those permissible
for a national bank.
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\13\ This commenter believed that moving and renumbering the
interpretations would make finding the interpretations more
difficult, particularly where citations are found in past Board
orders or other published materials. The Board believes that
publication of this final action in the Federal Register and changes
to the cross-citations in the interpretations that will remain in
the CFR will be sufficient to inform the public of this action.
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All public commenters supported the proposal to remove the
interpretation regarding the application of the prohibitions of section
32 to bank holding companies. These commenters believed that removal of
the interpretation would benefit bank holding companies by increasing
the pool from which to recruit qualified directors, officers, and
employees. Many commenters recommended that the Board determine that
the removal of this interpretation would allow bank holding companies
and their nonbank subsidiaries to have interlocks with registered open-
end investment companies (mutual funds) that receive investment advice
and/or administrative services from the bank holding company's
subsidiaries.
Three commenters suggested that the Board permit interlocks between
member banks and mutual funds. One of these commenters recommended that
the Board use its general rulemaking authority to create such an
exemption. Two of these commenters stated that such interlocks should
be allowed because the Investment Company Act and other federal banking
laws already exist to protect banks, mutual funds, and their customers.
Two commenters suggested that the Board modify its interpretation
that mutual funds are primarily engaged in the issuance, underwriting,
or distribution of securities. One of these commenters argued that
mutual funds are engaged in an investment business and that the
offering of shares is an incidental activity. One commenter argued that
a mutual fund holds a portfolio of securities and issues pro-rata
interests in the pool of underlying securities, but does not engage in
underwriting because it does not purchase securities from issuers and
resell them to the public.
One commenter also requested that the Board exempt from the
prohibitions of section 32 all but directors, policymaking officers,
and officers or employees who make investment recommendations or
decisions for the accounts of customers.14
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\14\ This commenter also suggested that the Board should delay
final action on this proposal until comments relating to Board
proposals regarding limitations on so-called section 20 subsidiaries
are received so that the Board could act on the portions of both
proposals relating to interlocks at the same time.
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In response to the Board's request for comment on whether other
interpretations of section 32 should be amended, one commenter
recommended that the Board rescind 12 CFR 218.107, which extends the
prohibitions of section 32 to interlocks between a member bank and an
investment adviser of a mutual fund if the adviser was created for the
sole purpose of advising a particular fund. This commenter argued that
this interpretation may not be consistent with current judicial and
administrative positions, since the Board has permitted bank holding
companies to act as investment advisers to mutual funds, pursuant to
Regulation Y, without prohibiting officer, director, or employee
interlocks between the investment adviser and any member bank.
Discussion
After review of the public comments, which raise no substantive
issues as to adoption of the proposal, the Board is
[[Page 57289]]
adopting the changes to Regulation R as they were proposed.15
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\15\ The Board will reserve Part 218 in the CFR in the event
that the Board determines in the future to adopt an exemption to
section 32.
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The Board does not believe it is within the scope of the present
rulemaking or appropriate without further analysis and rulemaking to
permit interlocks between a member bank and a mutual fund, or grant
other exemptions from the prohibitions of section 32.
In view of the Board determination to rescind its current
interpretation applying the prohibitions of section 32 to bank holding
companies, section 32 would no longer bar director, officer, or
employee interlocks between a bank holding company and a mutual
fund.16 The Board has been concerned that under certain
circumstances interlocks between a bank holding company and a mutual
fund could raise issues as to whether the holding company controls the
fund in a manner that creates an affiliation with the subsidiary bank
in violation of section 20 of the Glass-Steagall Act.17 The Board
is not modifying any of its prior interpretations at this time.18
To the extent that the Board's prior interpretations do not restrict
interlocks between a bank holding company and a mutual fund, bank
holding companies should ensure that they do not take any action that
would cause them to control a mutual fund under the Board's existing
rulings concerning what constitutes control.
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\16\ The Board has not interpreted the prohibitions of section
32 as applying to a nonbanking subsidiary of a bank holding company
if the nonbanking subsidiary does not directly or indirectly own
shares of a member bank.
\17\ The Board has found that the Glass-Steagall Act prohibits
affiliates of banks from sponsoring, organizing, or controlling
mutual funds or distributing their shares. 12 CFR 225.125. See,
e.g., The Governor and Company of the Bank of Ireland, 82 Federal
Reserve Bulletin __ (Order dated October 21, 1996); Mellon Bank
Corporation, 79 Federal Reserve Bulletin 626, 630 (1993).
\18\ In soliciting public comment on the instant proposal, the
Board stated that its action would not affect any of its precedent
regarding whether a bank holding company is deemed to control a
mutual fund for purposes of section 20 of the Glass-Steagall Act.
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Other
It does not appear that it would be appropriate for the Board to
follow the suggestion to rescind 12 CFR 218.107. In this
interpretation, the Board opined that section 32 prevented interlocks
between a member bank and a mutual fund manager that advised, managed
and distributed two mutual funds. In addition, two senior officers of
the mutual fund manager served as trustees of the funds. These facts,
viewed in light of recent Board precedent, would continue to raise an
issue as to whether the mutual fund manager noted in 12 CFR 218.107
controlled two mutual funds. Under such circumstances, interlocks
between the mutual fund manager and a member bank could be prohibited.
Accordingly, the Board will not rescind 12 CFR 218.107 at this time.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub.
L. 95-354, 5 U.S.C. 601 et seq.), the Board of Governors of the Federal
Reserve System certifies that adoption of this rule will not have a
significant economic impact on a substantial number of small entities
that would be subject to the regulation.
This amendment will remove a regulation and an interpretation that
the Board believes are no longer necessary. The amendment does not
impose more burdensome requirements on bank holding companies than are
currently applicable.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final rule under
the authority delegated to the Board by the Office of Management and
Budget. No collections of information pursuant to the Paperwork
Reduction Act are contained in the final rule.
List of Subjects
12 CFR Part 218
Antitrust, Federal Reserve System, Securities.
12 CFR Part 250
Federal Reserve System.
For the reasons set forth in the preamble, the Board is amending
Chapter II of title 12 of the Code of Federal Regulation under the
authority of 12 U.S.C. 248 as set forth below:
PART 218--[AMENDED]
Secs. 218.101 through 218.113 [Redesignated as Secs. 250.400 through
250.412]
1. Sections 218.101 through 218.113 are redesignated as set forth
in the following table:
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New
Old section section
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218.101...................................................... 250.400
218.102...................................................... 250.401
218.103...................................................... 250.402
218.104...................................................... 250.403
218.105...................................................... 250.404
218.106...................................................... 250.405
218.107...................................................... 250.406
218.108...................................................... 250.407
218.109...................................................... 250.408
218.110...................................................... 250.409
218.111...................................................... 250.410
218.112...................................................... 250.411
218.113...................................................... 250.412
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Sec. 218.114 [Removed]
2. Section 218.114 is removed.
PART 218--[REMOVED]
3. Part 218 is removed.
PART 250--MISCELLANEOUS INTERPRETATIONS
1. The authority citation for part 250 is revised to read as
follows:
Authority: 12 U.S.C. 78, 248(i) and 371c(e).
2. A new center heading is added immediately preceding the newly
designated Sec. 250.400 to read as follows:
Interpretations of Section 32 of the Glass-Steagall Act
3. Section 250.413 is added to read as follows:
Sec. 250.413 ``Bank-eligible'' securities activities.
Section 32 of the Glass-Steagall Act (12 U.S.C. 78) prohibits any
officer, director, or employee of any corporation or unincorporated
association, any partner or employee of any partnership, and any
individual, primarily engaged in the issue, flotation, underwriting,
public sale, or distribution, at wholesale or retail, or through
syndicate participation, of stocks, bonds, or other similar securities,
from serving at the same time as an officer, director, or employee of
any member bank of the Federal Reserve System. The Board is of the
opinion that to the extent that a company, other entity or person is
engaged in securities activities that are expressly authorized for a
state member bank under section 16 of the Glass-Steagall Act (12 U.S.C.
24(7), 335), the company, other entity or individual is not engaged in
the types of activities described in section 32. In addition, a
securities broker who is engaged solely in executing orders for the
purchase and sale of securities on behalf of others in the open market
is not engaged in the business referred to in section 32.
By order of the Board of Governors of the Federal Reserve
System, October 30, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-28359 Filed 11-5-96; 8:45 am]
BILLING CODE 6210-01-P
