[Federal Register Volume 63, Number 230 (Tuesday, December 1, 1998)]
[Proposed Rules]
[Pages 66339-66346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31151]
Federal Register / Vol. 63, No. 230 / Tuesday, December 1, 1998 /
Proposed Rules
[[Page 66339]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303, 337, and 362
RIN 3064-AC20
Activities of Insured State Banks and Insured Savings
Associations
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The FDIC is seeking public comment on its proposal to amend
its rules and regulations governing activities and investments of
insured state banks. The FDIC proposes to add safety and soundness
standards to govern insured state nonmember banks that engage in the
public sale, distribution or underwriting of stocks, bonds, debentures,
notes or other securities through a subsidiary if those activities are
permissible for a national bank subsidiary but are not permissible for
the national bank itself. In addition, the FDIC proposes to require
that insured state nonmember banks file a notice before commencing any
activities permissible for subsidiaries of a national bank that are not
permissible for the parent national bank itself. The FDIC also proposes
to remove and reserve the provisions addressing, ``Securities
Activities of Subsidiaries of Insured State Banks: Bank Transactions
with Affiliated Securities Companies.'' The proposed effect of these
amendments will be to require banks to notify the FDIC prior to
conducting securities or other activities through subsidiaries that are
not permissible for the bank itself. These amendments also will
consolidate all securities activities regulation.
DATES: Comments must be received by February 1, 1999.
ADDRESSES: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments
may be hand delivered to the guard station at the rear of the 17th
Street Building (located on F Street), on business days between 7:00
a.m. and 5:00 p.m. (Fax number (202) 898-3838; Internet Address:
comments@fdic.gov). Comments may be inspected and photocopied in the
FDIC Public Information Center, Room 100, 801 17th Street, N.W.
Washington, D.C. 20429, between 9:00 a.m. and 4:30 p.m. on business
days.
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
Recently, the FDIC reassessed part 362 of its rules, ``Activities
and Investments of Insured State Banks'' (12 CFR part 362) and
Sec. 337.4 of its rules, ``Securities Activities of Subsidiaries of
Insured State Banks: Bank Transactions with Affiliated Securities
Companies'' (12 CFR 337.4). That reassessment resulted in an amended
part 362 that is published as a final rule elsewhere in this issue of
the Federal Register. Although, in connection with that reassessment,
FDIC proposed removing Sec. 337.4, the FDIC decided to leave that rule
in place to retain the safety and soundness standards governing
securities activities that are not subject to section 24 of the Federal
Deposit Insurance Act (FDI Act) (12 U.S.C. 1831a) (discussed below)
during a further comment period on rules that would govern those
activities.
In this proposal, the FDIC seeks comment on proposed safety and
soundness standards governing an insured state nonmember bank
subsidiary engaging in the public sale, distribution or underwriting of
stocks, bonds, debentures, notes or other securities permissible for a
subsidiary of a national bank that are not permissible for the parent
national bank directly. The proposal also requests comment on a
proposed requirement that a notice be filed before an insured state
nonmember bank subsidiary engages in any other activity permissible for
a subsidiary of a national bank that is not permissible for the parent
national bank directly. Under the proposal, the FDIC would remove and
reserve Sec. 337.4. The proposal is described in more detail below.
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)
(Pub. L. 102-242). 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. In addition, with
certain exceptions, section 24 prohibits an insured state bank from
engaging as principal in any type of activity that is not permissible
for a national bank unless the bank meets applicable capital
requirements and the FDIC determines that the activity will not pose a
significant risk to the appropriate deposit insurance fund. Section 24
also prohibits an insured state bank subsidiary from engaging as
principal in any activity or making any equity investment of a type
that is not permissible for a national bank subsidiary unless the bank
meets applicable capital requirements and the FDIC determines that the
activity will not pose a significant risk to the appropriate deposit
insurance fund.
Since section 24 was enacted, the Office of the Comptroller of the
Currency (OCC) has confirmed--through its rule governing operating
subsidiaries--that there may be activities that are not permissible for
a national bank itself, but that are permissible for national bank
subsidiaries. Effective December 31, 1996, the OCC amended its
regulations governing the acquisition and establishment of operating
subsidiaries by national banks. 12 CFR part 5. These regulations
establish a process through which a national bank may seek approval to
conduct activities in an operating subsidiary that are part of or
incidental to the business of banking as determined by the OCC pursuant
to 12 U.S.C. 24 (Seventh) or other statutory authority but that differ
from the activities that are permissible for the national bank itself.
The OCC always requires an application from a bank seeking to conduct a
bank-impermissible activity in an operating subsidiary. If the activity
proposed for the operating subsidiary has not been approved previously
by the OCC, the OCC will publish a notice of the application in the
Federal Register and solicit comment. The OCC may also follow this
notice and comment procedure if the activity is one that the OCC has
previously approved. 12 CFR 5.34(f).
The framework in the regulation sets up a review process that has
two, equally important components. First, the OCC reviews operating
subsidiary applications to determine whether the proposed activities
are legally permissible for an operating subsidiary. Second, the OCC
evaluates the proposal to determine whether it is consistent with safe
and sound banking practices and OCC policy and does not endanger the
safety or soundness of the particular parent national bank.
The operating subsidiary rule sets out a number of conditions, or
firewalls, that the OCC will impose each time it approves the conduct
of an activity in an operating subsidiary that the parent
[[Page 66340]]
bank could not do directly.1 In addition, the rule
contemplates the imposition of other bank-specific conditions tailored
to the facts and circumstances presented by the individual application.
To date, the OCC has received and published notice of three
applications to conduct activities, through an operating subsidiary,
which would not be permissible for a national bank. Two applications
were filed by NationsBank, National Association, (Charlotte, North
Carolina) to engage in limited real estate development activities in
connection with bank premises and to provide real estate lease
financing through operating subsidiaries of the bank. The FDIC, in its
final rule published elsewhere in today's Federal Register, dealt with
state nonmember banks which seek to engage in real estate activities
permissible for a national bank only through a subsidiary (subpart B of
the amended part 362).
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\1\ Under these conditions, the Sec. 5.34(f) operating
subsidiary generally must: be physically separate from the parent;
hold itself out as a separate and distinct entity; use a different
name; have adequate capital; maintain separate accounting and
corporate records; have independent policies and procedures designed
to inform customers of the independence of the subsidiary; negotiate
contracts with the parent at arm's length; hold separate board
meetings; have at least one-third of the members of the board who
are not directors of the bank who have relevant expertise; and have
internal controls to manage financial and operational risks.
Moreover, if the operating subsidiary will be conducting activities
as principal, additional safety and soundness conditions are
imposed, including that the bank's equity investment in the
subsidiary must be deducted from the bank's capital and assets, and
the assets and liabilities of the subsidiary may not be consolidated
with those of the bank. In addition, the OCC will apply sections 23A
and 23B of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) to
transactions between the parent bank and its operating subsidiary.
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Another application was filed by Zions First National Bank, (Salt
Lake City, Utah) (Zions) to conduct municipal revenue bond underwriting
activities on April 8, 1997. The OCC published notice and requested
comment in the Federal Register on April 18, 1997. 62 FR 19171. On
December 11, 1997, the OCC announced its approval of the Zions'
application allowing an operating subsidiary of a national bank to
engage in the activities of underwriting, dealing in, and investing in
state and municipal revenue bonds, subject to certain safety and
soundness requirements.2
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\2\ Zions applied to the OCC pursuant to 12 CFR 5.34(f) to
commence a new activity in an existing operating subsidiary. The
subsidiary would underwrite, deal in, and invest in securities of
states and their political subdivisions. These securities include
the following: (1) Obligations presently defined by the OCC as
general obligations of states and political subdivisions (General
Obligation Securities); and (2) other obligations of states and
their political subdivisions that do not qualify under the OCC's
current definitions as general obligations (Revenue Bonds). The OCC
determined that the activity was permissible for an operating
subsidiary under the authority of 12 U.S.C. 24 (Seventh) that allows
a national bank to own operating subsidiaries that conduct
activities that are incidental to the business of banking. In this
case, the OCC determined that the activity of underwriting revenue
bonds is incidental to banking by finding that underwriting revenue
bonds is the functional equivalent or a logical outgrowth of
activities that are currently conducted by national banks. However,
the OCC reiterated that section 20 of the Glass-Steagall Act
prohibits the affiliation of member banks with firms that
principally engage in underwriting bank-ineligible securities. As a
result, the OCC imposed a 25 percent revenue limitation on the
Zions' subsidiary to conform to the limitation for section 20
subsidiaries set by Board of Governors of the Federal Reserve
System. The OCC imposed the conditions set forth in Sec. 5.34(f),
including corporate separateness requirements and the applications
of sections 23A and 23B of the Federal Reserve Act to transactions
between the bank and its subsidiary. In addition, the OCC imposed
other conditions tailored to the Zions' application. For example, it
required disclosures to customers, including use of the Interagency
Statement on Retail Sales of Nondeposit Investment Products
(Interagency Statement), and limited opinions on the bonds by bank
directors, officers and employees.
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This OCC approval means that the requirement under section 24 and
subpart A of part 362, that an insured state nonmember bank apply to
the FDIC for consent to engage in this activity through a subsidiary,
no longer applies. However, the FDIC did not remove Sec. 337.4 as
proposed, but instead left Sec. 337.4 in place to require that an
insured state nonmember bank file a notice and comply with the FDIC's
safety and soundness requirements to engage in the distribution or
underwriting of stocks, bonds, debentures, notes or other securities
through a subsidiary.3
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\3\ Section 362.4 of the final regulation establishes rules by
which subsidiaries of insured state banks may conduct certain
securities activities which are not permissible for a national bank
subsidiary. Section 362.8(b) established similar rules for
securities affiliates of insured state nonmember bank subsidiaries
of so-called ``nonbank bank holding companies.'' As is specified in
Sec. 337.4(i), the activities of such subsidiaries and affiliates
are controlled by part 362, not Sec. 337.4.
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Section 337.4 of the FDIC's regulations 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 that are impermissible for banks directly, under section 16
of the Banking Act of 1933 (12 U.S.C. 24 (Seventh)), commonly known as
the Glass-Steagall Act. Section 337.4 requires that these subsidiaries
qualify as bona fide subsidiaries; establishes transaction restrictions
between a bank and its subsidiaries or other affiliates that engage in
securities activities that are prohibited for banks under section 16;
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 a
securities subsidiary engaging in activities that are impermissible for
a bank under section 16 be deducted from the bank's capital.
Under the current version of Sec. 337.4, a subsidiary of a state
nonmember bank that wanted to underwrite, deal in, and invest in
municipal revenue bonds (securities of states and their political
subdivisions that do not qualify under the OCC's current definition of
general obligation bonds) would have to file a notice under Sec. 337.4
and meet its requirements. To underwrite, deal in, or invest in
municipal revenue bonds, the bank and its subsidiary would be required
to:
1. File a notice at least 60 days prior to the consummation of the
operation of the subsidiary;
2. Meet the ``bona fide subsidiary'' requirements as set forth in
definition in Sec. 337.4;
3. Deduct the capital invested in subsidiary from bank's total
capital;
4. Underwrite only debt securities of investment grade, unless the
subsidiary has been in continuous operation for the five year period
preceding the notice.4
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\4\ According to the information provided in the application,
the Zions' subsidiary appears to meet the 5-year operation test that
Sec. 337.4 would apply to a state nonmember bank subsidiary. Section
337.4 has no procedure for a bank to file an application to be
relieved of the five year operation requirement; however, there is a
waiver application procedure in Sec. 337.10. Any such application
would be granted at the discretion of the FDIC's Board of Directors.
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The applicability of Sec. 337.4 is not impacted by the OCC's
approval of the Zions application. The application of Sec. 337.4 is
independent of and was adopted prior to section 24 of the FDI Act and
part 362. Section 337.4 is invoked based on the securities activities
of the bank subsidiary and was adopted pursuant to an analysis of the
Glass-Steagall Act undertaken in the early 1980s. In short, the
regulation lists securities underwriting and distribution as an
activity that will not pose a significant risk to the fund if conducted
through a majority-owned subsidiary that operates in accordance with
Sec. 337.4. Now, in this rulemaking proceeding, the FDIC proposes to
remove and reserve Sec. 337.4 and address
[[Page 66341]]
the FDIC's standards governing bank subsidiary activities through part
362.
II. Description of the Proposal
In this proposal, the FDIC imposes safety and soundness constraints
on insured state nonmember bank subsidiaries that engage in the public
sale, distribution or underwriting of stocks, bonds, debentures, notes
or other securities that may be permissible for a national bank
subsidiary but are not permissible for a national bank directly. In
this proposal, the FDIC also requires that an insured state nonmember
bank file a 30-day advance notice before the bank's subsidiary may
engage in other activities not permissible for a national bank directly
that may be permissible for a national bank subsidiary. This 30-day
advance notice is designed to allow the FDIC to review any such
activity and consider whether safety and soundness considerations make
it prudent that conditions be placed on FDIC's consent to allow such
activities. The FDIC believes it gave sufficient notice in its August
26, 1997, proposal to amend part 362 that the FDIC could adopt a final
rule governing the insured state nonmember bank subsidiaries that
engage in the public sale, distribution or underwriting of stocks,
bonds, debentures, notes or other securities that are not permissible
for a national bank that are permissible for national bank
subsidiaries. However because regulatory text was not provided in its
earlier proposal, the FDIC believes that it is appropriate to provide
an additional opportunity for public comment before approving a final
rule to govern insured state nonmember bank subsidiaries that engage in
the public sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities that may be permissible for a
national bank subsidiary but are not permissible for a national bank.
A. Requirements for Securities Activities
There are three general reasons the FDIC proposes the imposition of
certain standards upon a state nonmember bank seeking to engage in the
sale, distribution or underwriting of stocks, bonds, debentures, notes
or other securities that may be permissible for a national bank
subsidiary but are not permissible for a national bank itself: to
ensure the bank is independent and operated in a manner consistent with
safe and sound banking practices; to protect the insurance fund (the
FDIC wants to avoid claims against the bank arising out of the public's
misperception as to with whom it is dealing and in what capacity); and
to comply with section 21 of the Glass-Steagall Act (12 U.S.C. 378),
which prohibits securities companies from taking deposits and banks
from engaging in certain securities activities. The FDIC has attempted
to meet these goals in a manner that minimizes the burden to insured
state nonmember banks without jeopardizing the FDIC's goals.
Thus, the FDIC proposal contains more flexible physical separation
standards than exist in the current version of Sec. 337.4. The FDIC
views these proposed physical separation standards, coupled with the
comprehensive requirements that include affirmative disclosures,
investment limits, transaction requirements and capital standards, as
adequate to protect bank safety and soundness, maintain the legal
separation between the bank and its subsidiary and avoid customer
confusion.
The FDIC also proposes to eliminate the different treatment of
state nonmember bank subsidiaries depending upon the type of securities
underwritten by the subsidiary. Instead, the FDIC is focusing on
prudent management policies and practices, and the sufficiency of the
subsidiary's capitalization. Additionally, the FDIC proposes to
eliminate the tiered approach to the securities activities of the
subsidiary, which limited for five years the underwriting by a new
subsidiary to investment quality debt securities, investment quality
equity securities, mutual funds that invest exclusively in investment
quality equity securities and/or investment quality debt securities.
Section 337.4 currently does not permit a subsidiary to engage in the
public sale, distribution or underwriting of stocks, bonds, debentures,
notes or other securities that are not permissible for a bank under
section 16 of the Glass-Steagall Act, unless the subsidiary meets the
bona fide definition and the activities are limited to underwriting of
investment quality securities. Later, a subsidiary can engage in
additional underwriting if it meets the definition of a bona fide
subsidiary and the following additional conditions are met:
(a) The subsidiary is a member in good standing of the National
Association of Securities Dealers (NASD);
(b) The subsidiary has been in continuous operation for a five-year
period preceding the notice to the FDIC;
(c) No director, officer, general partner, employee or 10 percent
shareholder has been convicted within five years of any felony or
misdemeanor in connection with the purchase or sale of any security;
(d) Neither the subsidiary nor any of its directors, officers,
general partners, employees, or 10 percent shareholders is subject to
any state or federal administrative order or court order, judgment or
decree arising out of the conduct of the securities business;
(e) None of the subsidiary's directors, officers, general partners,
employees or 10 percent shareholders are subject to an order entered
within five years issued by the Securities and Exchange Commission
(SEC) pursuant to certain provisions of the Securities Exchange Act of
1934 or the Investment Advisors Act of 1940; and
(f) All officers of the subsidiary who have supervisory
responsibility for underwriting activities have at least five years
experience in similar activities at NASD member securities firms.
Current Sec. 337.4 requires a bona fide subsidiary 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 insurance
fund, a bank's investment in these subsidiaries engaged in securities
activities that would be prohibited to the bank under section 16 are
not counted toward the bank's capital; that is, the investment in the
subsidiary is deducted before compliance with capital requirements is
measured.
The FDIC views its established separations for banks and securities
firms as creating an environment in which the FDIC's responsibility to
protect the insurance fund 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 entered into an agreement in principle
with the NASD concerning examination of securities companies affiliated
with insured institutions and has begun a dialogue with the SEC
concerning the exchange of information which may be pertinent to the
mission of the FDIC.
The number of banks which have subsidiaries engaging in securities
activities that cannot be conducted by the bank itself is very small.
These subsidiaries engage in the underwriting of debt and equity
securities and distribution and management of mutual funds.
Since implementation of the FDIC's Sec. 337.4 regulation, the
relationships between banks and securities firms have not been a matter
of supervisory concern due to the protections FDIC has in place.
However, the FDIC realizes that in a time of financial turmoil these
protections may not be adequate and a
[[Page 66342]]
program of direct examination could be necessary to protect the
insurance fund. Thus, the continuation of the FDIC's examination
authority in that area is important.
B. Notice Requirement for Other Activities Generally
Under a safety and soundness standard, subpart B of the revised
part 362 requires insured state nonmember bank subsidiaries engaging in
certain enumerated activities to meet certain standards established by
the FDIC, even if the OCC has determined that the activity in question
is permissible for a subsidiary of a particular national bank. Under
the modifications contained in this proposal, the FDIC would obtain the
opportunity to review situations in which a state nonmember bank
subsidiary seeks to engage in any activity determined by the OCC to be
permissible for a national bank through its subsidiary, rather than
through the national bank itself. This review would be analogous to the
safety and soundness evaluation undertaken by the OCC with respect to
operating subsidiary applications filed under Sec. 5.34(f) of its rules
(12 CFR 5.34(f)). It also would provide the FDIC with an opportunity to
impose appropriate conditions on the operations of the subsidiary. The
FDIC's Board of Directors wants to ensure that the FDIC can make a
determination if there are adverse effects on the safety and soundness
of the insured state nonmember bank and reserve authority to impose
appropriate conditions.
C. Authority
The FDIC's action in proposing this regulation is fully within the
agency's authority and is consistent with its stated goal of
safeguarding the safety and soundness of insured state nonmember banks.
The courts have recognized that defining what constitutes an unsafe or
unsound banking practice in a particular fact situation is within the
domain of the banking agencies. The United States Court of Appeals for
the Fifth Circuit, on two occasions, stated that ``[o]ne of the
purposes of the banking acts is clearly to commit the progressive
definition and eradication of such practices to the expertise of the
appropriate regulatory agencies.'' Groos National Bank v. Comptroller
of the Currency, 573 F.2d 880, 897 (5th Cir. 1978); First National Bank
of LaMargue v. Smith, 610 F.2d 1258, 1265 (5th Cir. 1980). The United
States Court of Appeals for the D.C. Circuit has stated with regard to
the OCC's authority under section 8 of the Federal Deposit Insurance
Act (12 U.S.C. 1818)--one of the statutory provisions from which the
FDIC derives authority for this rulemaking--that ``the Comptroller is
entitled to accomplish his regulatory responsibilities over ``unsafe
and unsound'' practices both by cease and desist proceedings and by
rules defining and explicating the practices which in his discretion he
finds threatening to a stable and effective national banking system.''
Independent Bankers Association of America v. Heimann, 613 F.2d 1164,
1169 (D.C. Cir. 1979). In his testimony on financial modernization, the
FDIC's Chairman recently confirmed the view that barriers between
banking and commerce should be lowered cautiously and incrementally
with safeguards to protect the insured bank.5
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\5\ See ``Testimony on Financial Modernization'' of Andrew C.
Hove, Jr., Chairman, Federal Deposit Insurance Corporation, Before
the Subcommittee on Finance and Hazardous Materials, Committee on
Commerce, United States House of Representatives, July 17, 1997.
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Under the proposed regulation, the FDIC is not waiving its right to
address on a case-by-case basis practices, conduct, or acts that are
not specifically addressed by this regulation which it finds constitute
unsafe and unsound practices. The FDIC will continue to monitor bank
direct and indirect involvement in securities activities and will take
whatever future action is appropriate.
The FDIC requests comments about all aspects of this proposed
revision to part 362. In addition, the FDIC is raising specific
questions for public comment as set out in connection with the analysis
of the proposal below.
III. Section by Section Analysis
A. Majority-owned Subsidiaries Engaging in the Public Sale,
Distribution or Underwriting of Stocks, Bonds, Debentures, Notes or
Other Securities That Are Not Permissible for a National Bank Under
Section 16 of the Banking Act of 1933
1. Description of the Rule
In connection with its recent adoption of restrictions, under
subpart A of part 362, for insured state bank subsidiaries seeking to
engage in the sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities that are not permissible for a
national bank and its subsidiary, the FDIC has determined that such
activities may involve risk. The FDIC consequently requires insured
state banks to file a notice to conduct this activity through a
majority-owned subsidiary. As long as the FDIC does not object to the
notice, the bank may conduct the activity in compliance with the
requirements set out in the rule. The fact that prior consent is not
required by subpart A does not preclude the FDIC from taking any
appropriate action with respect to the activities if the facts and
circumstances warrant such action.
In developing the proposed amendments under consideration here, the
FDIC did not see a need for differing treatment based on whether the
insured state nonmember bank subsidiaries that engage in the public
sale, distribution or underwriting of stocks, bonds, debentures, notes
or other securities that are not permissible for a national bank are
engaging in a similar activity that is permissible for a national bank
subsidiary. In either instance, the proposal would provide the same
comprehensive structure for insured state nonmember bank subsidiaries
that engage in the public sale, distribution or underwriting of stocks,
bonds, debentures, notes or other securities that are not permissible
for a national bank.
Thus, the standards being proposed as amendments to subpart B
addressing safety and soundness concerns are the same as those that
were adopted in subpart A in the final rule. The difference is that the
activities addressed in subpart A are not permissible for a national
bank subsidiary while the activities addressed in subpart B are those
that are permissible for a national bank subsidiary. Thus, the
activities addressed in subpart A are addressed primarily under the
authority found in section 24 of the FDI Act whereas the activities
addressed in subpart B are addressed under the authority found in
section 8 of the FDI Act.
The revised language would be located in subpart B of part 362 and
would become part of proposed Sec. 362.8(a).
Subpart A of part 362 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. In subpart A, the FDIC
grouped the exception for insured state bank subsidiaries that engage
in the public sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities that are not permissible for a
national bank together with the real estate exception in the structure
of the regulation to promote uniform standards across activities. In a
parallel fashion in subpart B, the FDIC proposes to group the exception
for insured state nonmember banks that acquire or establish
subsidiaries that engage in the public sale, distribution or
underwriting of stocks, bonds, debentures, notes or other securities
that are permissible for
[[Page 66343]]
a national bank only through a subsidiary together with the real estate
exception in the structure of the regulation, to promote uniform
standards across activities.
Similarly, the authority, constraints and notice process refers
back to subpart A and incorporates the same requirements and
limitations as govern securities underwriting activities thereunder. In
both instances the proposal would require the insured state nonmember
bank and its subsidiary to meet and continue to meet the following
standards to engage in the activity after notice to the FDIC, rather
than making a full application:
1. The bank must meet the requirements for an ``eligible depository
institution;'' 6
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\6\ An ``eligible depository institution'' is a depository
institution that: (1) Has been chartered and operating for at least
three years or is in an acceptable holding company structure; (2)
received an FDIC-assigned composite UFIRS rating of 1 or 2 at its
most recent examination; (3) received a rating of 1 or 2 under the
``management'' component of the UFIRS at its most recent
examination; (4) received at least a satisfactory CRA rating from
its primary federal regulator at its last examination; (5) received
a compliance rating of 1 or 2 from its primary federal regulator at
its last examination; and (6) is not subject to any corrective or
supervisory order or agreement.
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2. The bank must be well capitalized after deducting its investment
in the subsidiary;
3. The subsidiary must be an ``eligible subsidiary;'' 7
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\7\ An entity is an ``eligible subsidiary'' if it: (1) Meets the
capital requirements; (2) is physically separate and distinct in its
operations; (3) maintains separate accounting and other records; (4)
observes separate business formalities; (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
state-chartered depository institution; (7) conducts business
pursuant to independent policies and procedures; (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; 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.
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4. The bank and the subsidiary must comply with the investment
limits, transaction requirements and collateralization requirements in
dealing with each other;
5. The bank must adopt policies and procedures to govern its
participation in financing transactions arranged by the subsidiary;
6. The bank may not express an opinion of value or advisability of
securities underwritten by the subsidiary unless the customer is
notified of the bank's relationship with the subsidiary;
7. The subsidiary must be registered with SEC and agree to notify
the regional office of any material actions against the subsidiary by
any state authorities or the SEC; and
8. The bank may not buy securities underwritten by the subsidiary
as principal or fiduciary unless the bank's board of directors
approves.
The proposed requirements are uniform with other part 362 notice
procedures for insured state bank subsidiaries to engage in activities
not permissible for national banks or their subsidiaries, and would
recognize the level of risk present in subsidiaries that engage in the
public sale, distribution or underwriting of stocks, bonds, debentures,
notes or other securities that are not permissible for a national bank
itself. These requirements are not all 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. Banks not meeting
these criteria that want to engage in 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.
When the FDIC initially implemented Sec. 337.4 on securities
activities of subsidiaries of insured state nonmember banks, the FDIC
determined that some risk may be associated with those activities. The
FDIC continues to see a need to address that risk. The FDIC requests
comment on the application of these safeguards to these activities,
including the utility of management and board separations to limit
controlling person liability and the inappropriate disclosure of
material nonpublic information; the extent that any securities
underwriting liability may have been reduced due to the enactment of
The Private Securities Litigation Reform Act of 1995, Public Law 104-
67; and the efficacy of more limited restrictions on officer and
director interlocks to prevent both liability and information sharing
and any related issues.8
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\8\ 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 liability may be imposed on a parent
entity that is a bank under the most stringent of these authorities
in the securities underwriting setting. 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
section 15 or section 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. v.
Pring, 969 F.2d 891 (10th Cir. 1992), rev'd on other grounds, 511
U.S. 164 (1994); Arena Land & Inv. Co. Inc. v. Petty, 906 F. Supp.
1470 (D. Utah 1994); San Francisco-Oklahoma Petroleum Exploration
Corp. v. Carstan Oil Co., Inc., 765 F.2d 962 (10th Cir. 1985);
Seattle-First National Bank v. Carlstedt, 978 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 a
subsidiary that engages in the public sale, distribution or
underwriting of stocks, bonds, debentures, notes or other securities
that are not permissible for a national bank.
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2. Substantive Changes to the Subsidiary Underwriting Activities
Generally, these proposed amendments to subpart B, as compared to
the current provisions of Sec. 337.4 governing the state nonmember bank
subsidiaries that engage in the public sale, distribution or
underwriting of stocks, bonds, debentures, notes or other securities
that are not permissible for a bank under section 16 of Glass-Steagall,
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 proposed to eliminate those constraints that were
deemed to overlap with other requirements or that could be eliminated
and still maintain safety and soundness. The FDIC has determined that
it can adequately monitor other securities activities through its
regular reporting and examination processes. We invite comment on
whether the elimination of the other notices now found in Sec. 337.4,
such as the notice requirement for any
[[Page 66344]]
securities activity in Sec. 337.4(d), is appropriate.
The FDIC proposes the removal of the customer disclosures currently
contained in Sec. 337.4. Instead, the FDIC will be relying on the
Interagency Statement on the Retail Sale of Nondeposit Investment
Products (FIL-9-94,9 February 17, 1994) (or any successor
requirement) as applicable guidance to ensure that appropriate
disclosures are made when the subsidiary's products are sold on bank
premises, are sold by bank employees or are sold when the bank receives
a referral fee. While the current regulation requires disclosures,
those disclosures are similar but not identical to the disclosures
required by the Interagency Statement. This change makes compliance
easier. Comments submitted to the FDIC in connection with its recent
revisions to subpart A of part 362 support this change and recognize
that any retail sale of nondeposit investment products to bank
customers under such circumstances are subject to the Interagency
Statement. The FDIC requests comment on whether the Interagency
Statement provides adequate disclosures for retail sales in a
securities subsidiary and whether required compliance with that policy
statement needs to be specifically mentioned in the regulatory text.
Comment is invited on whether any other disclosures currently in
Sec. 337.4 should be retained or if any additional disclosures would be
appropriate.
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\9 \ Financial institution letters (FILs) are available in the
FDIC Public Information Center, room 100, 801 17th Street, N.W.,
Washington, D.C. 20429.
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The FDIC proposes to continue to impose many of the safeguards
found in section 23A of the Federal Reserve Act (12 U.S.C. 371c) and to
impose the safeguards similar to section 23B of the Federal Reserve Act
(12 U.S.C. 371c-1). The FDIC requests comment on the restrictions that
have been removed, including whether any of these restrictions should
be reimposed for securities activities. The FDIC also invites
suggestions for further improvements.
The FDIC proposes that the notice period be shortened from the
existing 60 days to 30 days and that the required notice and
application procedures be located 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 any insured state nonmember banks that have been
engaging in these activities under a notice filed and in compliance
with Sec. 337.4, the proposed regulation would allow those activities
to continue under the terms of that approval. This result differs from
the approach set out in Sec. 362.5(b) (applicable to state banks
engaging in securities activities impermissible for a national bank and
its subsidiary), which requires that 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 FDIC did not consider the additional
requirements to be necessary in subpart B, because we are not aware of
any insured state nonmember banks having subsidiaries that are
underwriting only securities that would fall under subpart B. We
believe that any subsidiaries that are underwriting the types of
securities regulated under subpart B already are required to follow the
continuation requirements found in subpart A.
3. Notice for Change in Circumstances
The final rule in subpart A applicable to state banks engaging in
securities activities impermissible for a national bank and its
subsidiary (Sec. 362.4(b)(5)) requires the bank to provide written
notice to the appropriate Regional Office of the FDIC within 10
business days of a change in circumstances. A change in circumstances
is described as a material change in a subsidiary's business plan or
management. Under the proposal, subpart B incorporates this requirement
by reference. The FDIC believes that it can address a bank's falling
out of compliance with any of the other requirements of the regulation
through the normal supervision and examination process.
B. Other Activities Permissible for Subsidiaries of a National Bank
That Are Not Permissible for a National Bank
In this proposal, the FDIC requires that an insured state nonmember
bank file a 30-day advance notice before the bank's subsidiary may
engage in other activities not permissible for a national bank that may
be permissible for a national bank subsidiary. This 30-day advance
notice is designed to allow FDIC to review any such activity and
consider whether safety and soundness considerations make it prudent
that conditions be placed on FDIC's consent to allow such activities.
Since section 24 was enacted, the OCC has confirmed through its
rule governing operating subsidiaries that there may be activities that
are permissible for national bank subsidiaries even though the parent
national bank may not conduct them directly. The FDIC needs to review
the activities and assess their safety and soundness in determining
whether the activity is appropriate for an insured state nonmember
bank's subsidiary. The FDIC also needs to determine whether any
conditions should be placed on the conduct of that activity. The FDIC
cannot assess the activities that may be approved in the future and
adopt specific standards to govern those activities. This safety and
soundness review and, if appropriate, the imposition of conditions
should be done on a case-by-case basis. The FDIC has elected to limit
its review to a 30-day period to limit the burden from this
requirement.
IV. Additional Requests for Comments
The FDIC is specifically requesting comments that address the
following:
(1) What criteria should the FDIC use to decide whether an activity
that is permissible for a national bank subsidiary but not permissible
for the national bank may be conducted in a safe and sound fashion by a
subsidiary of an insured state nonmember bank?
(2) Should activities that are permissible for a national bank
subsidiary but are not permissible for the national bank be limited to
subsidiaries of insured state nonmember banks of a certain asset size,
with a certain composite rating, etc.?
(3) What are the likely competitive effects of authorizing insured
state nonmember banks to engage (through subsidiaries) in activities
that are permissible for a national bank subsidiary but are not
permissible for the national bank?
(4) Alternately, are there other approaches or methods which would
facilitate access without compromising traditional safety and soundness
concerns?
Comments addressing these issues and any other aspects of the
general subject of permitting subsidiaries of insured state nonmember
banks to engage in activities that are permissible for a national bank
subsidiary but are not permissible for the national bank will be
welcomed.
V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1980 (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 Office of Management and Budget (OMB) control number.
The collection of information contained in this proposed rule has been
submitted to
[[Page 66345]]
OMB for review. Comments on the collection of information should be
sent to the desk officer for the agencies: Alexander T. Hunt, Office of
Information and Regulatory Affairs, Office of Management and Budget,
New Executive Office Building, Room 3208, Washington, DC 20503. Copies
of comments should also be sent to: Steven F. Hanft, FDIC Clearance
Officer, Office of the Executive Secretary, Federal Deposit Insurance
Corporation, 550 17th Street, NW, Washington, DC 20429, (202) 898-3907.
Comments may be hand-delivered to the guard station at the rear of the
17th Street building (located on F Street) on business days between
7:00 a.m. and 5:00 p.m. [Fax number (202) 898-3838; Internet address:
[email protected]]. For further information on the Paperwork Reduction
Act aspect of this rule, contact Steven F. Hanft at the above address.
Comment is solicited on:
(i) Whether the proposed collection of information is necessary for
the proper performance of the functions of the agency, including
whether the information will have practical utility;
(ii) The accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used;
(iii) The quality, utility, and clarity of the information to be
collected; and
(iv) Ways to minimize the burden of the collection of information
on those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Title of the collection: The proposed rule will modify an
information collection previously approved by OMB titled ``Activities
and Investments of Insured State Banks'' under control number 3064-
0111.
Summary of the collection: Generally, the collection includes the
description of the activity in which an insured state bank or its
subsidiary proposes to engage that would be impermissible absent the
FDIC's consent or nonobjection, and information about the relationship
of the proposed activity to the bank's and /or subsidiary's operation
and compliance with applicable laws and regulations.
Need and Use of the information: The FDIC uses the information to
determine whether to grant consent or provide a nonobjection for the
insured state bank or its subsidiary to engage in the proposed activity
that otherwise would be impermissible pursuant to section 8 of the FDI
Act and 12 CFR part 362.
Proposed changes to the collection: The proposed rule will modify
the collection in two ways. First, by adding, at Sec. 362.8(a)(2), the
requirement of a notice to the FDIC before the state nonmember bank
through a subsidiary engages in either the public sale, distribution or
underwriting of stocks, bonds, debenture, notes or other securities if
those activities are permissible for a national bank subsidiary but are
not permissible for the national bank itself. Second, by adding, at
Sec. 362.8(b), the requirement of a notice to the FDIC before the state
nonmember bank through a subsidiary engages in activities that are
permissible for a national bank subsidiary but are not permissible for
the national bank itself. The contents of both notices are described at
Sec. 303.121(b) of the final part 362 rule also published in today's
Federal Register.
Respondents: Banks or their subsidiaries desiring to engage in
activities that would be impermissible absent the FDIC's consent or
nonobjection.
Estimated annual burden resulting from this proposed rulemaking:
Frequency of response: Occasional
Number of responses: 1
Average number of hours to prepare a response: 8 hours
Total annual burden: 8 hours
VI. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
FDIC certifies that this proposed rule will not have a significant
economic impact on a substantial number of small entities. As noted
above in connection with the Paperwork Reduction Act, the FDIC
estimates that the incidences in which insured state nonmember banks
will be required to file a notice under the rule will be infrequent,
and will not require significant time to complete. Furthermore, the
proposed rule streamlines requirements for insured state nonmember
banks. It simplifies the requirements that apply when insured state
nonmember banks conduct certain securities activities through majority-
owned corporate subsidiaries. Whenever possible, the rule clarifies the
expectations of the FDIC when it requires notices or applications to
consent to activities by insured state banks. The proposed rule will
make it easier for small insured state banks to locate the rules that
apply to their investments.
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, Savings
associations, 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.
For the reasons set forth above and under the authority of 12
U.S.C. 1819(a) (Tenth), the FDIC Board of Directors hereby proposes to
amend 12 CFR chapter III as follows:
PART 303--FILING PROCEDURES AND DELEGATIONS OF AUTHORITY
1. The authority citation for part 303 continues 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. In Sec. 303.122, the first sentence of paragraph (a) and the
first sentence of paragraph (b) are revised to read as follows:
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), Sec. 362.8(a)(2), or Sec. 362.8(b) 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. * * *
(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)(iii)(A), Sec. 362.3(b)(2)(i), 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(c) of this chapter or for notices which
are not processed pursuant to the expedited
[[Page 66346]]
processing procedures, the FDIC will provide the insured state bank
with written notification of the final action as soon as the decision
is rendered. * * *
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.
Sec. 337.4 [Removed and Reserved]
5. Sec. 337.4 is removed and reserved.
PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS
ASSOCIATIONS
6. The authority citation for part 362 continues to read as
follows:
Authority: 12 U.S.C. 1816, 1818, 1819(a) (Tenth), 1828(m),
1831a, 1831e.
Subpart B--Safety and Soundness Rules Governing Insured State
Nonmember Banks
7. In Sec. 362.6, remove the third sentence and add two sentences
in its place to read as follows:
Sec. 362.6 Purpose and scope.
* * * The following standards shall apply for insured state
nonmember banks to conduct either real estate investment or to engage
in the public sale, distribution or underwriting of stocks, bonds,
debentures, notes or other securities through a subsidiary if those
activities are permissible for a national bank subsidiary but are not
permissible for the national bank itself. The FDIC also requires that
notices be filed before insured state nonmember banks conduct any other
activities through a subsidiary if those activities are permissible for
a national bank subsidiary but are not permissible for a national bank.
* * *
8. In Sec. 362.8, revise paragraph (a), redesignate paragraph (b)
as paragraph (c) and add new paragraph (b) to read as follows:
Sec. 362.8 Restrictions on activities of insured state nonmember
banks.
(a) Real estate investment or engaging in the public sale,
distribution or underwriting of stocks, bonds, debentures, notes or
other securities through a subsidiary if those activities are
permissible for a national bank subsidiary but are not permissible for
the national bank itself. The FDIC Board of Directors has found that,
depending on the facts and circumstances presented by a particular
case, real estate investment or engaging in the public sale,
distribution or underwriting of stocks, bonds, debentures, notes or
other securities activities may have adverse effects on the safety and
soundness of an insured state nonmember bank. Therefore, an insured
state nonmember bank may not establish or acquire a subsidiary that
engages in such real estate investment or in the public sale,
distribution or underwriting of stocks, bonds, debentures, notes or
other securities 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
or securities underwriting activities (as relevant) as set forth in
Sec. 362.4(b)(5), and submits a corresponding notice under Sec. 303.121
and Sec. 303.122(a) of this chapter to which no objection is taken by
FDIC, or applies for and obtains the FDIC's consent in accordance with
the procedures of Sec. 303.121 and Sec. 303.122(b) of this chapter.
(b) Other activities permissible for subsidiaries of a national
bank that are not permissible for a national bank. The FDIC Board of
Directors has found that depending on the facts and circumstances of a
particular case, the conduct of an activity in a subsidiary of an
insured state nonmember bank that is not permissible for a national
bank may have adverse effects on the safety and soundness of the
insured state nonmember bank. The FDIC Board of Directors has found
that the FDIC cannot make a determination whether there are adverse
effects on the safety and soundness of an insured state nonmember bank
engaging through a subsidiary in an activity not permissible for a
national bank but permissible for a subsidiary of a national bank,
unless the FDIC has had an opportunity for prior review of the
activities. Therefore, an insured state nonmember bank may not
establish or acquire a subsidiary that engages in such an activity
unless the insured state nonmember bank obtains the FDIC's consent.
Consent will be given only if the FDIC determines the activity poses no
adverse effects on the safety and soundness of the insured state
nonmember bank. Notices should be filed in compliance with
Secs. 303.121 and 303.122(a) of this chapter. Approvals granted under
Sec. 303.122(a) 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, prevent unsafe or unsound banking
practices, and/or ensure that the activity is consistent with the
purposes of federal deposit insurance and other applicable law. If the
FDIC previously granted an approval to the insured state nonmember bank
to engage in the activity, the bank need not file another notice under
this section.
* * * * *
By order of the Board of Directors.
Dated at Washington, DC, this 5th day of November 1998.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-31151 Filed 11-30-98; 8:45 am]
BILLING CODE 6714-01-P
