[Federal Register Volume 63, Number 59 (Friday, March 27, 1998)]
[Rules and Regulations]
[Pages 14803-14804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7972]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
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The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 63, No. 59 / Friday, March 27, 1998 / Rules
and Regulations
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FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-1010]
Bank Holding Companies and Change in Bank Control; Clarification
to the Board's Section 20 Orders
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final Conditions to Board Orders.
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SUMMARY: The Board is clarifying one of the operating standards
established in its decisions under the Bank Holding Company Act and
section 20 of the Glass-Steagall Act permitting a nonbank subsidiary of
a bank holding company to underwrite and deal in securities. The Board
is modifying the customer disclosure operating standard to make clear
that a section 20 subsidiary operating off bank premises may satisfy
the standard by providing a one-time disclosure in writing when an
investment account is opened.
EFFECTIVE DATE: March 27, 1998.
FOR FURTHER INFORMATION CONTACT: Thomas Corsi, Senior Counsel, (202)
452-3275, Legal Division; Michael J. Schoenfeld, Senior Supervisory
Financial Analyst, (202) 452-2781, Division of Banking Supervision and
Regulation; for the hearing impaired only, Telecommunications Device
for the Deaf (TDD), Diane Jenkins, (202) 452-3544.
SUPPLEMENTARY INFORMATION: In August 1997 the Board approved a
substantial revision to the prudential limitations governing the
activities of section 20 subsidiaries of bank holding
companies.1 The Board removed all of the existing firewalls
and adopted in their place 8 operating standards.2 Operating
standard 4(i) mandates that a section 20 subsidiary provide its retail
customers with the same oral and written disclosures that are required
of depository institutions by the Interagency Statement on the Retail
Sale of Nondeposit Investment Products (Interagency
Statement),3 even when the section 20 subsidiary is
operating off bank premises.4
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\1\ 62 FR 45295 (August 27, 1997). Section 20 subsidiaries are
companies that underwrite and deal in, to a limited extent,
securities that a member bank may not underwrite or deal in.
\2\ These operating standards are set out at 12 CFR 225.200.
\3\ I FRRS para. 3-1579.51.
\4\ 12 CFR 225.200(b)(4)(i).
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The Interagency Statement generally applies to retail sales of
securities and other nondeposit investment products on the premises of
depository institutions, and requires that customers be informed that
the products being sold are not FDIC-insured, are not deposits of or
guaranteed by any depository institution, and are subject to investment
risks, including possible loss of principal. The Statement requires
that these disclosures be given orally during sales presentations, in
connection with investment advice, and when an investment account is
opened. Written disclosures also are required when an investment
account is opened.5 Disclosures are generally required in
advertisements and promotional materials as well as in customer
confirmations and account statements.
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\5\ The Interagency Statement states that customers should sign
a statement acknowledging that they understand the written
disclosures that they receive.
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A section 20 subsidiary, like any affiliated or unaffiliated
broker, operating on the premises of a depository institution is
subject to the provisions of the Interagency Statement. The operating
standards extend the disclosure requirements of the Interagency
Statement to apply even when a section 20 subsidiary is operating off
the premises of a depository institution.
The Board recently received a request from several bank holding
companies that control section 20 subsidiaries to clarify the operating
standard on disclosures. These holding companies believe that requiring
a section 20 subsidiary to comply with the oral disclosures mandated by
the Interagency Statement when operating off the premises of a
depository institution is excessively burdensome. The holding companies
contend that it is not unusual for customers to call a broker several
times a day to solicit the broker's views on a particular security. The
companies believe that requiring brokers to provide oral disclosures to
customers in every instance is potentially damaging to customer
relationships and serves no purpose.
The Board retained a disclosure requirement as one of the section
20 operating standards to avoid customer confusion regarding whether
products sold by a section 20 subsidiary are federally insured or
guaranteed by an affiliated bank. The Board sought to limit the burden
of the disclosure requirement on section 20 subsidiaries by requiring
only disclosures to retail customers, and requiring the disclosures in
the Interagency Statement, which are familiar to banking organizations.
The Board stated that the disclosure requirement provides some benefit
at minimal cost.
The requesting bank holding companies are now stating that the cost
of complying with the disclosure requirement is higher than anticipated
when the Board adopted the operating standards. The cost has become
particularly apparent in view of the large numbers of registered
representatives employed by broker-dealers that have been acquired by
bank holding companies in recent months. The burden on large numbers of
brokers in complying with the oral disclosure requirement, and the
burden on institutions of monitoring compliance with the requirement
does not appear to be offset by a corresponding benefit. The potential
for customer confusion regarding the nature of products being purchased
should be less when a section 20 subsidiary is not operating on bank
premises. Accordingly, it appears appropriate to reduce the regulatory
burden on bank holding companies in these instances.
When a section 20 subsidiary is operating off bank premises, the
concern regarding customer confusion should be adequately mitigated if,
when a retail customer opens an investment account, the subsidiary
provides the customer with the written disclosures required by the
Interagency Statement in that situation. None of the other provisions
of the Interagency Statement would apply to a section 20 subsidiary
unless it is engaged in activities through arrangements with a bank
that are
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covered by the Interagency Statement. This revised requirement should
relieve some of the compliance burden on section 20 subsidiaries while
continuing to mitigate the concerns expressed by the Board in adopting
the disclosure requirement.
Public Comment and Deferred Effective Date
The Board does not believe that the notice, public comment and
delayed effective date requirements of the Administrative Procedure Act
at 5 U.S.C. 553 apply with respect to this action. The requirements of
section 553 do not apply when an agency finds that notice and public
procedure thereon are ``impracticable, unnecessary, or contrary to the
public interest.'' 5 U.S.C. 553(b). Similarly, a delayed effective date
is not required with respect to agency action that relieves a
restriction. 5 U.S.C. 553(d)(1).
The Board believes that notice, public procedure and a delayed
effective date are unnecessary in connection with this action. The
Board recently amended this restriction after providing notice and
seeking public comment. Furthermore, this action would relieve a
restriction on bank holding companies that operate section 20
subsidiaries. Accordingly, the Board concludes that the requirements of
section 553 do not apply to this action.
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, the Board amends 12 CFR
Part 225 as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for Part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907,
3908, and 3909.
2. Section 225.200 is amended by revising paragraph (b)(4)(i) to
read as follows:
Sec. 225.200 Conditions to Board's section 20 orders.
* * * * *
(b) Conditions. * * *
(4) Customer disclosure--(i) Disclosure to section 20 customers. A
section 20 subsidiary shall provide, in writing, to each of its retail
customers,4 at the time an investment account is opened, the
same minimum disclosures, and obtain the same customer acknowledgment,
described in the Interagency Statement on Retail Sales of Nondeposit
Investment Products (Statement) as applicable in such situations. These
disclosures must be provided regardless of whether the section 20
subsidiary is itself engaged in activities through arrangements with a
bank that is covered by the Statement.
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\4\ For purposes of this operating standard, a retail customer
is any customer that is not an ``accredited investor'' as defined in
17 CFR 230.501(a).
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* * * * *
By order of the Board of Governors of the Federal Reserve
System, March 23, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-7972 Filed 3-26-98; 8:45 am]
BILLING CODE 6210-01-P
