94-18723. Revisions Regarding Tying Restrictions  

  • [Federal Register Volume 59, Number 149 (Thursday, August 4, 1994)]
    [Unknown Section]
    [Page 0]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 94-18723]
    
    
    [[Page Unknown]]
    
    [Federal Register: August 4, 1994]
    
    
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    FEDERAL RESERVE SYSTEM
    
    12 CFR Part 225
    
    [Regulation Y; Docket No. R-0843]
    
     
    
    Revisions Regarding Tying Restrictions
    
    AGENCY: Board of Governors of the Federal Reserve System.
    
    ACTION: Notice of proposed rulemaking.
    
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    SUMMARY: The Board is seeking public comment on a proposed amendment to 
    the anti-tying provisions of Regulation Y. The proposed amendment would 
    permit a bank holding company or its nonbank subsidiary to discount any 
    of its products or services on condition that a customer obtain another 
    product or service from that company or subsidiary or from any of its 
    nonbank affiliates, provided that all products offered in the package 
    arrangement are separately available for purchase. This exception would 
    not apply when any product in the arrangement is offered by a bank. The 
    board believes that this will increase the efficiency with which 
    banking organizations can deliver banking services.
    
    DATES: Comments must be submitted on or before September 17, 1994.
    
    ADDRESSES: Comments should refer to Docket No. R-0843, and may be 
    mailed to William W. Wiles, Secretary, Board of Governors of the 
    Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
    Washington, D.C. 20551. Comments also may be delivered to room B-2222 
    of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to 
    the guard station in the Eccles Building courtyard on 20th Street, N.W. 
    (between Constitution Avenue and C Street) at any time. Comments may be 
    inspected in room MP-500 between 9:00 a.m. and 5:00 p.m. weekdays, 
    except as provided in 12 CFR 261.8 of the Board's rules regarding 
    availability of information.
    
    FOR FURTHER INFORMATION CONTACT: Robert deV. Frierson, Assistant 
    General Counsel (202/452-3711); Gregory A. Baer, Managing Senior 
    Counsel (202/452-3236), or David S. Simon, Attorney (202/452-3611), 
    Legal Division; or Anthony Cyrnak, Economist, (202/452-2917), Division 
    of Research and Statistics, Board of Governors of the Federal Reserve 
    System. For the hearing impaired only, Telecommunication Device for the 
    Deaf (TDD), Dorothea Thompson (202/452-3544).
    
    SUPPLEMENTARY INFORMATION:
    
    Background
    
        Section 106(b) of the Bank Holding Company Act Amendments of 1970 
    (12 U.S.C. 1972) generally prohibits a bank from tying a product or 
    service to another product or service offered by the bank or by any of 
    its affiliates.1 In 1971, the Board applied these tying 
    restrictions to bank holding companies and their nonbank subsidiaries 
    as if they were banks. 12 CFR 225.4(d)(1); 36 FR 10777, 10778 (1971).
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        \1\ A prohibited tie-in occurs if a bank: (1) varies the 
    consideration for a product or service (the ``tying product'') on 
    the condition that the customer obtain some additional product or 
    service (the ``tied product'') from the bank or from any of its 
    affiliates; or (2) as a condition for providing a customer a product 
    or service, requires the customer to purchase another product or 
    service from the bank or from any of its affiliates.
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        On March 11, 1994, the Board requested public comment on proposed 
    amendments to Regulation Y, including an extension of the so-called 
    traditional bank product exception of section 106 to package 
    arrangements with affiliates. 59 FR 12202 (March 16, 1994). In addition 
    to comments on the proposed rule, which is being made final in a 
    separate document published elsewhere in this issue of the Federal 
    Register, the Board received various requests for interpretation or 
    extension of regulatory exceptions to the tying restrictions imposed by 
    section 106 and Regulation Y. In particular, commenters urged the Board 
    to reconsider its extension of the tying restrictions of section 106 to 
    bank holding companies and their nonbank subsidiaries.
    
    Proposed Amendments
    
        After considering those requests, the Board has decided to propose 
    an amendment to its anti-tying regulation to conform it more closely to 
    section 106 and its focus on tying by banks. Under the proposed rule, 
    bank holding companies and their nonbanking subsidiaries would be 
    permitted to offer discounts on packaged products when: (1) Both the 
    tying and tied products2 are offered by bank holding companies or 
    their nonbanking subsidiaries--in other words, where no affiliated bank 
    is involved in the arrangement; and (2) both the tying and tied 
    products are separately available.3 In cases that do not qualify 
    for this (or some other) exception, the general restrictions of section 
    106 and Regulation Y would continue to apply; for example, if the 
    package arrangement involved a product offered by an affiliated bank, 
    the exception would not apply and the nonbanking subsidiary could only 
    offer discount package arrangements involving exclusively traditional 
    bank products or securities brokerage services, under exceptions 
    recently adopted by the Board and to take effect in thirty days. The 
    antitrust laws also would continue to apply in all cases.
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        \2\ The ``tying'' product is the product whose consideration is 
    being varied or whose availability is being conditioned. The 
    ``tied'' product is the product that must be purchased in order to 
    receive a discount on the tying product or become eligible to 
    purchase the tying product.
        \3\ The Board recognizes that requiring the products to be 
    separately available effectively requires that the exception be 
    limited to discounting, and vice versa, but is proposing both 
    conditions in order to avoid any ambiguity.
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        The Board believes that the proposed exception is consistent with 
    the terms and purposes of section 106, is justified by the competitive 
    environment in which nonbanking subsidiaries generally operate, and is 
    potentially beneficial both to banking organizations and consumers.
    
    Consistency With Section 106
    
        By its terms, section 106 applies only when a bank offers the tying 
    product--that is, when a bank is varying the consideration or 
    conditioning the availability of a product in order to create an 
    incentive for the customer to purchase another product from the bank or 
    an affiliate. This coverage was consistent with the stated purpose of 
    section 106: To prevent banks from using their market power over 
    certain products to gain an unfair competitive advantage in other 
    products. See, e.g., S. Rep. No. 1084, 91st Cong., 2d Sess., 16 (1970) 
    (section 106 was ``intended to provide specific statutory assurance 
    that the use of the economic power of a bank will not lead to a 
    lessening of competition or unfair competitive practices''). The 
    proposed exception would apply only when nonbanks are offering the 
    packaged products. Such arrangements are not covered by the terms of 
    section 106; nor do they raise the specific concerns that section 106 
    was intended to address.
    
    Consistency With Regulation Y
    
        The tying restrictions of section 106 were imposed by the Bank 
    Holding Company Act Amendments of 1970 in conjunction with an extension 
    of new nonbanking powers to bank holding companies and their nonbank 
    subsidiaries. The potential for anticompetitive behavior by such 
    subsidiaries--which were then uncommon--was uncertain pending 
    implementation of the Act, and the Board therefore adopted a 
    prophylactic rule in applying the restrictions of section 106 to bank 
    holding companies and their nonbank subsidiaries.
        Much has changed, however, since adoption of that rule. Competition 
    in most financial markets has increased substantially since 1971, and 
    through its experience in the supervision of nonbank subsidiaries of 
    bank holding companies, the Board has been able to assess the role of 
    nonbanking subsidiaries in those markets. The Board believes that 
    neither bank holding companies nor their nonbanking subsidiaries 
    generally appear to possess sufficient market power in the products 
    that they offer to impair competition. For example, the ``laundry 
    list'' activities in which bank holding companies and their nonbanking 
    subsidiaries are permitted to engage are generally conducted in 
    competitive national or regional markets that are characterized by 
    large numbers of actual or potential competitors and low barriers to 
    entry.4 In such markets, the potential for a market participant to 
    gain a competitive advantage through tying is substantially reduced.
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        \4\ The ``laundry list'' activities are specified by regulation. 
    See 12 CFR 225.25.
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        Moreover, if the Board's proposal were adopted, ties involving bank 
    holding companies and their nonbanking subsidiaries would, as noted, 
    continue to be restricted by the federal antitrust laws (primarily the 
    Clayton and Sherman Acts)--the same restrictions that bind their 
    competitors. In addition, section 106 would continue to restrict tying 
    by banks, and the Board would continue to apply special restrictions to 
    tying by a nonbank when the tied product is offered by an affiliated 
    bank. As a final protection, the Board would retain the authority to 
    terminate or modify any exception that resulted in anticompetitive 
    practices.
        Furthermore, the Board is proposing to rescind its special 
    restrictions on tying between nonbanks only where the products are 
    separately available and a discount is being offered.5 These 
    conditions prevent the conditioning of the availability of one product 
    on the purchase of another and allow consumers to compare prices. The 
    Board recognizes that to the extent that the market for products 
    offered by bank holding companies and their nonbanking subsidiaries is 
    competitive, these conditions should not be strictly necessary. The 
    Board seeks comment on whether these conditions should be retained as a 
    precaution against any anti-competitive practices. The Board also seeks 
    comment on a clarification to the requirement of separate availability, 
    applicable to all the regulatory exceptions, that would provide that 
    products must be separately available ``at competitive prices.'' This 
    amendment would clarify that if a product is available outside a 
    package arrangement only at a non-competitive price, it is not truly 
    separately available.
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        \5\ Under antitrust law, concerns over tying arrangements are 
    substantially reduced where the buyer is free to take either product 
    by itself, even though the seller may also offer the two items as a 
    unit at a single price. Northern Pacific R. Co. v. Unites States, 
    356 U.S. 1, 6 n.4 (1958).
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    Costs of Tying Restrictions
    
        The special tying restrictions imposed on nonbank subsidiaries of 
    bank holding companies not only appear to be unnecessary to prevent 
    those companies from gaining an unfair competitive advantage, but also 
    place those companies at a competitive disadvantage with other 
    providers of the same products and services. As a result of Regulation 
    Y's current prohibition, a nonbanking company is generally prohibited 
    from offering discounted packages of its own products or discounted 
    packages that include its own products and those of other affiliated 
    nonbanking companies. Their competitors who are not affiliated with 
    banks are not similarly constrained. Several commenters in the Board's 
    recent rulemaking noted that brokerage firms and other nonbank 
    competitors are offering the types of discounts currently prohibited by 
    Regulation Y, which are not generally illegal for purposes of the 
    federal antitrust laws.
        The inability of nonbanks in a holding company structure to offer 
    discounts not only diminishes their competitiveness but also deprives 
    their customers of an opportunity to receive discounts. The Board 
    believes that under the proposed rule, customers would be presented 
    with more choices and potentially lower costs.
    
    Congressional Intent
    
        The Board notes that this proposed treatment of tying by nonbanking 
    subsidiaries is consistent with recent Congressional action in the 
    tying area. In applying anti-tying restrictions to savings associations 
    in the Garn-St. Germain Depository Institutions Act, Public Law No. 97-
    320, section 331, 96 Stat. 1496, Congress closely paralleled section 
    106 in applying the restriction only when the tying product was offered 
    by the savings association. An extension of the restrictions to non-
    savings association affiliates of the type adopted by the Board was 
    neither included by Congress nor subsequently adopted by the Office of 
    Thrift Supervision.
    
    Other Issues
    
        Finally, the Board is proposing to amend Regulation Y to clarify 
    that the Board's retained authority to revoke an exception that is 
    resulting in anti-competitive practices includes authority to halt such 
    practices at an individual institution.
    
    Paperwork Reduction Act
    
        No collections of information pursuant to section 3504(h) of the 
    Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are contained in the 
    proposed rule.
    
    Regulatory Flexibility Act
    
        It is hereby certified that this proposed rule, if adopted as a 
    final rule, will not have a significant economic impact on a 
    substantial number of small entities that would be subject to the 
    regulation.
    
    List of Subjects in 12 CFR Part 225
    
        Administrative practice and procedure, Banks, banking, Holding 
    companies, Reporting and recordkeeping requirements, Securities.
    
        For the reasons set forth in the preamble, the Board proposes to 
    amend 12 CFR Part 225 as set forth below:
    
    PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
    (REGULATION Y)
    
        1. The authority citation for 12 CFR 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(1), 3106, 3108, 3907, 3909, 3310, and 
    3331-3351.
    
        2. In section 225.7, a new paragraph (b)(3) is added and paragraph 
    (c) is revised to read as follows:
    
    
    Sec. 225.7  Tying Restrictions.
    
    * * * * *
        (b) * * *
        (3) Discounts on tie-in arrangements not involving banks. A bank 
    holding company or any nonbank subsidiary thereof may vary the 
    consideration for any extension of credit, lease or sale of property of 
    any kind, or service, on the condition or requirement that the customer 
    obtain some additional credit, property, or service from itself or a 
    nonbank affiliate, provided that all products and services offered in 
    the arrangement also are separately available for purchase by the 
    customer.
        (c) Limitations on exceptions. (1) The exceptions of this section 
    shall apply only if all products involved in the tying arrangement are 
    separately available for purchase at competitive prices.
        (2) Any exception granted pursuant to this section shall terminate 
    upon a finding by the Board that the arrangement is resulting in anti-
    competitive practices. The eligibility of a bank holding company or 
    bank or nonbank subsidiary thereof to operate under any exception 
    granted pursuant to this section shall terminate upon a finding by the 
    Board that its exercise of this authority is resulting in anti-
    competitive practices.
    * * * * *
        By order of the Board of Governors of the Federal Reserve 
    System, July 27, 1994.
    William W. Wiles,
    Secretary of the Board.
    [FR Doc. 94-18723 Filed 8-3-94; 8:45 am]
    BILLING CODE 6210-01-P
    
    
    

Document Information

Published:
08/04/1994
Department:
Federal Reserve System
Entry Type:
Uncategorized Document
Action:
Notice of proposed rulemaking.
Document Number:
94-18723
Dates:
Comments must be submitted on or before September 17, 1994.
Pages:
0-0 (1 pages)
Docket Numbers:
Federal Register: August 4, 1994, Regulation Y, Docket No. R-0843
CFR: (1)
12 CFR 225.7