[Federal Register Volume 59, Number 149 (Thursday, August 4, 1994)]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18724]
Federal Register / Vol. 59, No. 149 / Thursday, August 4, 1994 /
[[Page Unknown]]
[Federal Register: August 4, 1994]
VOL. 59, NO. 149
Thursday, August 4, 1994
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0832]
Revisions Regarding Tying Restrictions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is adopting a final rule amending the anti-tying
provision of Regulation Y to permit a bank or a bank holding company to
offer a discount on a loan, discount, deposit, or trust service (a
``traditional bank product''), or on securities brokerage services, on
condition that the customer obtain a traditional bank product from an
affiliate. The Board believes that this will increase the efficiency
with which organizations can deliver banking services.
EFFECTIVE DATE: September 2, 1994.
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. A prohibited tie 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. 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).
Section 106 contains an exception (the ``traditional bank product
exception'') permitting a bank to tie a product to a traditional bank
product offered by that bank, but not by any affiliated bank or
nonbank.1 Thus, for example, the statutory exception permits a
bank to offer a discount on a loan on the condition that a customer
maintain a deposit account at that bank; however, the bank may not
offer a discount on a loan on the condition that a customer maintain a
deposit account at an affiliated bank.
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\1\Similarly, under the Board's extension of section 106 to
nonbanks in Regulation Y, a nonbank may tie a product to a
traditional bank product offered by itself, but not by an affiliate.
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On March 11, 1994, the Board requested public comment on two
proposed exceptions to section 106. 59 FR 12,202 (March 16, 1994). The
first exception would extend the statutory traditional bank product
exception described above to permit a bank or bank holding company to
offer a discount on a traditional bank product to a customer who
obtains another traditional bank product from an affiliate. The second
proposed exception would permit a bank or bank holding company to offer
a discount on securities brokerage services to a customer who obtains a
traditional bank product from an affiliate.
Section 106 authorizes the Board to permit, by regulation or order,
exceptions from its anti-tying provisions where the Board determines
that an exception will not be contrary to the purposes of the section.
General Summary of Comments
The Board received 68 comments on its proposal. These commenters
included 31 bank holding companies, 17 banks, two law firms, five
Reserve Banks and seven trade associations. Overall, the comments
supported both parts of the proposed rule. One commenter generally
opposed the proposed amendments because it believed that exceptions to
section 106 should be provided on a case-by-case basis and not as a
general matter through rulemaking, and that by acting on individual
requests, the Board would be able to prevent potential anticompetitive
effects, especially in small towns. The Board has concluded, however,
that the benefits and costs of the proposal may be assessed in the
aggregate and that rulemaking is appropriate.
Traditional Bank Products
The Board is adopting substantially as proposed the extension of
the traditional bank product exception in section 106 to cover discount
arrangements involving an affiliate. In particular, the final rule
permits a bank or nonbank to vary the consideration charged for a
traditional bank product on the condition that a customer obtain
another traditional bank product from an affiliate, provided that each
product in the arrangement is separately available for purchase by the
customer. The Board believes that the exception is fully consistent
with the purposes of section 106, will increase the efficiency with
which banking organizations can deliver banking services, and will
allow those organizations to provide their customers discounts on
packages of banking products that include products offered by
affiliates.
As noted, section 106 contains an exception permitting a bank to
tie a product to a traditional bank product offered by that same bank.
The Senate Report accompanying section 106 states that the traditional
bank product exception was intended to preserve a customer's ability to
negotiate the price of multiple banking services with the bank on the
basis of the customer's entire relationship with the bank. S. Rep. No.
1084, 91st Cong., 2d Sess., 16-17 (1970). The Board believes that it is
consistent with this stated statutory purpose for a bank or bank
holding company to offer a discount on packages of traditional bank
products when one of the component products in the package is offered
by an affiliate. Since 1970 and 1971, there has been a substantial
increase in the number of affiliates in bank holding company
organizations and the extent of specialization of these affiliates,
which has led to customers obtaining traditional bank products from
multiple affiliates, both bank and nonbank. Adoption of the proposed
rule will be consistent with the purposes of section 106 by allowing a
customer to negotiate the price of multiple traditional banking
services on the basis of the customer's entire relationship with a bank
holding company organization, as opposed to just a single bank within
such an organization.
By allowing bank holding companies to package traditional bank
products offered by multiple subsidiaries, the exception also will
increase the efficiency with which bank holding companies can deliver
those products. Several commenters explained that the existing rule had
created a disincentive for bank holding companies to consolidate a
given traditional bank product in one affiliate (and thereby lose the
exemption for that activity), as opposed to offering the product
through all its subsidiary banks (retaining the exemption at each bank
but forfeiting efficiency gains).
Adoption of the proposed exception to section 106 will not only
permit bank holding companies to offer products more efficiently but
also will allow their customers to benefit. Customers will be able to
realize cost savings when they obtain traditional bank products from
two or more subsidiaries of a bank holding company instead of just one.
Because the inter-affiliate traditional bank product exception will
allow bank holding company affiliates to offer customers a more
favorable price on packages of banking products, thereby relieving bank
holding companies of a competitive disadvantage and benefitting their
customers, the Board has concluded that the amendment is consistent
with the purposes of section 106 and should be adopted.
Several commenters requested an expansion of the proposed exception
to include inter-affiliate arrangements in which the tying product is a
non-traditional bank product and the tied product is a traditional bank
product. The Board has decided not to extend the statutory traditional
bank product exception to inter-affiliate tying involving non-
traditional bank products at this time. However, in a separate notice,
the Board is proposing to amend the tying restrictions of Regulation Y
to permit any discount arrangement that involves only nonbank
affiliates.
Discounts on Securities Brokerage Services
In December 1993, the Board approved an exemption for a brokerage
subsidiary of a bank to offer a discount on brokerage services to its
customers who maintain a minimum balance in an account at the bank or
any affiliated bank. First Union Corporation, 80 Federal Reserve
Bulletin 166 (1994). The Board concluded that the requested exemption
was consistent with the legislative purpose of section 106 (to prevent
banks from using their economic power to engage in anticompetitive
practices) and the legislative purpose of the Board's exemptive
authority (to allow appropriate traditional banking practices based on
sound economic analysis). In its order, the Board found that the market
for retail brokerage services was national in scope and highly
competitive, making it unlikely that any of these banks--or any other
provider of brokerage services--could exercise sufficient market power
in brokerage services to impair competition in the market for
traditional banking services. As part of the order, the Board required
that the two products in the arrangement be separately available for
purchase by the customer, noting that under antitrust precedent,
concerns about tying are substantially reduced when the buyer is free
to take either product by itself.
The Board is adopting substantially as proposed an amendment to
Regulation Y making this exemption available to all bank holding
companies. This amendment will permit any bank or bank holding company
to offer a discount on brokerage services if a customer obtains a
traditional bank product from any affiliate. The regulatory exception
is conditioned on the brokerage services and traditional bank products
offered in the arrangement being separately available for purchase by
the customer.
Commenters overwhelmingly favored the proposed amendment.
Commenters stated that the regulatory exception would promote fair
competition with nonbank competitors and would result in cost savings
and other benefits to customers.
A securities industry association opposed the proposed exception
because it believed that the exception would increase customer
confusion by reinforcing the false impression that brokerage services
offered by banks are insured by the federal government. However, the
recent inter-agency statement on retail sales of non-deposit investment
products specifies steps that banks should take to prevent confusion,
including informing customers in writing that the products are not
federally insured, are not deposits or other obligations of the
institution and are not guaranteed by the institution, and involve
investment risks including possible loss of principal. In addition, the
statement restricts where an institution may offer non-deposit
investment products. The Board believes that this statement
satisfactorily addresses any possibility of an increase in customer
confusion about coverage of federal deposit insurance where banks offer
brokerage services as part of a package arrangement.
A few commenters requested that the Board clarify that ``brokerage
services'' refers to ``securities brokerage services'' and that
securities brokerage services include related incidental services as
authorized by Regulation Y. These technical changes are consistent with
the intent of the proposed rule, and will be included in the final
rule.
Some commenters requested that the Board grant an exception
permitting a bank or a bank holding company to vary the consideration
charged for a traditional bank product, such as a deposit service,
based on a customer's purchase of brokerage services--the converse of
the proposed exception. The Board believes that this proposal should be
evaluated in the context of a specific exemption request. One such
request has been published for comment. Fleet Financial Group, Inc., 59
FR 9,216 (February 25, 1994).
A few commenters sought an interpretation that ties involving
mutual funds were either wholly or partially exempt from section 106,
either because mutual funds are not bank holding company subsidiaries
or because mutual fund products constitute trust services and therefore
qualify as traditional bank products. The Board intends to address this
issue separately.
Some commenters sought clarification on whether both proposed
exceptions were limited to cases where the tying product was offered by
a bank, or also included cases where the tying product was offered by a
bank holding company or its nonbanking subsidiary. The concern arose
because the proposed exceptions were phrased only in terms of banks.
The Board notes that the language of section 225.4(d)(1) of Regulation
Y would automatically apply the proposed exceptions for banks to bank
holding companies and their nonbanking subsidiaries, as was intended by
the proposed rulemaking. However, the final rule has been amended to
make this coverage explicit. Rather than referring to a ``bank''
offering a traditional bank product or a discount on brokerage
services, the rule refers to a ``bank holding company or bank or
nonbank subsidiary thereof.''
Reorganization of Regulation
In a non-substantive change, the Board has restructured the
regulation to make it more easily understandable. The regulation has
been moved from the section on corporate practices, Sec. 225.4, and
established as its own section, Sec. 225.7. The application of section
106 to bank holding companies and their nonbank subsidiaries is
contained in paragraph (a). Paragraph (b) contains exceptions to both
section 106 and Sec. 225.7(a), and paragraph (c) contains limitations
on each of those exceptions. Finally, a definition paragraph,
Sec. 225.7(d), has been added.
In addition, the exception for credit card services previously
contained in Sec. 225.4(d)(2) has been removed from the regulation, as
all transactions previously excepted under that provision are now
excepted under the traditional bank product exception in
Sec. 225.7(b)(1). Also, the phrase ``(but no other products)'' has been
deleted in places where it was superfluous. These changes are not
substantive.
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 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 this document, the Board amends 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.
Sec. 225.4 [Amended]
2. In Sec. 225.4, paragraph (d) is removed and paragraphs (e)
through (g) are redesignated as paragraphs (d) through (f).
3. A new Sec. 225.7 is added to subpart A of part 225 to read as
follows:
Sec. 225.7 Tying restrictions.
(a) Applicability to nonbanks. A bank holding company and any
nonbanking subsidiary conducting an activity authorized under
Sec. 225.23 may not in any manner extend credit, lease or sell property
of any kind, provide any service, or fix or vary the consideration for
any of these transactions subject to any condition or requirement that,
if imposed by a bank, would constitute an unlawful tie-in arrangement
under section 106 of the Bank Holding Company Act Amendments of 1970
(12 U.S.C. 1971, 1972(1)).
(b) Exceptions. Subject to the limitations of paragraph (c) of this
section, the Board has adopted the following exceptions to the anti-
tying restrictions of section 106 of the Bank Holding Company Act
Amendments of 1970 and paragraph (a) of this section.
(1) Traditional bank products. A bank holding company or any bank
or nonbank subsidiary thereof may vary the consideration charged for a
traditional bank product on the condition or requirement that a
customer also obtain a traditional bank product from an affiliate.
(2) Securities brokerage services. A bank holding company or any
bank or nonbank subsidiary thereof may vary the consideration charged
for securities brokerage services on the condition or requirement that
a customer also obtain a traditional bank product from that bank
holding company or bank or nonbank subsidiary, or from any affiliate of
such company or subsidiary.
(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.
(2) Any exception granted pursuant to this section shall terminate
upon a finding by the Board that the arrangement is resulting in
anticompetitive practices.
(d) Definitions. For purposes of this section:
(1) Traditional bank product means a loan, discount, deposit, or
trust service.
(2) Affiliate has the meaning given such term in section 2(k) of
the Bank Holding Company Act (12 U.S.C. 1841(k)).
(3) Securities brokerage services means those activities authorized
by the Board pursuant to Sec. 225.25(b)(15).
By order of the Board of Governors of the Federal Reserve
System, July 27, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-18724 Filed 8-3-94; 8:45 am]
BILLING CODE 6210-01-P
