[Federal Register Volume 61, Number 151 (Monday, August 5, 1996)]
[Notices]
[Pages 40642-40643]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19865]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
[Docket No. R-0932]
Revenue Limit on Bank-Ineligible Activities of Subsidiaries of
Bank Holding Companies Engaged in Underwriting and Dealing in
Securities
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice; Request for comments.
-----------------------------------------------------------------------
SUMMARY: The Board is proposing for comment a change in the manner in
which interest earned on securities authorized for investment by a
member bank of the Federal Reserve System is treated in determining
whether a company is engaged principally in underwriting and dealing in
securities for purposes of section 20 of the Glass-Steagall Act. In
order to ensure compliance with section 20, the Board required that the
amount of revenue a company derived from underwriting and dealing in
securities that a member bank may not underwrite or deal in (ineligible
securities) not exceed 10 percent of the total revenue of the company.
The Board is proposing to clarify that interest earned on the types of
debt securities that a member bank may hold for its own account is not
treated as revenue from underwriting or dealing for purposes of section
20.
DATES: Comments must be received by September 3, 1996.
ADDRESSES: Comments, which should refer to Docket No. R-0932, may be
mailed to the Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue, NW, Washington, D.C. 20551, to the
attention of Mr. William Wiles, Secretary. Comments may also 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 of the
Martin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as
provided in section 261.8 of the Board's Rules Regarding Availability
of Information, 12 CFR 261.8.
FOR FURTHER INFORMATION CONTACT: Richard M. Ashton, Associate General
Counsel (202/452-3750), Thomas M. Corsi, Senior Attorney (202/452-
3275), Legal Division; Michael J. Schoenfeld, Senior Securities
Regulation Analyst (202/452-2781), Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System. For the
hearing impaired only, Telecommunication Device for the Deaf (TDD),
Dorothea Thompson (202/452-3544), Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, NW, Washington,
D.C.
SUPPLEMENTARY INFORMATION:
Background
Beginning with orders issued in 1987, the Board has authorized
nonbank subsidiaries of bank holding companies, so-called section 20
subsidiaries, to underwrite and deal in ineligible securities.\1\ In
order to assure compliance with section 20 of the Glass-Steagall
Act,\2\ the Board provided as a condition of its orders that the gross
revenue derived by the subsidiary from ineligible securities
underwriting and dealing activities not exceed 10 percent of the total
gross revenue of the subsidiary, when revenue is averaged over a
rolling 8-quarter period.
---------------------------------------------------------------------------
\1\ E.g., Citicorp, 73 Federal Reserve Bulletin 473 (1987),
aff'd, Securities Industry Ass'n v. Board of Governors, 839 F.2d 47
(2d Cir.), cert. denied, 486 U.S. 1059 (1988).
\2\ Section 20 provides that a member bank may not be affiliated
with a company that is ``engaged principally'' in underwriting and
dealing in securities. 12 U.S.C. 377. Section 20 does not prohibit a
bank affiliate from underwriting and dealing in securities that
banks may underwrite and deal in directly (eligible securities).
---------------------------------------------------------------------------
For purposes of computing the 10 percent revenue limit section 20
subsidiaries currently report all interest earned on third-party
ineligible debt securities held by the subsidiaries in an underwriting
or dealing capacity as revenue derived from underwriting and dealing in
securities.\3\ Questions have
[[Page 40643]]
been raised as to whether this treatment is appropriate for interest
earned on debt securities that a member bank is authorized to hold.
Under the Glass-Steagall Act, a member bank is expressly authorized to
purchase and sell for its own account ``investment securities,'' which
generally include investment grade corporate debt and certain municipal
revenue securities.\4\ The Board is aware that pursuant to this
authority many banks hold for their own account a significant amount of
investment grade debt securities. In addition, many banks buy and sell
these securities on a relatively frequent basis as part of managing
their investment portfolio. In recognition of this activity, changes to
accounting rules were made at the end of 1993 to establish separate
accounting treatment for bank portfolio securities that are ``available
for sale'' and not intended to be held to maturity.\5\
---------------------------------------------------------------------------
\3\ Instructions for Preparation of the Financial Statements for
a Bank Holding Company Subsidiary Engaged in Bank-Ineligible
Securities Underwriting and Dealing, Form FR Y-20. Schedule SUD-I,
Line Item 5 (December 1994) (FR Y-20 Instructions). See also
``Structuring Bank-Eligible and Bank-Ineligible Transactions'' in FR
Y-20 Instructions.
\4\ 12 U.S.C. 24 Seventh, 335; 12 CFR 1.3. Member banks may not
purchase any non-investment grade debt securities or equity
securities for their own account.
\5\ Statement of Financial Accounting Standards No. 115.
---------------------------------------------------------------------------
In view of the above, the Board is proposing to clarify that
interest earned on the types of debt securities that a member bank may
hold for its own account is not treated as revenue from underwriting or
dealing in ineligible securities for purposes of section 20. The Board
believes a distinction can be made between the interest earned by a
section 20 subsidiary from holding these kinds of securities and the
profit made from underwriting or reselling them. The profit or loss a
section 20 subsidiary earns on the resale of investment grade
ineligible debt securities the subsidiary holds in inventory more
closely approximates the revenue that should be attributed to
performing the functions of dealing in or underwriting securities, the
critical element of which is the actual offering and sale of the
instruments involved.\6\
---------------------------------------------------------------------------
\6\ For purposes of the section 20 revenue limitation, the Board
has viewed ``public sale'' to include the activity of dealing in
securities--the process of buying and reselling to the public
specific securities as part of an ongoing, regular business. E.g.,
Citicorp, supra, 73 Federal Reserve Bulletin at 506-08. The term
``underwriting'' generally refers to the process by which new issues
of securities are offered and sold to the public. E.g., Securities
Industry Ass'n v. Board of Governors, 807 F.2d 1052, 1062-66 (D.C.
Cir. 1986), cert. denied, 483 U.S. 1005 (1987).
---------------------------------------------------------------------------
On the other hand, the interest the subsidiary earns on investment
grade ineligible debt securities while it holds them in inventory more
closely represents the revenue that can be attributed to holding the
securities as a member bank may do.\7\ Thus, the Board believes that it
is reasonable to conclude that interest revenue derived from holding
the kinds of debt securities a member bank may hold should not be
treated as revenue from underwriting or dealing in securities. The
proposed clarification would apply only to interest derived from those
types of debt securities that a member bank may hold for its own
account, but not underwrite or deal in.
\7\ This distinction is further reflected in the current
reporting requirements for section 20 subsidiaries and in Generally
Accepted Accounting Principles for bank holding companies, which
prescribe that interest revenue be reported separately from gains or
losses on securities owned. FR Y-20 Instructions, Statement of
Income, Schedule SUD-I, Line Items 2, 5); Securities and Exchange
Commission FOCUS Report (Form X-17A-5 Part II) and instructions
thereto. Generally Accepted Accounting Principles incorporate the
format of the FOCUS Report.
---------------------------------------------------------------------------
By order of the Board of Governors of the Federal Reserve
System, July 31, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-19865 Filed 8-2-96; 8:45am]
BILLING CODE 6210-01-P
