[Federal Register Volume 62, Number 177 (Friday, September 12, 1997)]
[Proposed Rules]
[Pages 47969-48025]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23881]
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Proposed Rules
Federal Register
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This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 /
Proposed Rules
[[Page 47969]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303, 337 and 362
RIN 3064-AC12
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: As part of the FDIC's systematic review of its regulations and
written policies under section 303(a) of the Riegle Community
Development and Regulatory Improvement Act of 1994 (CDRI), the FDIC is
seeking public comment on its proposal to revise and consolidate its
rules and regulations governing activities and investments of insured
state banks and insured savings associations. The FDIC proposes to
combine its regulations governing the activities and investments of
insured state banks with those governing insured savings associations.
In addition, the proposal updates the FDIC's regulations governing the
safety and soundness of securities activities of subsidiaries and
affiliates of insured state nonmember banks. The FDIC's proposal
modernizes this group of regulations and harmonizes the provisions
governing activities that are not permissible for national banks with
those governing the securities activities of state nonmember banks. The
proposed regulation will make a number of substantive changes and will
revise the regulations by deleting obsolete provisions, rewriting the
regulatory text to make it more readable, conforming the treatment of
state banks and savings associations to the extent possible given the
underlying statutory and regulatory scheme governing the different
charters. The proposal establishes a number of new exceptions and will
allow institutions to conduct certain activities after providing the
FDIC with notice rather than filing an application. The proposal also
will revise these regulations by deleting obsolete provisions,
rewriting the regulatory text to make it more readable, removing a
number of the current restrictions on those activities and conforming
the disclosures required under the current regulation to an existing
interagency statement concerning the retail sales of nondeposit
investment products.
DATES: Comments must be received by December 11, 1997.
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) or John Jilovec, Examination Specialist, (202/898-8958)
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
Section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA) requires that the FDIC review its
regulations for the purpose of streamlining those regulations, reducing
any unnecessary costs and eliminating unwarranted constraints on credit
availability while faithfully implementing statutory requirements.
Pursuant to that statutory direction the FDIC has reviewed part 362
``Activities and Investments of Insured State Banks,'' Sec. 303.13
``Applications and Notices by Savings Associations,'' and Sec. 337.4
``Securities Activities of Subsidiaries of Insured State Banks: Bank
Transactions with Affiliated Securities Companies' and proposes to make
a number of changes to those regulations. The proposal is described in
more detail below. In brief, however, the proposal would restructure
existing part 362, placing the substance of the text of the current
regulation into new subpart A. Subpart A would address the Activities
of Insured State Banks which implements section 24 of the Federal
Deposit Insurance Act (FDI Act). 12 U.S.C. 1831a. Section 24 restricts
and prohibits insured state banks and their subsidiaries from engaging
in activities and investments of a type that are not permissible for
national banks and their subsidiaries. In addition, the proposal would
move the FDIC's regulations governing the securities activities of
subsidiaries of insured state nonmember banks (currently at 12 CFR
337.4) into subpart A of part 362 and revise those regulations by
deleting obsolete provisions, rewriting the regulatory text to make it
more readable, removing a number of the obsolete current restrictions
on those activities, and removing the disclosures required under the
current regulation to conform the required disclosures to the
Interagency Statement on the Retail Sale of Nondeposit Investment
Products (Interagency Statement).
Safety and Soundness Rules Governing Insured State Nonmember Banks
would be set out in new subpart B. Subpart B would establish modern
standards for insured state nonmember banks to conduct real estate
investment activities through a subsidiary and for those insured state
nonmember banks that are not affiliated with a bank holding company
(nonbank banks) to conduct securities activities in an affiliated
organization. The existing restrictions on these securities activities
are found in Sec. 337.4 of this chapter.
Existing Sec. 303.13 of this chapter which relates to activities of
state savings associations and filings by all savings associations
would be revised in a number of ways and primarily placed in new
subpart C of part 362. Procedures to be used by all savings
associations when Acquiring, Establishing, or Conducting New Activities
through a Subsidiary would be placed in new subpart D. Subpart E would
contain the revised provisions concerning application and notice
procedures as well as delegations for insured state banks. Subpart F
would contain the revised provisions concerning application and notice
procedures as well as delegations for insured savings associations.
[[Page 47970]]
In addition, the FDIC is processing a complete revision of part 303
of the FDIC's rules and regulations. Part 303 contains the FDIC's
applications procedures and delegations of authority. As a part of that
process and for ease of reference, the FDIC is proposing to remove the
applications procedures relating to activities and investments of
insured state banks from part 362 and place them in subpart G of part
303. The procedures applicable to insured savings associations will be
consolidated in subpart H of part 303. We anticipate that the proposed
changes to part 303 will be published for comment within 90 days of
today's publication. At that time, subparts G and H of part 303 will be
designated as the place where the text of subparts E and F of this
proposed rule eventually will be located.
Part 362 of the FDIC's regulations implements the provisions of
section 24 of the FDI Act (12 U.S.C. 1831a). Section 24 was added to
the FDI Act by the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA). 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,
section 24 prohibits an insured state bank from directly, or indirectly
through a subsidiary, engaging as principal in any activity that is not
permissible for a national bank unless the bank meets its capital
requirements and the FDIC determines that the activity will not pose a
significant risk to the appropriate deposit insurance fund. The FDIC
may make such determinations by regulation or order. The statute
requires institutions that held equity investments not conforming to
the new requirements to divest no later than December 19, 1996. The
statute also requires that banks file certain notices with the FDIC
concerning grandfathered investments.
Part 362 was adopted in two stages. The provisions of the current
regulation concerning equity investments appeared in the Federal
Register on November 9, 1992, at 57 FR 53234. The provisions of the
current regulation concerning activities of insured state banks and
their majority-owned subsidiaries appeared in the Federal Register on
December 8, 1993, at 58 FR 64455.
Section 303.13 of the FDIC's regulations (12 CFR 303.13) implements
sections 28 and 18(m) of the FDI Act. Both sections were added to the
FDI Act by the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA). While section 28 of the FDI Act and section 24 of
the FDI Act are similar, there are a number of fundamental differences
in the two provisions which caused the implementing regulations to
differ in some respects.
Section 18(m) of the FDI Act (12 U.S.C. 1828(m)) requires state and
federal savings associations to provide the FDIC with notice 30 days
before establishing or acquiring a subsidiary or engaging in any new
activity through a subsidiary. Section 28 (12 U.S.C. 1831e) governs the
activities and equity investments of state savings associations and
provides that no state savings association may engage as principal in
any activity of a type or in an amount that is impermissible for a
federal savings association unless the FDIC determines that the
activity will not pose a significant risk to the affected deposit
insurance fund and the savings association is in compliance with the
fully phased-in capital requirements prescribed under section 5(t) of
the Home Owners' Loan Act (HOLA, 12 U.S.C. 1464(t)). Except for its
investment in service corporations, a state savings association is
prohibited from acquiring or retaining any equity investment that is
not permissible for a federal savings association. A state savings
association may acquire or retain an investment in a service
corporation of a type or in an amount not permissible for a federal
savings association if the FDIC determines that neither the amount
invested in the service corporation nor the activities of the service
corporation pose a significant risk to the affected deposit insurance
fund and the savings association continues to meet the fully phased-in
capital requirements. A savings association was required to divest
itself of prohibited equity investments no later than July 1, 1994.
Section 28 also prohibits state and federal savings associations from
acquiring any corporate debt security that is not of investment grade
(commonly known as ``junk bonds'').
Section 303.13 of the FDIC's regulations was adopted as an interim
final rule on December 29, 1989 (54 FR 53548). The FDIC revised the
rule after reviewing the comments and the regulation as adopted
appeared in the Federal Register on September 17, 1990 (55 FR 38042).
The regulation establishes application and notice procedures governing
requests by a state savings association to directly, or through a
service corporation, engage in activities that are not permissible for
a federal savings association; the intent of a state savings
association to engage in permissible activities in an amount exceeding
that permissible for a federal savings association; or the intent of a
state savings association to divest corporate debt securities not of
investment grade. The regulation also establishes procedures to give
prior notice for the establishment or acquisition of a subsidiary or
the conduct of new activities through a subsidiary.
Section 337.4 of the FDIC's regulations (12 CFR 337.4) 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 national banks under
section 16 of the Banking Act of 1933 (12 U.S.C. section 24 seventh),
commonly known as the Glass-Steagall Act. It 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 national
banks, 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 national bank be deducted from the bank's capital.
On August 23, 1996, the FDIC published a notice of proposed
rulemaking (61 FR 43486, August 23, 1996) (August proposed rule) to
amend part 362. Under the proposed rule a notice procedure would have
replaced the application currently required in the case of real estate
investment, life insurance and annuity investment activities provided
certain conditions and restrictions were met. The proposed rule set
forth notice processing procedures for real estate, life insurance
policies and annuity contract investments for well-capitalized, well-
managed insured state banks. Under the proposal, all real estate
activities would be required to be conducted in a majority-owned
subsidiary, while life insurance policies and annuity contracts could
be held directly or through a majority-owned subsidiary. Notices would
have been filed with the appropriate FDIC regional office. The FDIC
regional office would have had 60 days to process a notice under the
proposal, with a possible extension of 30 days. If the FDIC did not
object to the
[[Page 47971]]
notice prior to the expiration of the notice period (or any extension),
the bank could have proceeded with the investment activity. In the
event a bank fell out of compliance with any of the eligibility
conditions after starting the activity, it would have been required to
report the noncompliance to the appropriate FDIC regional office within
10 business days of the occurrence.
With respect to investments in real estate activities, the August
proposed rule set forth 9 conditions which banks would have had to meet
to be ``eligible'' for the notice procedure. These 9 conditions
addressed the bank's capital levels and financial condition (must be
well-capitalized after deducting investment in real estate and must
have a Uniform Financial Institutions Rating System (UFIRS) rating of 1
or 2), how the real estate activity would be conducted (a ``bona fide''
subsidiary which only engages in real estate activities), management
experience and independence of the real estate subsidiary (subsidiary
must have management with real estate experience, a written business
plan, and at least one director with real estate experience who is not
an employee, officer or director of the bank), and placed limits on
bank transactions with the subsidiary and customers (sections 23A and
23B of the Federal Reserve Act applied to transactions between the bank
and its subsidiary and tying and insider transactions were prohibited).
The August proposed rule also set forth the contents of the notice that
was to be sent to the FDIC regional office. The required information
included 7 items; information regarding the proposed activity (general
description of proposed real estate activity, a copy of the written
business plan, and a description of the subsidiary's operations
including management's expertise), the amount of investment and impact
on bank capital (aggregate amount of investment in activity and pro
forma effect of deducting such investments on the bank's capital
levels) and the bank's authority to engage in such activity (copy of
the board of directors' resolution authorizing activity and
identification of state law permitting the activity). Under the August
proposal, the regional office could have requested additional
information.
After considering the comments to the August proposed rule and
reconsidering the issues underlying the current regulation, we have
restructured the approach we are taking under part 362. As a result,
the FDIC withdrew the August proposed rule, which is published
elsewhere in today's Federal Register in favor of the more
comprehensive approach presently proposed.
While the August proposed rule amended existing part 362, the
current proposal would replace existing part 362. Unlike the rule
proposed in August, the current proposal is not limited to considering
the notice procedure used under part 362. In drafting the current
proposal, we have deleted items that are either duplicative,
unnecessary due to the passage of time, or have proven unwarranted
given our experience in implementing section 24 over the last five
years. In addition, we have refined the notice procedure that was
proposed in August. We are no longer recommending a life insurance
policy and annuity contract investment notice due to recent guidance
provided by the Office of the Comptroller of the Currency (OCC). The
OCC's guidance appears to eliminate the necessity for an application
with respect to virtually all of the life insurance and annuity
investments received by the FDIC in the past. While Section 24 and the
part 362 application process would continue to apply to those life
insurance and annuity investments which are impermissible for national
banks, the FDIC has decided that there is no need to adopt a notice
process that specifically addresses what we expect to be an extremely
small number of situations. We invite comment on whether we are correct
in concluding that there is no longer a need for a notice process for
life insurance and annuity investments which are impermissible for
national banks.
II. Description of Proposal
The FDIC proposes to divide part 362 into six subparts. Before
describing the reorganization of part 362, we would like to make a few
general comments concerning the proposal. First, we moved substantive
aspects of the regulation that were formerly found in the definitions
of terms like ``bona fide subsidiary'' to the applicable regulation
text. This reorganization should assist the reader in understanding and
applying the regulation. Second, current part 362 contains a number of
provisions relating to divesture. We have deleted any divestiture
provisions in the current proposal that we found to be unnecessary due
to the passage of time. Third, we are proposing to combine the rules
covering the equity investments of banks and savings associations into
part 362 and to regulate these investments as consistently as possible
given the limitations imposed by statute. Fourth, unlike the
regulations promulgated by the Office of Thrift Supervision we do not
distinguish between activities carried out by a first tier subsidiary
of a savings association versus a lower-tier subsidiary. Finally,
although the FDIC agrees with the principles applicable to transactions
between insured depository institutions and its affiliates contained in
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and
371c-1), our experience over the last five years in applying section 24
has led us to conclude that extending 23A and 23B by reference to bank
subsidiaries is inadvisable. For that reason, the proposed regulation
does not incorporate sections 23A and 23B of the Federal Reserve Act by
cross-reference; rather, the proposal adapts the principles set forth
in sections 23A and 23B to the bank/subsidiary relationship as
appropriate. In drafting the proposed revision to part 362, we have
considered each of the requirements contained in sections 23A and 23B
in the context of transactions between an insured institution and its
subsidiary and refined the restrictions appropriately. The FDIC
requests comment on whether these proposals assist in the application
of the principles of 23A and 23B to the subsidiaries of insured
depository institutions. We also request comment on all aspects of
these restrictions including whether this approach strikes a better
balance between caution and commercial reality by harmonizing the
capital deductions and the principles of 23A and 23B.
Subpart A of the proposed regulation would deal with the activities
and investments of insured state banks. Except for those sections
pertaining to the applications, notices and related delegations of
authority (procedural provisions), existing part 362 would essentially
become subpart A under the current proposal. The procedural provisions
of existing part 362 have been transferred to subpart E. As proposed,
subpart A addresses the activities of the insured state bank in
Sec. 362.3. The activities carried on in a subsidiary of the insured
state bank are addressed in a separate section (see Sec. 362.4 in the
proposed regulation). We are soliciting comment on whether this
reorganization of part 362 is helpful.
The ability of insured state banks to engage in activities as
principal is directly linked to the ability of a national bank to
engage in the same type of activity. National banks have a limited
ability to hold equity investments in real estate. Even so, if a
particular real estate investment has been determined to be permissible
for a national bank, an insured state bank only needs to document that
determination to undertake the
[[Page 47972]]
investment. Insured state banks that want to undertake a real estate
investment which is impermissible for a national bank (or continue to
hold the real estate investment in the case of investments acquired
before enactment of section 24 of the FDI Act), must file an
application with the FDIC for consent. The FDIC may approve such
applications if the investment is made through a majority-owned
subsidiary, the institution meets the applicable capital standards set
by the appropriate Federal banking agency and the FDIC determines that
the activity does not pose a significant risk to the appropriate
deposit insurance fund.
The FDIC has determined that real estate investment activities may
pose significant risks to the deposit insurance funds. For that reason,
the FDIC is proposing to establish standards that an insured state
nonmember bank must meet before engaging in real estate investment
activities that are not permissible for a national bank. Under a safety
and soundness standard, subpart B of the proposed regulation requires
insured state nonmember banks to meet the standards established by the
FDIC, even if the Comptroller of the Currency determines that those
activities are permissible for a national bank subsidiary. Subpart B
also would establish modern standards for insured state nonmember banks
to govern transactions between those insured state nonmember banks that
are not affiliated with a bank holding company (nonbank banks) and
affiliated organizations conducting securities activities. The existing
restrictions on these securities activities are found in Sec. 337.4 of
this chapter. The new rule will only cover those entities not covered
by orders issued by the Board of Governors of the Federal Reserve
System (FRB) governing the securities activities of those banks that
are affiliated with a bank holding company or a member bank.
Subpart B prohibits an insured state nonmember bank not affiliated
with a company that is treated as a bank holding company (see section
4(f) of the Bank Holding Company Act, 12 U.S.C. 1843(f)), from becoming
affiliated with a company that directly engages in the underwriting of
securities not permissible for a national bank unless the standards
established under the proposed regulation are met.
Subpart C of the proposed regulation concerns the activities and
investments of insured state savings associations. The provisions
applicable to activities of savings associations currently appearing in
Sec. 303.13 would be revised in a number of ways and placed in new
subpart C. To the extent possible, activities and investments of
insured state savings associations would be treated consistently with
the treatment provided insured state banks. Thus, we revised a number
of definitions currently contained in Sec. 303.13 to track the
definitions used in subpart A. We request comment on whether the
revisions made in subpart C contribute to the efficient operation of
savings associations and their service corporations while continuing to
implement the statutory requirements.
Subpart D of the proposal requires that an insured savings
association provide a 30 day notice to the FDIC whenever the
institution establishes or acquires a subsidiary or conducts a new
activity through a subsidiary. This provision does not alter the notice
required by statute. We moved this requirement to a new subpart to
accommodate Federally chartered savings associations by limiting the
amount of regulation text they would have to read to comply with this
statutory notice. Comment is invited on whether this separation avoids
confusion, enhances readability and simplifies compliance.
Subparts E and F of the proposal each contain the notice and
application requirements and the delegations of authority for the
substantive matters covered by the proposal for insured state banks and
state savings associations, respectively.
The FDIC requests comments about all aspects of the 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. Subpart A--Activities of Insured State Banks
Section 362.1 Purpose and Scope
The purpose and scope of subpart A is to ensure that the activities
and investments undertaken by insured state banks and their
subsidiaries do not present a significant risk to the deposit insurance
funds, are not unsafe and are not unsound, are consistent with the
purposes of federal deposit insurance and are otherwise consistent with
law. This subpart implements the provisions of section 24 of the FDI
Act that restrict and prohibit insured state banks and their
subsidiaries from engaging in activities and investments of a type that
are not permissible for national banks and their subsidiaries. The
phrase ``activity permissible for a national bank'' means any activity
authorized for national banks under any statute including the National
Bank Act (12 U.S.C. 21 et seq.), as well as activities recognized as
permissible for a national bank in regulations, official circulars,
bulletins, orders or written interpretations issued by the OCC. This
subpart governs activities conducted ``as principal'' and therefore
does not govern activities conducted as agent for a customer, conducted
in a brokerage, custodial, advisory, or administrative capacity, or
conducted as trustee. We moved this language from Sec. 362.2(c) of the
current version of part 362 where the term ``as principal'' is defined
to mean acting other than as agent for a customer, acting as trustee,
or conducting an activity in a brokerage, custodial or advisory
capacity. The FDIC previously described this definition as not
covering, for example, acting as agent for the sale of insurance,
acting as agent for the sale of securities, acting as agent for the
sale of real estate, or acting as agent in arranging for travel
services. Likewise, providing safekeeping services, providing personal
financial planning services, and acting as trustee were described as
not being ``as principal'' activities within the meaning of this
definition. In contrast, real estate development, insurance
underwriting, issuing annuities, and securities underwriting would
constitute ``as principal'' activities. Further, for example, travel
agency activities have not been brought within the scope of part 362
and would not require prior consent from the FDIC even though a
national bank is not permitted to act as travel agent. This result
obtains from the fact that the state bank would not be acting ``as
principal'' in providing those services. Thus, the fact that a national
bank may not engage in travel agency activities would be of no
consequence. Of course, state banks would have to be authorized to
engage in travel agency activities under state law. We intend to
continue to interpret section 24 and part 362 as excluding any coverage
of activities being conducted as agent. To highlight this issue,
provide clarity and alert the reader of this rule that activities being
conducted as agent are not within the scope of section 24 and part 362,
we have moved this language to the purpose and scope paragraph. We
[[Page 47973]]
request comment on whether moving this language to the purpose and
scope paragraph assists users of this rule in interpreting its
parameters. We also invite comment on whether the ``as principal''
definition still would be necessary.
Equity investments acquired in connection with debts previously
contracted (DPC) that are held within the shorter of the time limits
prescribed by state or federal law are not subject to the limitations
of this subpart. The exclusion of equity investments acquired in
connection with DPC has been moved from the definition of ``Equity
investment'' to the purpose and scope paragraph to highlight this
issue, provide clarity and alert the reader of this rule that these
investments are not within the scope of section 24 and part 362.
However, the intent of the insured state bank in holding equity
investments acquired in connection with DPC continues to be relevant to
the analysis of whether the equity investment is permitted. Interests
taken as DPC are excluded from the scope of this regulation provided
that the interests are not held for investment purposes and are not
held longer than the shorter of any time limit on holding such
interests (1) set by applicable state law or regulation or (2) the
maximum time limit on holding such interests set by applicable statute
for a national bank. The result of the modification would be to make it
clear, for example, that real estate taken DPC may not be held for
longer than 10 years (see 12 U.S.C. 29) or any shorter period of time
set by the state. In the case of equity securities taken DPC, the bank
must divest the equity securities ``within a reasonable time'' (i.e, as
soon as possible consistent with obtaining a reasonable return) (see
OCC Interpretive Letter No. 395, August 24, 1987, (1988-89 Transfer
Binder) Fed Banking L. Rep. (CCH) p. 85,619, which interprets and
applies the National Bank Act) or no later than the time permitted
under state law if that time period is shorter.
In addition, any interest taken DPC may not be held for investment
purposes. For example, while a bank may be able to expend monies in
connection with DPC property and/or take other actions with regard to
that property, if those expenditures and actions are speculative in
nature or go beyond what is necessary and prudent in order for the bank
to recover on the loan, the property will not fall within the DPC
exclusion. The FDIC expects that bank management will document that DPC
property is being actively marketed and current appraisals or other
means of establishing fair market value may be used to support
management's decision not to dispose of property if offers to purchase
the property have been received and rejected by management.
Similarly to highlight this issue, provide clarity and alert the
reader of this rule, we have moved to the purpose and scope paragraph
the language governing any interest in real estate in which the real
property is (a) used or intended in good faith to be used within a
reasonable time by an insured state bank or its subsidiaries as offices
or related facilities for the conduct of its business or future
expansion of its business or (b) used as public welfare investments of
a type permissible for national banks. In the case of real property
held for use at some time in the future as premises, the holding of the
property must reflect a bona fide intent on the part of the bank to use
the property in the future as premises. We are not aware of any
statutory time frame that applies in the case of a national bank which
limits the holding of such property to a specific time period.
Therefore, the issue of the precise time frame under which future
premises may be held without implicating part 362 must be decided on a
case-by-case basis. If the holding period allowed for under state law
is longer than what the FDIC determines to be reasonable and consistent
with a bona fide intent to use the property for future premises, the
bank will be so informed and will be required to convert the property
to use, divest the property, or apply for consent to hold the property
through a majority-owned subsidiary of the bank. We note that the OCC's
regulations indicate that real property held for future premises should
``normally'' be converted to use within five years after which time it
will be considered other real estate owned and must be actively
marketed and divested in no later than ten years. (12 CFR 34). We
understand that the time periods set forth in the OCC's regulation
reflect safety and soundness determinations by that agency. As such,
and in keeping with what has been to date the FDIC's posture with
regard to safety and soundness determinations of the OCC, the FDIC will
substitute its own judgment to determine when a reasonable time has
elapsed for holding the property.
A subsidiary of an insured state bank may not engage in real estate
investment activities not permissible for a subsidiary of a national
bank unless the bank is in compliance with applicable capital standards
and the FDIC has determined that the activity poses no significant risk
to the deposit insurance fund. Subpart A provides standards for real
estate investment activities that are not permissible for a subsidiary
of a national bank. Because of safety and soundness concerns relating
to real estate investment activities, subpart B reflects special rules
for subsidiaries of insured state nonmember banks that engage in real
estate investment activities of a type that are not permissible for a
national bank but may be otherwise permissible for a subsidiary of a
national bank.
The FDIC intends to allow insured state banks and their
subsidiaries to undertake safe and sound activities and investments
that do not present a significant risk to the deposit insurance funds
and that are consistent with the purposes of federal deposit insurance
and other applicable law. This subpart does not authorize any insured
state bank to make investments or to conduct activities that are not
authorized or that are prohibited by either state or federal law.
Section 362.2 Definitions
Revised subpart A Sec. 362.2 contains--definitions. We have left
most of the definitions unchanged or edited them to enhance clarity or
readability without changing the meaning.
To standardize as many definitions as possible, we have
incorporated several definitions from section 3 of the FDI Act (12 U.S.
C. 1813). These definitions are ``Bank,'' ``State bank,'' ``Savings
association,'' ``State savings association,'' ``Depository
institution,'' ``Insured depository institution,'' ``Insured state
bank,'' ``Federal savings association,'' and ``Insured state nonmember
bank.'' This standardization required that we delete the definitions of
``depository institution'' and ``insured state bank''currently found in
part 362. No substantive change was intended by this change. The
definitions that were added by this change are ``Bank,'' ``State
bank,'' ``Savings association,'' ``State savings association,''
``Insured depository institution,'' ``Federal savings association,''
and ``Insured state nonmember bank.'' These definitions were added to
provide clarity throughout the proposed part 362 because we are
incorporating so many definitions from subpart A into subpart B
governing safety and soundness concerns of insured state nonmember
banks, subpart C governing the activities of state savings
associations, and subpart D governing subsidiaries of all savings
associations. We invite comment on whether readers view these
definitions as needing further changes to enhance clarity and
readability. We also invite comment on whether any of
[[Page 47974]]
the changes we have made may have changed the substance of the
regulation in ways that we may not have intended.
The definitions that have been left unchanged or edited to enhance
clarity or readability without changing the meaning are the following:
``Control,'' ``Extension of credit,'' ``Executive officer,''
``Director,'' ``Principal shareholder,'' ``Related interest,''
``National Securities exchange,'' ``Residents of state,''
``Subsidiary,'' and ``Tier one capital.'' We invite comment on whether
readers view these definitions as needing further changes to enhance
clarity and readability. We also invite comment on whether any of the
changes we have made may have changed the substance of the regulation
in ways that we may not have intended.
The name of one definition has been simplified without
substantively changing the meaning of the definition. That definition
is currently found in Sec. 362.2(g) and is described as follows ``An
insured state bank will be considered to convert its charter.'' We
moved this definition to Sec. 362.2(e) and call this definition,
``Convert its charter.'' The substance of the definition is intended to
remain unchanged by this revised language. We invite comment on whether
readers view the change in this definition as needing any further
changes to enhance clarity and readability. We also invite comment on
whether any of the changes we have made to this definition may have
changed the substance of the regulation in ways that we may not have
intended.
Although most of the definitions as set out in the proposal are the
same or virtually unchanged, a few of the definitions in the proposal
have been substantively revised. The proposed changes to these
definitions are discussed below.
We deleted the definitions of ``Activity permissible for a national
bank,'' ``An activity is considered to be conducted as principal,'' and
``Equity investment permissible for a national bank.'' We moved the
substance of the information that was contained in these definitions
into the scope paragraph in Sec. 362.1. We thought that including the
information that was in these definitions in the scope paragraph made
the coverage of the rule clearer to the reader and was consistent with
the purpose of the scope paragraph. We expect that some readers may
save time by realizing sooner that the regulation may be inapplicable
to conduct contemplated by a particular bank. We also thought that the
reader might be more likely to consider the scope paragraph than to
consider the definition section when reading the rule to determine its
applicability. We concluded that it would be unnecessary to duplicate
this same information in the definition section. We invite comment on
whether readers prefer to see these concepts in the scope paragraph and
whether readers also would prefer to see these concepts defined.
We deleted the definition of ``Equity interest in real estate'' and
moved the recitation of the permissibility of owning real estate for
bank premises and future premises, owning real estate for public
welfare investments and owning real estate from DPC to the scope
paragraph for the reasons stated in the preceding paragraph. These
activities are permissible for national banks and we thought that it
was unnecessary to continue to restate this information in the
definition section of the regulation. No substantive change is intended
by this simplification of the language. In addition, we determined that
the remainder of the definition of ``Equity interest in real estate''
did little to enhance clarity or understanding; therefore, we are
relying on the language defining ``Equity investment'' to cover real
estate investments. We conformed the definition of ``Equity
investment'' by deleting the reference to the deleted definition of
``Equity interest in real estate.'' No substantive change is intended
by shortening this language. We invite comment on whether the readers
view the definition of ``Equity interest in real estate'' as necessary
to enhance clarity and readability on these issues as well as whether
readers prefer seeing these concepts in the scope paragraph.
The remainder of the definition of ``Equity investment'' has been
shortened and edited to enhance readability. We intend no substantive
change by shortening this language. This concept is intended to
encompass an investment in an equity security or real estate as it does
in the current definition. We invite comment on the changes to this
definition and whether any further changes are needed.
With regard to the definition of ``Equity security,'' we modified
this definition by deleting the references to permissible national bank
holdings such as equity securities being held as a result of a
foreclosure or other arrangements concerning debt previously
contracted. Language discussing the exclusion of DPC and other
investments that are permissible for national banks has been relocated
to the scope paragraph for the reasons stated above. Thus, the equity
investment definitions no longer include these references. We intend no
substantive change through the deletion of this redundant language. We
invite comment on whether any ambiguity or unintended change in the
meaning may be created by removing this language from the definition.
We added a shorter definition of ``Real estate investment
activity'' meaning any interest in real estate held directly or
indirectly that is not permissible for a national bank. This term is
used in Sec. 362.4(b)(5) of subpart A and in Sec. 362.7 of subpart B
which contains safety and soundness restrictions on real estate
activities of subsidiaries of insured state nonmember banks that may be
deemed to be permissible for operating subsidiaries of national banks
that would not be permissible for a national bank, itself. We invite
comment on this definition, including its meaning and clarity as well
as the underlying safety and soundness proposal in subpart B. We
specifically invite comment on the exclusion of real estate leasing
from the definition of real estate investment activity. The proposal
has eliminated real estate leasing from the definition of real estate
investment activity in order to assure that banks using the notice
procedure are not getting involved in a commercial business. The notice
procedures are designed for institutions that wish to hold parcels of
real estate for ultimate sale. If an institution wishes to hold the
property to lease it for ongoing business purposes, we believe the
proposal should be considered under the application process.
We deleted the definitions of ``Investment in department'' and
``Department'' because we thought they were no longer needed in the
revised regulation text. The core standards applicable to a department
of a bank are set out in detail in Sec. 362.3(c) and defining the term
``Department'' no longer seems to be necessary. Regarding the
definition of ``Investment in department,'' we also considered this
definition unnecessary. We believe that if a calculation of
``Investment in department'' needs to be made, we will defer to state
law on this issue. We invite comment on whether the readers view these
definitions as necessary to enhance clarity and readability on these
issues. We also request comment on whether deference to state law on
this investment issue would cause any unintended consequences that we
have not foreseen.
Similarly, we deleted the definition of ``Investment in
subsidiary'' because the definition is no longer needed in the revised
regulation text. The core standards applicable to an insured state bank
and its subsidiary make a
[[Page 47975]]
definition of ``Investment in subsidiary'' superfluous. The core
standards contained in Sec. 362.4(c) set out the requirements in
detail. Therefore, defining the term ``Investment in subsidiary'' no
longer seems to be necessary. We invite comment on whether the readers
view this definition or a similar definition as necessary to enhance
clarity and readability on these issues.
We deleted the definition of ``bona fide subsidiary'' and chose to
make similar characteristics part of the eligible subsidiary criteria
in Sec. 362.4(c)(2). We thought that including these criteria as a part
of the substantive regulation text in that subsection, rather than as a
definition, makes reading the rule easier and the meaning clearer. We
invite comment on whether readers prefer to see this concept set forth
in the substantive section of the rule or the definition section and
whether readers believe any additional definition is necessary to
enhance clarity and readability.
The proposal substitutes the current definition of ``Lower income''
with a cross reference in Sec. 362.3(a)(2)(ii) to the definition of
``low income'' and ``moderate income'' as used for purposes of part 345
of the FDIC's regulations (12 CFR 345) which implements the Community
Reinvestment Act (CRA). 12 U.S.C. 2901, et seq. Under part 345, ``low
income'' means an individual income that is less than 50 percent of the
area median income or a median family income that is less than 50
percent in the case of a census tract or a block numbering area
delineated by the United States Census in the most recent decennial
census. ``Moderate income'' means an individual income that is at least
50 percent but less than 80 percent of the area median or a median
family income that is at least 50 but less than 80 percent in the case
of a census tract or block numbering area.
The definition ``Lower income'' is relevant for purposes of
applying the exception in the regulation which allows an insured state
bank to be a partner in a limited partnership whose sole purpose is
direct or indirect investment in the acquisition, rehabilitation, or
new construction of qualified housing projects (housing for lower
income persons). As we anticipate that insured state banks would seek
to use such investments in meeting their community reinvestment
obligations, the FDIC is of the opinion that conforming the definition
of lower income to that used for CRA purposes will benefit banks. We
note that the change will have the effect of expanding the housing
projects that qualify for the exception. We invite comment on this
change.
We have simplified the definition of the term ``Activity.'' As
modified the definition includes all investments. Where equity
investments are intended to be excluded, we expressly exclude those
investments in the regulation text. We invite comment on whether the
modification to the definition enhances clarity or whether the longer
definition found in the current regulation should be reinstated. In
particular, we invite comment on whether the definition should be
modified to take into account in some fashion a recent interpretation
by the agency under which it was determined that the act of making a
political campaign contribution does not constitute an ``activity'' for
purposes of part 362. The interpretation uses a three prong test to
help determine whether particular conduct should be considered an
activity and therefore subject to review under part 362 if the conduct
is not permissible for a national bank. If at least two of the tests
yield a conclusion that the conduct is part of the authorized conduct
of business by the bank, the better conclusion is that the conduct is
an activity. First, any conduct that is an integral part of the
business of banking as well as any conduct which is closely related or
incidental to banking should be considered an activity . In applying
this test it is important to focus on what banks do that makes them
different from other types of businesses. For example, lending money is
clearly an ``activity'' for purposes of part 362. The second test asks
whether the conduct is merely a corporate function as opposed to a
banking function. For example, paying dividends to shareholders is
primarily a general corporate function and not one associated with
banking because of some unique characteristic of banking as a business.
Generally, activities that are not general corporate functions will
involve interaction between the bank and its customers rather than its
employees or shareholders. The third test asks whether the conduct
involves an attempt by the bank to generate a profit. For example,
banks make loans and accept deposits in an effort to make money.
However, contracting with another company to generate monthly customer
statements should not be considered to be an activity unto itself as it
simply is entered into in support of the ``activity'' of taking
deposits. We also invite any other comments that would make this
definition easier to understand and apply.
The proposal modifies the definition of ``Company'' to add limited
liability companies to the list of entities that will be considered a
company. This change in the definition is being proposed in recognition
of the creation of limited liability companies and their growing
prevalence in the market place. We invite comment on whether this
addition to the list of forms of business enterprise is appropriate and
whether we should add any more forms of business enterprise.
The FDIC has changed the definition of ``Significant risk to the
fund'' by adding the second sentence that clarifies that this
definition includes the risk that may be present either when an
activity or an equity investment contributes or may contribute to the
decline in condition of a particular state-chartered depository
institution or when a type of activity or equity investment is found by
the FDIC to contribute or potentially contribute to the deterioration
of the overall condition of the banking system. We invite comment on
whether the definition should be modified in some other manner and if
so how. Our interpretation of the definition remains unchanged.
Significant risk to the deposit insurance fund shall be understood to
be present whenever there is a high probability that any insurance fund
administered by the FDIC may suffer a loss. The preamble accompanying
the adoption of this definition in final indicated that the FDIC
recognized that no investment or activity may be said to be without
risk under all circumstances and that such fact alone will not cause
the agency to determine that a particular activity or investment poses
a significant risk of loss to the fund. The emphasis rather is on
whether there is a high degree of likelihood under all of the
circumstances that an investment or activity by a particular bank, or
by banks in general or in a given market or region, may ultimately
produce a loss to either of the funds. The relative or absolute size of
the loss that is projected in comparison to the fund will not be
determinative of the issue. The preamble indicated that the definition
is consistent with and derived from the legislative history of section
24 of the FDI Act. Previously, the FDIC rejected the suggestion that
risk to the fund only be found if a particular activity or investment
is expected to result in the imminent failure of a bank. The suggestion
was rejected as the FDIC determined at that time that it was
appropriate to approach the issue conservatively. We think that this
conservatism is more clearly articulated in this modification to the
definition. We invite comments on whether this
[[Page 47976]]
additional language is necessary and whether any other language should
be added.
We re-defined the term ``Well-capitalized'' to incorporate the same
meaning set forth in part 325 of this chapter for an insured state
nonmember bank. For other state-chartered depository institutions, the
term ``well-capitalized'' has the same meaning as set forth in the
capital regulations adopted by the appropriate Federal banking agency.
We decided that it would simplify the calculations for the various
state-chartered depository institutions if the capital definition
imported the definitions used by those institutions when they deal with
their appropriate Federal banking agency. We deleted the other terms
defined under Sec. 362.2(x) as unnecessary due to the changes in the
regulation text. We invite comment on whether we have missed an item
that still needs to be included in this definition.
We added definitions of the following terms: ``Change in control,''
``Institution,'' ``Majority-owned subsidiary,'' ``Security'' and
``State-chartered depository institution.''
Under section 24 of the FDI Act, the grandfather with respect to
common or preferred stock listed on a national securities exchange and
shares of registered investment companies ceases to apply if the bank
undergoes a change in control. The phrase ``Change in control'' is
defined for the purposes of part 362 in what is currently
Sec. 362.3(b)(4)(ii) of the regulation. Under the proposal, the
definition is relocated into the definitions section and modified.
Under the current regulation a ``Change in control'' that will
result in the loss of the grandfather is defined to mean a transaction
in which the bank converts its charter, undergoes a transaction which
requires a notice to be filed under section 7(j) of the FDI Act (12
U.S.C. 1817(j)) except a transaction which is presumed to be a change
in control for the purposes of that section under FDIC's regulations
implementing section 7(j), any transaction subject to section 3 of the
Bank Holding Company Act ( 12 U.S.C. 1842) other than a one bank
holding company formation, a transaction in which the bank is acquired
by or merged into a bank that is not eligible for the grandfather, or a
transaction in which control of the bank's parent company changes. The
proposal would narrow the definition of ``Change in control'' by
defining the phrase to only encompass transactions subject to section
7(j) of the FDI Act (except for transactions which trigger the
presumptions under FDIC's regulations implementing section 7(j) or the
FRB's regulations implementing section 7(j)) and transactions in which
the bank is acquired by or merged into a bank that is not eligible for
the grandfather. This definition change will narrow the instances in
which a bank may lose its grandfathered ability to invest in common or
preferred stock listed on a national securities exchange and shares of
registered investment companies. It is our belief that the revised
definition, if adopted, will more closely approximate when a true
change in control has occurred.
We added a definition of ``Institution'' and defined it to mean the
same as a ``state-chartered depository institution'' to shorten the
drafting of the rule, particularly for those items that are applicable
to both insured state banks and insured state savings associations.
This definition is intended to enhance readability. We invite comment
on whether this definition creates any confusion or ambiguity.
We added a definition of ``Majority-owned subsidiary'' and defined
it to mean any corporation in which the parent insured state bank owns
a majority of the outstanding voting stock. We added this definition to
clarify our intention that the expedited notice procedures only be
available when an insured state bank interposes an entity that gives
limited liability to the parent institution. We interpret Congress's
intention in imposing the majority-owned subsidiary requirement in
section 24 of the FDI Act to generally require that such a subsidiary
provide limited liability to the insured state bank. Thus, except in
unusual circumstances, we have and will require majority-owned
subsidiaries to adopt a form of business that provides limited
liability to the parent bank. In assessing our experience with
applications, we have determined that the notice procedure will be
available only to banks that engage in activities through a majority-
owned subsidiary that takes the corporate form of business. We welcome
applications that may take a different form of business such as a
limited partnership or limited liability company, but would like to
develop more experience with appropriate separations to protect the
bank from liability under these other forms of business enterprise
through the application process before including these entities in a
notice procedure. We have decided that there may have been an ambiguity
in the notice provisions we proposed for comment and published August
23, 1996, in the Federal Register at 61 FR 43486. We intended that an
entity eligible for the notice procedure be in corporate form and
implied that requirement by incorporating the bona fide subsidiary
requirements that included references to a board of directors. The
addition of this definition should make our intention clear that the
notice procedure requires a majority-owned subsidiary to take the
corporate form. We invite comment on this definition, our substantive
decision to require the corporate form for a majority-owned subsidiary
of an insured state bank using the notice procedures, and our decision
to exclude other limited liability business forms from the notice
procedure. We also invite comment on any ambiguities or questions that
this definition may create.
We adopted the definition of ``Security'' from part 344 of this
chapter to eliminate any ambiguity over the coverage of this rule when
securities activities and investments are contemplated. We invite
comment on any ambiguities or questions that this definition may
create.
We defined ``State-chartered depository institution'' to mean any
state bank or state savings association insured by the FDIC to
eliminate confusion and ambiguity. We invite comment on any ambiguities
or questions that this definition may create.
We invite any general comment on the proposed definitions and
invite any suggestions for additional definitions that would be helpful
to the reader of the regulatory text.
Section 362.3 Activities of Insured State Banks
Equity Investment Prohibition
Section 362.3(a) of the proposal restates the statutory prohibition
on insured state banks making or retaining any equity investment of a
type that is not permissible for a national bank. The prohibition does
not apply if one of the statutory exceptions contained in section 24 of
the FDI Act (restated in the current regulation and carried forward in
the proposal) applies. The provision is being retained. The proposal
eliminates the reference to amount that is contained in the current
version of Sec. 362.3(a). We have reconsidered our interpretation of
the language of section 24 where paragraph (c) prohibits an insured
state bank from acquiring or retaining any equity investment of a type
that is impermissible for a national bank and paragraph (f) prohibits
an insured state bank from acquiring or retaining any equity investment
of a type or in an amount that is impermissible for a national bank. We
[[Page 47977]]
previously interpreted the language of paragraph (f) as controlling and
read that language into the entire statute. We reconsidered this
approach, decided that it was not the most reasonable construction of
this statute and determined that the language of paragraph (c) is
controlling. Thus, the language of paragraph (c) controls when any
other equity investment is being considered. Therefore, we deleted the
amount language from prohibition in the regulation. We request comment
on this change.
Exception for Majority-Owned Subsidiary
The FDIC proposes to retain the exception which allows investment
in majority-owned subsidiaries as currently in effect without any
substantive change. However, the FDIC has modified the language of this
section to remove negative inferences and make the text clearer. Rather
than stating that the bank may do what is not prohibited, the FDIC is
affirmatively stating that an insured state chartered bank may acquire
or retain investments through a majority-owned subsidiary. If an
insured state bank holds less than a majority interest in the
subsidiary, and that equity investment is of a type that would be
prohibited to a national bank, the exception does not apply and the
investment is subject to divestiture.
Majority ownership for the exception is understood to mean
ownership of greater than 50 percent of the outstanding voting stock of
the subsidiary. It is our understanding that national banks may own a
minority interest in certain types of subsidiaries. (See 12 CFR
5.34(1997)). Therefore, an insured state bank may hold a minority
interest in a subsidiary if a national bank could do so. Thus, the
statute does not necessarily require a state bank to hold at least a
majority of the stock of a company in order for the equity investment
in the company to be permissible under the regulation. Only investments
that would not be permissible for a national bank must be held through
a majority-owned subsidiary.
The regulation defines the business form of a majority-owned
subsidiary to be a corporation. There may be other forms of business
organization that are suitable for the purposes of this exception such
as partnerships or limited liability companies. The FDIC does not wish
to give blanket authorization to a non-corporate form of organization
since these forms may not provide for the same separations the FDIC
believes to be necessary to protect the insured bank from assuming the
liabilities of its subsidiary. The proposal anticipates that the Board
will review alternate forms of organization to assure that appropriate
separation between the insured depository institution and the
subsidiary is in place. We are soliciting comment on other forms of
business organization which the FDIC may allow. Please provide a
discussion of the separations inherent in alternate forms of business
organization.
To qualify for this exception, the majority-owned subsidiary must
engage in activities that are described in Sec. 362.4(b). The allowable
activities include both statutory and regulatory exceptions to the
general prohibitions of the regulation.
Investments in Qualified Housing Projects
The FDIC proposes to combine the language found in two paragraphs
of the current regulation. The FDIC proposes to retain the combined
paragraphs of the regulation with substantially the same language as
currently in effect. The changes that have been made reflect practical
clarifications resulting from the implications of the technical way the
qualified housing rules work and are not intended to be substantive. In
addition, the FDIC has modified the language of the text to remove
negative inferences and make the text clearer. Section 362.3(a)(2)(ii)
of the proposal provides an exception for qualified housing projects.
Under the exception, an insured state bank is not prohibited from
investing as a limited partner in a partnership, the sole purpose of
which is direct or indirect investment in the acquisition,
rehabilitation, or new construction of a residential housing project
intended to primarily benefit lower income persons throughout the
period of the bank's investment. The bank's investments, when
aggregated with any existing investment in such a partnership or
partnerships, may not exceed 2 percent of the bank's total assets. The
FDIC expects that banks use the figure reported on the bank's most
recent consolidated report of condition prior to making the investment
as the measure of their total assets. If an investment in a qualified
housing project does not exceed the limit at the time the investment
was made, the investment shall be considered to be a legal investment
even if the bank's total assets subsequently decline.
The current exception is limited to instances in which the bank
invests as a limited partner in a partnership. Comment is invited on
(1) whether the FDIC should expand the exception to include limited
liability companies and (2) whether doing so is permissible under the
statute. (Section 24(c)(3) of the FDI Act provides that a state bank
may invest ``as a limited partner in a partnership.'')
Grandfathered Investments in Listed Common or Preferred Stock and
Shares of Registered Investment Companies
The current regulation restates the statutory exception for
investments in common or preferred stock listed on a national
securities exchange and for shares of investment companies registered
under the Investment Company Act of 1940 that is available to certain
state banks if they meet the requirements to be eligible for the
grandfather. The statute requires, among other things, that a state
bank file a notice with the FDIC before relying on the exception and
that the FDIC approve the notice. The notice requirement, content of
notice, presumptions with respect to the notice, and the maximum
permissible investment under the grandfather also are set out in the
current regulation. The FDIC proposes to retain the regulatory language
as currently in effect without any substantive change. The exception is
found in Sec. 362.3(a)(2)(iii) of the proposal. Although there would be
no substantive change, the FDIC has modified the language of this
section to remove negative inferences and make the text clearer.
We deleted the reference in the current regulation describing the
notice content and procedure because we believe that most, if not all,
of the banks eligible for the grandfather already have filed notices
with the FDIC. Thus, we shortened the regulation by eliminating
language governing the specific content and processing of the notices.
Investment in common or preferred stock listed on a national securities
exchange or shares of an investment company is governed by the language
of the statute. Notices must conform to the statutory requirements
whether filed previously or filed in the future. Any bank that has
filed a notice need not file again. Comment is invited on whether the
regulatory filing requirements should be retained and eventually moved
into part 303 of this chapter.
Section 362.3(a)(2)(iii)(A) of the proposal implements the
grandfathered listed stock and registered shares provision found in
section 24(f)(2) of the FDI Act. Paragraph (B) of this section of the
proposal provides that the exception for listed stock and registered
shares ceases to apply in the event that the bank converts its charter
or the bank or its parent holding company undergoes a change in
control. This language restates the statutory language governing when
[[Page 47978]]
grandfather rights terminate. State banks should continue to be aware
that, depending upon the circumstances, the exception may be considered
lost after a merger transaction in which an eligible bank is the
survivor. For example, if a state bank that is not eligible for the
exception is merged into a much smaller state bank that is eligible for
the exception, the FDIC may determine that in substance the eligible
bank has been acquired by a bank that is not eligible for the
exception.
The regulation continues to provide that in the event an eligible
bank undergoes any transaction that results in the loss of the
exception, the bank is not prohibited from retaining its existing
investments unless the FDIC determines that retaining the investments
will adversely affect the bank and the FDIC orders the bank to divest
the stock and/or shares. This provision has been retained in the
regulation without any change except for the deletion of the citation
to specific authorities the FDIC may rely on to order divestiture.
Rather than containing specific citations, the proposal merely
references FDIC's ability to order divestiture under any applicable
authority. State banks should continue to be aware that any inaction by
the FDIC would not preclude a bank's appropriate banking agency (when
that agency is an agency other than the FDIC) from taking steps to
require divestiture of the stock and/or shares if in that agency's
judgment divestiture is warranted.
Finally, the FDIC has moved, simplified and shortened the limit on
the maximum permissible investment in listed stock and registered
shares. The proposal limits the investment in grandfathered listed
stock and registered shares to a maximum of one hundred percent (100
percent) of tier one capital as measured on the bank's most recent
consolidated report of condition. The FDIC continues to use book value
as the measure of compliance with this limitation. Language indicating
that investments by well-capitalized banks in amounts up to 100 percent
of tier one capital will be presumed not to present a significant risk
to the fund is being deleted as is language indicating that it will be
presumed to present a significant risk to the fund for an
undercapitalized bank to invest in amounts that high. In addition, we
deleted the language stating the presumption that, absent some
mitigating factor, it will not be presumed to present a significant
risk for an adequately capitalized bank to invest up to 100 percent of
tier one capital. At this time we believe that it is not necessary to
expressly state these presumptions in the regulation.
Language in the current regulation concerning the divestiture of
stock and/or shares in excess of that permitted by the FDIC (as well as
such investments in excess of 100 percent of the bank's tier one
capital) is deleted under the proposal as no longer necessary due to
the passage of time. In both instances the time allowed for such
divestiture has passed.
Comment is invited on whether this grandfather exception for
investment in listed stock and registered shares should be applied by
the FDIC as an exception that is separate and distinct from any other
exception under the regulation that would allow a subsidiary of an
insured state bank to hold equity securities. In short, should we allow
this exception in addition to the exception for stock discussed below
or should the FDIC consider any listed stock held by a subsidiary of
the bank pursuant to an exception in the regulation toward the 100
percent of tier one capital limit under this exception? We note that
the statute does not itself impose any conditions or restrictions on a
bank that enjoys the grandfather in terms of per issuer limits. Comment
is sought on whether it is appropriate to impose restrictions under the
regulation that would, for example, limit a bank to investing in less
than a controlling interest in any given issuer. Is there some other
limit or restriction the FDIC should consider imposing by regulation
that is important to ensuring that the grandfathered investments do not
pose a risk? Should this be done, if at all, solely through the notice
and approval process?
Stock Investment in Insured Depository Institutions Owned Exclusively
by Other Banks and Savings Associations
The content of the proposed regulation reflects the statutory
exception that an insured state bank is not prohibited from acquiring
or retaining the shares of depository institutions that engage only in
activities permissible for national banks, are subject to examination
and are regulated by a state bank supervisor, and are owned by 20 or
more depository institutions not one of which owns more than 15 percent
of the voting shares. In addition, the voting shares must be held only
by depository institutions (other than directors' qualifying shares or
shares held under or acquired through a plan established for the
benefit of the officers and employees). Section 24(f)(3)(B) of the FDI
Act does not limit the exception to voting stock. We are not proposing
to eliminate the reference to ``voting'' in the current regulation when
referencing control of the insured depository institution. Any other
reference to voting stock has been eliminated in the exception to allow
holding of non-voting stock. The FDIC seeks comment concerning
retaining the reference to ``voting'' stock when calculating the 15
percent ownership limitation contained in the statute.
Stock Investments in Insurance Companies
Section 362.3(b)(2)(v) of the proposal contains exceptions that
permit state banks to hold equity investments in insurance companies.
The exceptions are provided by statute and implemented in the current
version of part 362. For the most part, we brought the exceptions
forward into this proposal with no substantive editing. The exceptions
are discussed separately below.
Directors and Officers Liability Insurance Corporations
The first statutory exception permits insured state banks to own
stock in corporations that solely underwrite or reinsure financial
institution directors' and officers' liability insurance or blanket
bond group insurance. A bank's investment in any one corporation is
limited to 10 percent of the outstanding stock. We eliminated the
present limitation of 10 percent of the ``voting'' stock and changed
the present reference from ``company'' to ``corporation,'' conforming
the language to the statutory exception.
While the statute and regulation provide a limit on a bank's
investment in the stock of any one insurance company, there is no
statutory or regulatory ``aggregate'' investment limit in all insurance
companies nor does the statute combine this equity investment with any
other exception under which a state bank may invest in equity
securities. In the past, the FDIC has addressed investment
concentration and diversification issues on a case-by-case basis. The
FDIC is not at this time proposing to impose aggregate investment
limits on equity investments which have specific statutory carve outs
nor are we proposing to combine those investments with other equity
investments made under the exceptions to the regulation for which
aggregate investments are being proposed. The FDIC would like to
receive comment, however, on whether there should be an ``aggregate''
investment limit for equity investments in insurance companies.
[[Page 47979]]
Stock of Savings Bank Life Insurance Company
The second statutory exception for equity investments in insurance
companies permits any insured state bank located in the states of New
York, Massachusetts and Connecticut to own stock in savings bank life
insurance companies provided that consumer disclosures are made. Again,
this regulatory provision mirrors the specific statutory carve out
found in Section 24 and is contained in the present regulation. We have
carried this provision forward into the proposal with some changes.
The savings bank life insurance investment exception is broader
than the director and officer liability insurance company exception
discussed above. There are no individual or aggregate investment
limitations for investments in savings bank life insurance companies.
The proposed language is shorter than the existing regulation and makes
a substantive change by clarifying what the required disclosures are
for insured banks selling these products. As was indicated above,
insured banks located in New York, Massachusetts and Connecticut are
permitted to invest in the stock of a savings bank life insurance
company as long as certain disclosure requirements are met. The FDIC
proposes to amend the regulatory language to specifically require
compliance with the Interagency Statement in lieu of the disclosures
presently set out in the regulation. Insured banks selling savings bank
life insurance policies, other insurance products and annuities will be
required to provide customers with written disclosures that are
consistent with the Interagency Statement which include a statement
that the products are not insured by the FDIC, are not guaranteed by
the bank, and may involve risk of loss. The last disclosure--that such
products may involve risk of loss--is not currently required under the
regulation.
The FDIC would like to request comment regarding the disclosure
obligations of insured banks. It is the FDIC's view that savings bank
life insurance, other insurance products and annuities are ``nondeposit
investment products'' as that term is used in the Interagency
Statement. The FDIC is aware that insurance companies typically offer
annuity products and that many states regulate annuities through their
insurance departments. However, the FDIC agrees with the Comptroller of
the Currency that annuities are financial products and not insurance.
Nevertheless, annuities are nondeposit investment products and are
therefore subject to the requirements found in the Interagency
Statement when sold to retail customers on bank premises as well as in
other instances. On this basis, all the requirements in the Interagency
Statement should apply to the marketing and sale of annuities by a
financial institution.
While the existing regulatory language is similar to the
Interagency Statement in what it requires to be disclosed, it is not
identical. The FDIC believes the proposed changes will clarify the
standards which are to be followed by insured state banks.
It could be argued that the regulatory language in this part
repeats existing guidance and is unnecessary. We note, however, that
the statute requires that disclosures be made in order for the
exception to be available. While the Interagency Statement is
enforceable in the sense that noncompliance may constitute an unsafe or
unsound banking practice that may give rise to a cease and desist
action, the Interagency Statement is not itself a regulation with the
force and effect of law.
We seek comments on whether it would be preferable for the
regulation to fully set out the disclosure requirements rather than
cross referencing the Interagency Statement. Commenters should address
these points, as well as discuss the differences between enforcing
specific regulatory language versus enforcing a policy statement. We
invite comments on the applicability of the Interagency Statement in
the absence of the language referencing it in this regulation. We
invite comment on whether using the Interagency Statement makes
compliance easier for banks as it provides uniform standards applicable
to multiple products. We also invite comment on any other issues that
are of concern to the industry or the public in using these particular
disclosures when selling insurance and annuity products.
Other Activities Prohibition
Section 362.3(b) of the proposal restates the statutory prohibition
on insured state banks directly or indirectly engaging as principal in
any activity that is not permissible for a national bank. Activity is
defined in this proposal as the conduct of business by a state-
chartered depository institution, including acquiring or retaining any
investment. Because acquiring or retaining an investment is an activity
by definition, language has been added to make clear that this
prohibition does not supersede the equity investment exception of
Sec. 362.3(b). The prohibition does not apply if one of the statutory
exceptions contained in section 24 of the FDI Act (restated in the
current regulation and carried forward in the proposal) applies. The
FDIC has provided two regulatory exceptions to the prohibition on other
activities.
Consent Through Application
The limitation on activities contained in the statute states that
an insured state bank may not engage as principal in any type of
activity that is not permissible for a national bank unless the FDIC
has determined that the activity would pose no significant risk to the
appropriate deposit insurance fund, and the bank is and continues to be
in compliance with applicable capital standards prescribed by the
appropriate federal banking agency. Section 362.3(b)(2)(i) establishes
an application process for the FDIC to make the determination
concerning risk to the funds. The substance of this process is
unchanged from the current regulation.
Insurance Underwriting
This exception tracks the statutory exception in section 24 of the
FDI Act which grandfathers (1) an insured state bank engaged in the
underwriting of savings bank life insurance through a department of the
bank; (2) any insured state bank that engaged in underwriting of
insurance on or before September 30, 1991, which was reinsured in whole
or in part by the Federal Crop Insurance Corporation; and (3) well-
capitalized banks engaged in insurance underwriting through a
department of a bank. The exception is carried over from the current
regulation with a number of proposed modifications.
To use the savings bank life insurance exception, an insured state
bank located in Massachusetts, New York or Connecticut must engage in
the activity through a department of the bank that meets core standards
discussed below. The standards for conducting this activity are taken
from the current regulation with the exception of disclosure standards
which are discussed below. We have moved the requirements for a
department from the definitions to the substantive portion of the
regulation text.
The exception for underwriting federal crop insurance reflects the
statutory exception. This exception is unchanged from the current
regulation, and there are no regulatory limitations on the conduct of
the activity.
An insured state bank that wishes to use the grandfathered
insurance underwriting exception may do so only if the insured state
bank was lawfully providing insurance, as principal, as of November 21,
1991. Further, an insured
[[Page 47980]]
state bank must be well-capitalized if it is to engage in insurance
underwriting, and the bank must conduct the insurance underwriting in a
department that meets the core standards described below.
Banks taking advantage of this grandfather provision only may
underwrite the same type of insurance that was underwritten as of
November 21, 1991 and only may operate and have customers in the same
states in which it was underwriting policies on November 21, 1991. The
grandfather authority for this activity does not terminate upon a
change in control of the bank or its parent holding company.
Both savings bank life insurance activities and grandfathered
insurance underwriting must take place in a department of the bank
which meets certain core standards. The core operating standards for
the department require the department to provide customers with written
disclosures that are consistent with those in the Interagency
Statement. Consistent with the disclosure requirements of the current
regulation, the proposed rule requires the department to inform its
customers that only the assets of the department may be used to satisfy
the obligations of the department. Note that this language does not
require the bank to say that the bank is not obligated for the
obligations of the department. The bank and the department constitute
one corporate entity. In the event of insolvency, the insurance
underwriting department's assets and liabilities would be segregated
from the bank's assets and liabilities due to the requirements of state
law.
The FDIC views any financial product that is not a deposit and
entails some investment component to be a ``nondeposit investment
product'' subject to the Interagency Statement. Part 362 was
promulgated in 1992 before the Interagency Statement was issued in
February of 1994. While the disclosures currently required by part 362
are similar to the disclosures set out in the Interagency Statement,
they are not identical. Banks that engage in insurance underwriting are
thus covered by the Interagency Statement and part 362 and must comply
with similar but somewhat different requirements. We are proposing to
cross reference the Interagency Statement in part 362 to make
compliance clearer. We believe that using the uniform standards set
forth in the Interagency Statement will make compliance easier.
In the case of insurance underwriting activities conducted by a
department of the bank, the disclosure required by the Interagency
Statement that the product is not an obligation of the bank is not
correct as noted above, and the suggested language in the regulation
does not require this disclosure. This clarification is consistent with
other interpretations of the Interagency Statement which stated that
disclosures should be consistent with the types of products offered.
The FDIC would like to receive comment on whether such clarification is
necessary or whether the regulation language is seen as duplicating
other guidance.
The FDIC notes that the consumer disclosures are statutorily
required for savings bank life insurance. The Interagency Statement is
joint supervisory guidance issued by the Federal Banking Agencies, not
a regulation. The FDIC requests comment regarding the enforceability of
the Interagency Statement versus a regulation promulgated under the
rulemaking requirements of the Administrative Procedures Act.
The core separation standards restate the requirements currently
found in the definition of department. These standards require that the
department (1) be physically distinct from the remainder of the bank,
(2) maintain separate accounting and other records, (3) have assets,
liabilities, obligations and expenses that are separate and distinct
from those of the remainder of the bank; and (4) be subject to state
statutes that require the obligations, liabilities and expenses be
satisfied only with the assets of the department. The standards in the
proposed regulation are not changed from the current regulation, but
have been moved from the definitions section of the regulation to
ensure that requirements of the rule are shown in connection with the
appropriate regulatory exception.
Acquiring and Retaining Adjustable Rate and Money Market Preferred
Stock by the Bank
The proposal provides an exception that allows a state bank to
invest in up to 15 percent of the bank's tier one capital in adjustable
rate preferred stock and money market (auction rate) preferred stock
without filing an application with the FDIC. The exception was adopted
when the 1992 version of the regulation was adopted in final form. At
that time after reviewing comments, the FDIC found that adjustable rate
preferred stock and money market (auction rate) preferred stock were
essentially substitutes for money market investments such as commercial
paper and that their characteristics are closer to debt than to equity
securities. Therefore, money market preferred stock and adjustable rate
preferred stock were excluded from the definition of equity security.
As a result, these investments are not subject to the equity investment
prohibitions of the statute and of the regulation and are considered to
be an ``other activity'' for the purposes of this regulation.
This exception focuses on two categories of preferred stock. This
first category, adjustable rate preferred stock refers to shares where
dividends are established by contract through the use of a formula
based on Treasury rates or some other readily available interest rate
levels. Money market preferred stock refers to those issues where
dividends are established through a periodic auction process that
establishes yields in relation to short term rates paid on commercial
paper issued by the same or a similar company. The credit quality of
the issuer determines the value of the security, and money market
preferred shares are sold at auction.
We have modified the exception under the proposal by limiting the
15 percent measurement to tier one capital, rather than total capital.
Throughout the current proposal, we have measured capital-based
limitations against tier one capital. We changed the base in this
provision to increase uniformity within the regulation. We recognize
that this change may lower the permitted amount of these investments
held by institutions already engaged in the activity. An insured state
bank that has investments exceeding the proposed limit, but within the
total capital limit, may continue holding those investments until they
are redeemed or repurchased by the issuer. The 15 percent of tier one
capital limitation should be used in determining the allowable amount
of new purchases of money market preferred and adjustable rate
preferred stock. Of course, any institution that wants to increase its
holding of these securities may submit an application to the FDIC.
The FDIC seeks comment on whether this treatment of money market
preferred stock and adjustable rate preferred stock is still
appropriate. Comment is requested concerning whether other similar
types of investments should be given similar treatment. Comments also
are requested on whether the reduced capital base affects any
institution currently holding these investments or is likely to affect
the investment plans of any institution.
Activities That Are Closely Related to Banking Conducted by Bank or Its
Subsidiary
The proposed regulation continues the language found in the current
regulation titled, ``Activities that are
[[Page 47981]]
closely related to banking.'' This section permits an insured state
bank to engage as principal in any activity that is not permissible for
a national bank provided that the FRB by regulation or order has found
the activity to be closely related to banking for the purposes of
section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)).
This exception is subject to the statutory prohibition that does not
allow the FDIC to permit the bank to directly hold equity securities
that a national bank may not hold and which are not otherwise
permissible investments for insured state banks pursuant to
Sec. 362.3(b).
Additional language has been added to clarify that this subsection
does not authorize an insured state bank engaged in real estate leasing
to hold the leased property for more than two years at the end of the
lease unless the property is re-leased. This language is added to
ensure that this provision does not allow an insured state bank to hold
an equity interest in real estate after the end of the lease period.
The FDIC has decided to provide a two-year period for the bank to
divest the property if the bank cannot lease the property again.
Comment is invited on the reasonableness of this approach. Should the
FDIC consider an alternative approach that a bank may not enter a non-
operating lease unless title reverts to the lessee at the end of the
lease period? Are there other standards that the FDIC should consider
in this matter?
As does the current regulation, these provisions allow a state bank
to directly engage in any ``as principal'' activity included on the
FRB's list of activities that are closely related to banking (found at
12 CFR 225.28) and ``as principal'' in any activity with respect to
which the FRB has issued an order finding that the activity is closely
related to banking.
However, the consent to engage in real estate leasing directly by
an insured state bank has been modified. Comment is requested on
whether there are any additional activities permitted under the
proposed language that should be modified. Comment is requested on the
effect of the proposed treatment of real estate leasing activities on
banks that may want to engage in this activity in the future. Comment
also is requested on the perceived risks of leasing activities and
whether we should impose standards to address those risks. Comment is
requested on whether we should consider any other approach, including
returning to the language in the current regulation or deleting the
references to the Bank Holding Company Act (12 U.S.C. 1843(c)(8) and
the activities that the FRB by regulation or order has found to be
closely related to banking for the purposes of section 4(c)(8).
Guarantee Activities by Banks
The current regulation contains a provision that permits a state
bank with a foreign branch to directly guarantee the obligations of its
customers as set out in Sec. 347.3(c)(1) of the FDIC's regulations
without filing any application under part 362. It also permits a state
bank to offer customer-sponsored credit card programs in which the bank
guarantees the obligations of its retail banking deposit customers.
This provision has been deleted as unnecessary since we understand that
these activities are permissible for a national bank. In its current
rule, the FDIC added this provision to clarify that part 362 does not
prohibit these activities; however to shorten the regulation, such
clarifying language has been deleted since the activity is permissible
for a national bank. The FDIC seeks comment as to whether the deletion
of this language has an adverse impact on insured state depository
institutions and if there are specific activities that this provision
allowed that are not permissible for a national bank.
In the FDIC's proposal regarding the consolidation and
simplification of its international banking regulations found in the
Federal Register on July 15, 1997, at 62 FR 37748, a technical
amendment to the current version of part 362 is found. This amendment
updates the reference to Sec. 347.103(a)(1) of this chapter in
Sec. 362.4(c)(3)(I)(A). This amendment may become final as a part of
the consolidation and simplification of the FDIC's international
banking regulations to reflect the correct citation in the current
version of part 362. Nevertheless, we propose to eliminate the
references to guarantee activities in this proposal because we consider
them unnecessary as they duplicate powers granted to national banks. As
previously stated, we invite comment on the necessity of including
specific language dealing with the power to guarantee customer
obligations in the regulatory text of part 362.
Section 362.4 Subsidiaries of Insured State Banks
General Prohibition
The regulatory language implementing the statutory prohibition on
``as principal'' activities that are not permissible for a subsidiary
of a national bank has been separated from the prohibition on
activities which are not permissible for a national bank conducted in
the bank. By separating bank and subsidiary activities, Sec. 362.4 now
deals exclusively with activities that may be conducted in a subsidiary
of an insured state bank. We believe that separating the activities
that may be conducted at the bank level from the activities that must
be conducted by a subsidiary makes it easier for the reader to
understand the intent of the regulation. We invite comment on whether
this structure is more useful to the reader. We also invite comment on
whether any additional changes would make it easier for the reader to
interpret the regulation text.
Exceptions
Prohibited activities may not be conducted unless one of the
exceptions in the regulation applies. This language is similar to the
current part 362 and results in no substantive change to the
prohibition.
Consent Obtained Through Application
The proposal continues to allow approval by individual application
provided that the insured state bank meets and continues to meet the
applicable capital standards and the FDIC finds there is no significant
risk to the fund. The proposal would delete the language expressly
providing that approval is necessary for each subsidiary even if the
bank received approval to engage in the same activity through another
subsidiary. Deleting this language will not automatically permit a
state bank to establish a second subsidiary to conduct the same
activity that was approved for another subsidiary of the same bank.
Deleting the language leaves the issue to be handled on a case-by-case
basis by the FDIC pursuant to order. For example, if the FDIC approves
an application by a state bank to establish a majority-owned subsidiary
to engage in real estate investment activities, the order may (in the
FDIC's discretion) be written to allow additional such subsidiaries or
to require that any additional real estate subsidiaries must be
individually approved.
The notice procedures described herein requires that the subsidiary
must take the corporate organizational form. Insured state banks that
organize subsidiaries in a form other than a corporation may make
application under this section. Any bank that does not meet the notice
criteria or that desires relief from a limit or restriction included in
the notice criteria may also file an application under this section and
are encouraged to do so.
[[Page 47982]]
Application instructions have been moved to subpart E.
Language has been eliminated that prohibited an insured state bank
from engaging in insurance underwriting through a subsidiary except to
the extent that such activities are permissible for a national bank.
Eliminating this language does not result in any substantive change as
section 24 of the FDI Act clearly provides that the FDIC may not
approve an application for a state bank to directly or indirectly
conduct insurance underwriting activities that are not permissible for
a national bank. We invite comment on whether the language should be
retained in the regulation to make it clear to state banks that
applications to conduct such activities will not be approved.
The current part 362 allows state banks that do not meet their
minimum capital requirements to gradually phase out otherwise
impermissible activities that were being conducted as of December 19,
1992. These provisions are eliminated under the proposal due to the
passage of time. The relevant outside dates to complete the phase out
of those activities have passed (December 19, 1996, for real estate
activities and December 8, 1994, for all other activities).
Grandfathered Insurance Underwriting
The proposed regulation provides for three statutory exceptions
that allow subsidiaries to engage in insurance underwriting.
Subsidiaries may engage in the same grandfathered insurance
underwriting as the bank if the bank or subsidiary was lawfully
providing insurance as principal on November 21, 1991.
The limitations under which this subsidiary may operate have been
changed. Under the current regulation, the bank must be well-
capitalized. Under the proposal, the bank must be well-capitalized
after deducting its investment in the insurance subsidiary. The FDIC
believes that the capital deduction is an important element in
separating the operations of the bank and the subsidiary. This
deduction clearly delineates the capital that is available to support
the bank and the capital that is available to support the subsidiary.
Capital standards for insurance companies are based on different
criteria from bank capital requirements. Most states have minimum
capital requirements for insurance companies. The FDIC believes that a
bank's investment in an insurance underwriting subsidiary is not
actually ``available'' to the bank in the event the bank experiences
losses and needs a cash infusion. As a result, the bank's investment in
the insurance subsidiary should not be considered when determining
whether the bank has sufficient capital to meet its needs. Comment is
invited on whether the capital deduction is appropriate or necessary.
If the FDIC requires a capital deduction, should it be required in the
case of any insurance underwriting subsidiary that is given a statutory
grandfather, e.g., should title insurance subsidiaries also be subject
to the capital deduction? Should the capital deduction treatment depend
upon what type of insurance is underwritten (if there is a greater risk
associated with the insurance, should the capital deduction be
required)? Is the phase-in period appropriate and clearly written?
The proposed regulation requires a subsidiary engaging in
grandfathered insurance underwriting to meet the standards for an
``eligible subsidiary'' discussed below. This standard replaces the
``bona fide'' subsidiary standard in the current regulation. The
``eligible subsidiary'' standard generally contains the same
requirements for corporate separateness as the ``bona fide'' subsidiary
definition but adds the following provisions: (1) the subsidiary has
only one business purpose; (2) the subsidiary has a current written
business plan that is appropriate to its type and scope of business;
(3) the subsidiary has adequate management for the type of activity
contemplated, including appropriate licenses and memberships, and
complies with industry standards; and (4) the subsidiary establishes
policies and procedures to ensure adequate computer, audit and
accounting systems, internal risk management controls, and the
subsidiary has the necessary operational and managerial infrastructure
to implement the business plan. The FDIC requests comment on the effect
of these additional requirements on banks engaged in insurance
underwriting. We invite comment on whether these requirements
appropriately separate the subsidiary from the bank. We request comment
on whether the restrictions are appropriate to the identified risks
being undertaken by these banks.
In lieu of the prescribed disclosures contained in the current
regulation, the proposal prescribes that disclosures consistent with
the Interagency Statement be made. The proposal also eliminates the
acceptance of disclosures that are required by state law. While the
current regulation requires disclosures, those disclosures are similar
but not identical to the disclosures required by the Interagency
Statement. Again, this proposed change is intended to make compliance
with the Interagency Statement and the regulation easier. Comment is
sought on whether the disclosure requirements in the regulation are
necessary now that the Interagency Statement has been adopted. Any
retail sale of nondeposit investment products to bank customers is
subject to the Interagency Statement. The FDIC recognizes that some
grandfathered insurance underwriting subsidiaries may have a line of
business and customer base which is completely separate from the bank's
operations. The Interagency Statement would not normally apply as the
Statement does not technically apply unless there is a ``retail sale''
to a ``bank customer.'' If the FDIC were to rely wholly upon the
Interagency Statement there would be a gap from the current coverage of
the disclosure requirements. Should that be of concern to the FDIC?
Banks with subsidiaries engaged in grandfathered insurance
underwriting activities are expected to meet the new requirements of
this proposal. Banks which are not in compliance with the requirements
should provide a notice to the FDIC pursuant to Sec. 362.5(b). The FDIC
will consider the notices on a case-by-case basis.
The regulation provides that a subsidiary may continue to
underwrite title insurance based on the specific statutory authority
from section 24. This provision is currently in part 362 and is carried
forward into the proposal with no substantive change. The insured state
bank is only permitted to retain the investment if the insured state
bank was required, before June 1, 1991, to provide title insurance as a
condition of the bank's initial chartering under state law. The
authority to retain the investment terminates if a change in control of
the grandfathered bank or its holding company occurs after June 1,
1991. There are no statutory or regulatory investment limits on banks
holding these types of grandfathered investments.
The exception for subsidiaries engaged in underwriting crop
insurance is continued. Under section 24, insured state banks and their
subsidiaries are permitted to continue underwriting crop insurance
under two conditions: (1) they were engaged in the business on or
before September 30, 1991, and (2) the crop insurance was reinsured in
whole or in part by the Federal Crop Insurance Corporation. While this
grandfathered insurance underwriting authority requires that the bank
or its subsidiary had to be engaged in the activity as of a certain
date, the authority does not
[[Page 47983]]
terminate upon a change in control of the bank or its parent holding
company.
Majority-owned Subsidiaries Which Own a Control Interest in Companies
Engaged in Permissible Activities
The FDIC has found that it is not a significant risk to the deposit
insurance funds if a majority-owned subsidiary holds stock of a company
that engages in (1) any activity permissible for a national bank; (2)
any activity permissible for the bank itself (except engaging in
insurance underwriting and holding grandfathered equity investments);
(3) activities that are not conducted ``as principal;'' or (4) activity
that is not permissible for a national bank provided the Federal
Reserve Board by regulation or order has found the activity to be
closely related to banking, if the majority-owned subsidiary exercises
control over the issuer of the stock purchased by the subsidiary. These
exceptions are found in the current regulation but do not contain the
provision that the majority-owned subsidiary must exercise
control.1 This change clarifies that this exception is
intended only for subsidiaries that are operating a business that is
either permissible for the bank itself or is considered to be operated
other than ``as principal.'' As rewritten, the proposal differentiates
between the types of stock held by a majority-owned subsidiary--having
a controlling interest and simply investing in the shares of a company.
The FDIC intends that this provision cover lower level subsidiaries
that are engaged in activities that the FDIC has found present no
significant risk to the fund. The FDIC expects lower level subsidiaries
that engage in other activities to conform to the application or notice
procedures of this regulation. The FDIC recognizes that changing the
level of ownership permissible for these activities may adversely
affect some insured state bank. We invite comment on the effect of this
change. The FDIC invites comment on whether this language change was
necessary, whether it should be concerned about lower level
subsidiaries, whether this approach is appropriate to the risks
inherent in the activities and whether any other approach, including
returning to the language in the current regulation should be
considered.
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\1\ The current regulatory exception for activities conducted
not as principal provides for a test of 50% or less of the stock of
a corporation which engages solely in activities which are not
considered to be as principal. The term ``corporation'' is being
changed to ``company'' to accommodate the other forms of business
enterprise listed in the definition. The reference to 50% or less is
being deleted in order to avoid the confusion generated by that
limitation.
---------------------------------------------------------------------------
We deleted one other form of stock ownership at the majority
subsidiary level from the current regulation by deleting the language
now found in Sec. 362.4(c)(3)(iv)(C) of the current regulation titled,
``Stock of a corporation that engages in activities permissible for a
bank service corporation.'' Through a majority-owned subsidiary, this
section of the current regulation allows an insured state bank to
invest in 50% or less of the stock of a corporation which engages
solely in any activity that is permissible for a bank service
corporation. Since bank service corporations may engage in any activity
that is closely related to banking, this exception also allowed
majority-owned subsidiaries to own stock in those entities that solely
engaged in activities that were closely related to banking. This
exception has been deleted in this proposal because the coverage of the
proposed exceptions in Sec. 362.4(b)(3) would duplicate the coverage of
the existing exception.
Comment is requested on whether the proposed language clearly sets
forth the coverage of these exceptions. Comment is requested on whether
the proposed language clearly allows the same activities that the
current exception allows by permitting majority-owned subsidiaries to
hold stock of a company engaged in activities permissible for a bank
service corporation. The FDIC seeks comment on whether any inadvertent
substantive change has been made by eliminating the specific references
permitting the ownership of bank service company stock. We seek comment
on the use of the control test for defining activities for lower level
subsidiaries. We invite comment on whether any other approach,
including returning to the language in the current regulation should be
reconsidered. Should the FDIC use a majority-owned test for defining
when a lower level subsidiary exists?
We added clarifying language to the exception governing activities
closely related to banking. The first exception states that this
section does not authorize a subsidiary engaged in real estate leasing
to hold the leased property for more than two years at the end of the
lease unless the property is re-leased. This provision is the same at
the bank level. The second provision is that this section does not
authorize a subsidiary to acquire or hold the stock of a savings
association other than as allowed in Sec. 362.4(b)(4). As is discussed
below, this subsection does not allow a majority-owned subsidiary to
have a control interest in a savings association. Comment is requested
concerning the effect of this change.
Majority-Owned Subsidiaries Ownership of Equity Securities That Do Not
Represent a Control Interest
The proposed regulation significantly changes the exception in the
current regulation involving the holding of equity securities that do
not represent a control interest. The FDIC has determined that the
activity of holding the equity securities at the majority-owned
subsidiary level, subject to certain limitations, does not present a
significant risk to the deposit insurance funds.
This provision replaces two exceptions contained in the current
regulation: (1) grandfathered investments in common or preferred stock
and shares of investment companies, and (2) stock of insured depository
institutions. The proposed regulation adds an expanded exception
allowing the holding of other corporate stock.
The current regulation provides that an insured state bank that has
obtained approval to hold listed common or preferred stock and/or
shares of registered investment companies under the statutory
grandfather (discussed above) may hold the stock and/or shares through
a majority-owned subsidiary provided that any conditions imposed in
connection with the approval are met. The FDIC previously determined
that a majority-owned subsidiary could be accorded the same treatment
under the grandfather provided for by section 24(f) of the FDI Act
without risk to the fund. Thus, the bank should be permitted to invest
in those securities and investment company shares through a majority-
owned subsidiary.
The current regulation requires that each bank file a notice with
the FDIC of the bank's intent to make such investments and that the
FDIC determine that such investments will not pose a significant risk
to the deposit insurance fund before any insured state bank may take
advantage of the ``grandfather'' allowing investments in common or
preferred stock listed on a national securities exchange and shares of
an investment company registered under the Investment Company Act of
1940 (15 U.S.C. 80a-1, et seq.). In no event may the bank's investments
in such securities and/or investment company shares, plus those of the
subsidiary, exceed one hundred percent of the bank's tier one capital.
The FDIC may condition its finding of no risk upon whatever conditions
or restrictions it finds appropriate. The
[[Page 47984]]
``grandfather'' will be lost if the events occur that are discussed
above.
The proposed regulation eliminates the notice for these activities
and the specific reference to grandfathered activity and allows similar
activity for all insured state banks provided that the bank's
investment in the majority-owned subsidiary is deducted from capital
and the activity is subject to the eligibility requirements and
transaction limitations discussed below. Comment is invited on whether
this exception is more appropriately applied by the FDIC as an
exception that is separate and distinct from any other exception under
the regulation that would allow a subsidiary of an insured state bank
to hold equity securities. In short, should this exception be in
addition to any other exception for holding stock?
The FDIC proposes to expand the current regulatory exception from
the acquisition of stock in another insured bank through a majority-
owned subsidiary to an exception for the acquisition of stock of
insured banks, insured savings associations, bank holding companies,
and savings and loan holding companies. The exception would continue to
be limited to the acquisition of no more than 10 percent of the
outstanding voting stock of any one issuer. The acquisition would be
through a majority-owned subsidiary which was organized for the purpose
of holding such stock.
This exception is being expanded to cover savings association
stock, bank holding company stock and savings and loan holding company
stock in response to the FDIC's experience with applications that have
been presented to the FDIC in which insured state banks have sought
approval for these kinds of investments. In acting upon those
applications it has been the opinion of the FDIC to date that
investments in bank holding company stock should not present a risk to
the fund given the fact that bank holding companies are subject to a
very strong regulatory and supervisory scheme and are limited, for the
most part, to engaging in activities that are closely related to
banking. The FDIC proposes to allow investment in savings association
stock for similar reasons. Comment is invited on whether the exception
should allow investments in savings and loan holding company stock in
view of the broad range of activities in which savings and loan holding
companies may engage.
The FDIC has become aware that some insured state banks own a
sufficient interest in the stock of other insured state banks to cause
the bank which is so owned to be considered a majority-owned subsidiary
under part 362. It is the FDIC's position that such an owner bank does
not need to file a request under part 362 seeking approval for its
majority-owned subsidiary that is an insured state bank to conduct as
principal activities that are not permissible for a national bank. As
the majority-owned subsidiary is itself an insured state bank, that
bank is required under part 362 and section 24 of the FDI Act to
request consent on its own behalf for permission to engage in any as
principal activity that is not permissible for a national bank.
The proposal encompasses the exceptions contained in the previous
regulation and expands the exception to a majority-owned subsidiary of
other insured state bank to acquire corporate stock. In order for an
insured state bank to use the exception, the bank must be well-
capitalized exclusive of the bank's investment in the subsidiary and
must make the capital deduction for purposes of reporting capital on
the bank's Call Report. For insured state banks that are using the
current exception for grandfathered equities and holding bank stock,
the capital deduction requirement is new. This requirement is similar
to that found in the proposed notice procedures for state nonmember
banks to engage in activities not permissible for national banks and
recognizes the level of risk present in securities investment
activities. Insured state banks that are currently engaging in these
activities but are not in compliance with the requirements contained in
the proposal should provide notice under Sec. 362.5(b).
The subsidiary may only invest in corporate equity securities if
the bank and subsidiary meet the eligibility requirements. Those
requirements are: (1) the state-chartered depository institution may
have only one majority-owned subsidiary engaging in this activity; (2)
the majority-owned subsidiary's investment in equity securities (except
stock of an insured depository institution, a bank holding company or a
savings and loan holding company) must be limited to equity securities
listed on a national securities exchange; (3) the state-chartered
depository institution and majority-owned subsidiary may not have
control over any issuer of stock purchased; and (4) the majority-owned
subsidiary's equity investments (except stock of an insured depository
institution, a bank holding company or a savings and loan holding
company) must be limited to equity securities listed on a national
securities exchange.
The requirement that the subsidiary's investment be limited to 10
percent of the outstanding voting stock of any company. This limitation
reflects the FDIC's intent that this exception be used only as a
vehicle for investment in equity securities. The 10 percent limitation
was chosen because it reflects a level of investment that is generally
recognized as not involving control of the business. This requirement
is to be read together with the eligibility requirement that the
depository institution may not exercise control over any issuer of
stock purchased by the subsidiary. These requirements reflect the
FDIC's intent that the depository institution is not operating a
business through investments in equity securities. Comment is requested
as to the appropriateness of the 10 percent limitation.
The FDIC believes that only listed securities should be allowed
under this exception. Listed securities are more liquid than nonlisted
securities and companies whose stock is listed must meet capital and
other requirements of the exchange. These requirements provide some
assurances as to the quality of the investment. The requirement that
securities be listed is not extended to bank and savings association
stock, bank holding company stock, or stock of a savings association
holding company. These companies are part of a highly regulated
industry which provides some investment quality assurance. Banks that
may want to invest in unlisted securities in other industries should be
subject to the scrutiny of the application process.
To qualify for this exception, the state-chartered depository
institution may not extend credit to the majority-owned subsidiary,
purchase any debt instruments from the majority-owned subsidiary, or
originate any other transaction that is used to benefit the majority-
owned subsidiary which invests in stock under this subpart. As noted
above, the depository institution may have only one subsidiary engaged
in this activity. These requirements reflect the FDIC's desire that the
scope of the exception be limited. Institutions that wish to have
multiple subsidiaries engaged in holding equity securities and wish to
extend credit to finance these transactions should use the applications
procedures to request consent.
We added a provision relating to portfolio management. The FDIC is
concerned that a majority-owned subsidiary not engage in activities
which the FDIC has identified as speculative. Therefore for the
purposes of this subsection, investment in the equity securities of any
company does not include pursuing short-term trading activities. The
exception has been
[[Page 47985]]
created to facilitate holding of corporate equity securities that are
within the overall investment strategies of the state-chartered
depository institution and its subsidiaries. It is expected that these
investment strategies take account of such factors as quality,
diversification and marketability as well as income. Short term trading
that emphasizes income over other investment factors is speculative and
may not be pursued through this exception.
In addition to requesting comment on the particular exception as
proposed, the FDIC requests comment on whether it is appropriate for
the regulation to contain any exception that would allow an insured
state bank to hold equity securities at the subsidiary level. The FDIC
also requests comment on the adequacy of the restrictions and
constraints that it has proposed for the banks and subsidiaries that
would hold these investments. What additional constraints, if any,
should we consider adding for the banks and subsidiaries that would
hold these investments? We note that the statute does not itself impose
any conditions or restrictions on a bank that enjoys the grandfather
for investment in equity securities in terms of per issuer limits.
Comment is sought on whether it is appropriate to impose the
restriction that limits a bank and its subsidiary to investing in less
than a controlling interest in any given issuer. Is there some other
limit or restriction the FDIC should consider imposing by regulation
that is important to ensuring that the grandfathered investments do not
pose a risk?
Majority-owned Subsidiaries Conducting Real Estate Investment
Activities and Securities Underwriting
The FDIC has determined that real estate investment and securities
underwriting activities do not represent a significant risk to the
deposit insurance funds, provided that the activities are conducted by
a majority-owned subsidiary in compliance with the requirements set
forth. These activities require the insured state banks to file a
notice. Then, as long as the FDIC does not object to the notice, the
bank may conduct the activity in compliance with the requirement. The
fact that prior consent is not required by this subpart does not
preclude the FDIC from taking any appropriate action with respect to
the activities if the facts and circumstances warrant such action.
Engage in Real Estate Investment Activities
Under section 24 of the FDI Act and the current version of part
362, an insured state bank may not directly or indirectly engage in
real estate investment activities not permissible for a national bank.
Section 24 does not grant FDIC authority to permit an insured state
bank to directly engage in real estate investment activities not
permissible for a national bank. The circumstances under which national
banks may hold equity investments in real estate are limited. If a
particular real estate investment is permissible for a national bank,
an insured state bank only needs to document that determination. If a
particular real estate investment is not permissible for a national
bank and an insured state bank wants to engage in real estate
investment activities (or continue to hold the real estate investment
in the case of investments acquired before enactment of section 24 of
the FDI Act), the insured state bank must file an application with FDIC
for consent. The FDIC may approve such applications if the investment
is made through a majority-owned subsidiary, the institution is well
capitalized and the FDIC determines that the activity does not pose a
significant risk to the deposit insurance fund.
The FDIC approved 92 of 95 applications from December 1992 through
June 30, 1997, involving real estate investment activities. The FDIC
denied one application, approved one in part, and one bank withdrew its
application. The real estate investment applications generally have
fallen into three categories: (1) requests for consent to hold real
estate at the subsidiary level while liquidating the property where the
bank expects that liquidation will be completed later than December 19,
1996; (2) requests for consent to continue to engage in real estate
investment activity in a subsidiary, where such activities were
initiated prior to enactment of section 24 of the FDI Act; and (3)
requests for consent to initiate for the first time real estate
investment activities through a majority-owned subsidiary.
The approved applications have involved investments which have
ranged from less than 1 percent to over 70 percent of the bank's tier
one capital. The majority of the investments, however, involved
investments of less than 10 percent of tier one capital with only seven
applications involving investments exceeding 25 percent of tier one
capital. The applications filed with the FDIC have involved a range of
real estate investments including holding residential properties,
commercial properties, raw land, the development of both residential
and commercial properties, and leasing of previously improved property.
The applications approved by the FDIC include 33 residential
properties, 39 commercial properties and 20 applications covering a mix
of commercial and residential properties. The assets of the
institutions that submitted approved applications ranged from $1
million to $6.7 billion. The institutions which have been approved to
continue or commence new real estate investment activity primarily have
had composite ratings of 1 or 2 ratings under the UFIRS. However, 6
institutions were rated 3, and 3 institutions were rated 4. The 4-rated
institutions submitted applications to continue an orderly divestiture
of real estate investments after December 19, 1996. Of the approved
applications, 9 were to conduct new real estate investment activities,
while 80 were submitted to continue holding existing real estate or to
hold existing real estate after December 19, 1996, to pursue an orderly
liquidation. The remaining 3 approved applications asked for consent to
continue existing holdings and conduct new real estate activities. One
application was partially approved and partially denied. This
application involved a bank that applied for consent to continue direct
real estate activities and consent to continue indirect real estate
investment activities through a subsidiary. The FDIC approved the
application to continue the real estate investment activity through the
subsidiary and denied the application for the bank to engage directly
in real estate investment activities.
To date, the FDIC has evaluated a number of factors when acting on
applications for consent to engage in real estate investment
activities. Where appropriate, the FDIC has fashioned conditions
designed to address potential risks that have been identified in the
context of a given application. In evaluating an application to conduct
equity real estate investment activity, the FDIC considers the type of
proposed real estate investment activity to determine if the activity
is unsuitable for an insured depository institution. The FDIC also
reviews the proposed subsidiary structure and its management policies
and practices to determine if the insured state bank is adequately
protected and analyzes capital adequacy to ensure that the insured
institution has sufficient capital to support its more traditional
banking activities.
In every instance in which the FDIC has approved an application to
conduct a real estate investment activity, we have determined that it
was necessary to impose a number of conditions in granting the
approval. In short, the FDIC has determined on a case-by-case basis
that the conduct of certain real estate
[[Page 47986]]
investment activities by a majority-owned corporate subsidiary of an
insured state bank will not present a significant risk to the deposit
insurance fund provided certain conditions are observed. In drafting
this proposed regulation, we have evaluated the conditions usually
imposed when granting such approval to insured state banks and
incorporated these conditions within the proposal where appropriate.
The FDIC requests general comment on whether the conditions imposed
under the proposed regulation are appropriate. Comments are invited on
each condition, especially on the requirements that the subsidiary have
an independent chief executive officer and that a majority of its board
be composed of individuals who are not directors, officers, or
employees of the insured institution.
The proposed rule would allow majority-owned subsidiaries to invest
in and/or retain equity interests in real estate not permissible for a
national bank provided that the insured state bank qualifies as an
``eligible depository institution,'' as that term is defined within the
proposed regulation, and the majority-owned subsidiary qualifies as an
``eligible subsidiary,'' which is also defined within the proposed
rule. The insured state bank must also abide by the investment and
transaction limitations set forth in the proposed regulation. Under the
proposed regulation, the insured state bank may not invest more than 10
percent of the bank's tier one capital in any one majority-owned real
estate subsidiary. In addition, the total of the insured state bank's
investment in all of its majority-owned subsidiaries which are
conducting real estate activities may not exceed 20 percent of its tier
one capital under the proposed regulation. Under the proposed rule, the
20 percent aggregate investment limit applies to subsidiaries engaged
in the same activity.
For the purpose of calculating the dollar amount of the investment
limitations, the bank would calculate 10 percent and 20 percent of its
tier one capital after deducting all amounts required by the proposed
regulation or any FDIC order. We request comment on all aspects and any
implications of this proposal.
Under the proposed regulation, the insured state bank must file a
notice with the FDIC providing a description of the proposed activity
and the manner in which it will be conducted. A description of the
other items required to be contained in the notice under this proposal
are contained in subpart E of the proposed regulation.
The FDIC recognizes that some real estate investments or activities
are more time, management and capital intensive than others. Our
experience in reviewing the applications filed under section 24 has led
us to conclude that extremely small equity investments in real estate--
held under certain conditions--do not pose a significant risk to the
deposit insurance fund. As a result, the proposed regulation provides
relief to insured state banks having such small investments in a
majority-owned subsidiary engaging in real estate investment
activities. The FDIC is attempting to strike a reasonable balance
between prudential safeguards and regulatory burden in its proposed
regulation. As a result, the proposed regulation establishes certain
exceptions from the requirements necessary to establish an eligible
subsidiary whenever the insured state bank's investment is of a de
minimis nature and meets certain other criteria. Under the proposal,
whenever the bank's investment in its majority-owned subsidiary
conducting real estate activities does not exceed 2 percent of the
bank's tier one capital and the bank's investment in the subsidiary
does not include extensions of credit from the bank to the subsidiary,
a debt instrument purchased from the subsidiary or any other
transaction originated from the bank to the benefit of the subsidiary,
the subsidiary is relieved of certain of the requirements that must be
met to establish an eligible subsidiary under the regulation. Under the
proposed regulation, an insured state bank with a limited investment in
a majority-owned subsidiary need not adhere to the requirements that
the subsidiary be physically separate from the insured state bank; the
chief executive officer of the subsidiary is not required to be an
employee separate from the bank; a majority of the board of directors
of the subsidiary need not be separate from the directors or officers
of the bank; and the subsidiary need not establish separate policies
and procedures as described in the proposed regulation in
Sec. 362.4(c)(2)(xi). The FDIC requests comment on the exceptions being
proposed for establishing an eligible subsidiary whenever the bank's
investment is of such a limited nature. Are there any of the other
requirements necessary to establish an ``eligible subsidiary'' that
should be excepted for banks with such limited investments? Commenters
should keep in mind that the FDIC's goal is to reduce regulatory burden
while maintaining adequate protection of the deposit insurance funds.
Comment is requested on all aspects of this real estate investment
activity authority.
Under current law, an insured state bank must apply to the FDIC
prior to engaging in real estate investment activities that are
impermissible for a national bank. The proposed regulation contains a
procedure under which certain insured state banks may participate in
real estate investment activity under specific circumstances by filing
a notice with the FDIC. To qualify for the notice procedure proposed
under Sec. 362.4(b)(5), the real estate investment activities must be
conducted by a majority-owned subsidiary that further qualifies as an
``eligible subsidiary'' under the proposal. The characteristics of an
eligible subsidiary are set forth in Sec. 362.4(c)(2) of the regulation
and further described below. If the institution or its investment does
not meet the criteria established under the proposed regulation for
using the notice procedure, an application may be filed with the FDIC
under Sec. 362.4(b)(1). The FDIC encourages institutions to file an
application if the institution wishes to request relief from any of the
requirements necessary to be considered an eligible depository
institution or an eligible subsidiary. The FDIC recognizes that not all
real estate investment requires a subsidiary to be established exactly
as outlined under the eligible subsidiary definition.
Section 362.4(b)(5) of the proposal permits certain highly rated
banks (defined in Sec. 362.4(c)(1) of the proposal as eligible
depository institutions) to engage, through a majority-owned
subsidiary, in real estate investment activities not otherwise
permissible for a national bank by filing a notice according to the
procedures set forth in subpart E of the proposed regulation.
Comment is requested on all aspects of this proposal to allow real
estate activities through a notice procedure.
Engage in the Public Sale, Distribution or Underwriting of Securities
That Are Not Permissible for a National Bank Under Section 16 of the
Banking Act of 1933
The current regulation provides that an insured state nonmember
bank may establish a majority-owned subsidiary that engages in the
underwriting and distribution of securities without filing an
application with the FDIC if the requirements and restrictions of
Sec. 337.4 of the FDIC's regulations are met. Section 337.4 governs the
manner in which subsidiaries of insured state nonmember banks must
operate if the subsidiaries engage in securities activities that would
not be permissible for the bank itself under section 16 of
[[Page 47987]]
the Banking Act of 1933, commonly known as the Glass-Steagall Act. 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. The proposed regulation makes significant
changes to that exception.
Due to the existing cross reference to Sec. 337.4, FDIC reviewed
Sec. 337.4 as a part of its review of part 362 for CDRI. The purpose of
the review was to streamline and clarify the regulation, update the
regulation as necessary given any changes in the law, regulatory
practice, and the marketplace since its adoption, and remove any
redundant or unnecessary provisions. As a result of that review, the
FDIC proposes making a number of substantive changes to the rules which
govern securities sales, distribution, or underwriting by subsidiaries
of insured state nonmember banks and eliminating Sec. 337.4 as a
separate regulation. The revised language would be relocated to part
362 and would become what is proposed Sec. 362.4(b)(5)(ii). Although
the FDIC has chosen to place the exception in the part of the
regulation governing activities by insured state banks, by law, only
subsidiaries of state nonmember banks may engage in securities
underwriting activities that are not permissible for national banks. As
we have previously stated, subpart A of this regulation 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. We
placed the exception for securities underwriting with the real estate
exception in the structure of the regulation to promote uniform
standards across activities, even though it is possible that a state
member bank could qualify for the real estate exception and not the
securities exception. We request comment on whether this placement
causes any confusion. Of course, as the appropriate Federal banking
agency for state member banks, the FRB may impose more stringent
restrictions on any activity conducted by a state member bank.
The following discussion describes the purpose and background of
Sec. 337.4, the conditions and restrictions imposed by that rule on
securities activities, the language of the exception in proposed part
362 and the proposed revisions to the conditions and restrictions
governing this activity.
History of Section 337.4
On August 23, 1982, the FDIC adopted a policy statement on the
applicability of the Glass-Steagall Act to securities activities of
insured state nonmember banks (47 FR 38984). That policy statement
expressed the opinion of the FDIC that under the Glass-Steagall Act:
(1) Insured state nonmember banks may be affiliated with companies that
engage in securities activities, and (2) securities activities of bona
fide subsidiaries of insured state nonmember banks are not prohibited
by section 21 of the Glass-Steagall Act (12 U.S.C. 378) which prohibits
deposit taking institutions from engaging in the business of issuing,
underwriting, selling, or distributing stocks, bonds, debentures,
notes, or other securities.
The policy statement applies solely to insured state nonmember
banks. As noted in the policy statement, the Bank Holding Company Act
of 1956 (12 U.S.C. 1841 et. seq.) places certain restrictions on non-
banking activities. Insured state nonmember banks that are members of a
bank holding company system need to take into consideration sections
4(a) and 4(c)(8) of the Bank Holding Company Act of 1956 (12 U.S.C.
1843 (a) and (c)) and applicable Federal Reserve Board regulations
before entering into securities activities through subsidiaries.
The policy statement also expressed the opinion of the Board of
Directors of the FDIC that there may be a need to restrict or prohibit
certain securities activities of subsidiaries of state nonmember banks.
As the policy statement noted, ``the FDIC * * * recognizes its ongoing
responsibility to ensure the safe and sound operation of insured state
nonmember banks, and depending upon the facts, the potential risks
inherent in a bank subsidiary's involvement in certain securities
activities.''2
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\2\ Representatives of mutual fund companies and investment
bankers brought action challenging the Federal Deposit Insurance
Corporation Policy Statement. Their suit was dismissed without
prejudice, pending the outcome of FDIC's rulemaking process.
Investment Company Institute v. United States, D.D.C. Civil Action
No. 82-2532, filed September 8, 1982.
---------------------------------------------------------------------------
In November 1984, after notice and comment proceedings, the FDIC
adopted a final rule regulating the securities activities of affiliates
and subsidiaries of insured state nonmember banks under the FDI Act. 49
FR 46709 (Nov. 28, 1984), regulations codified at 12 CFR 337.4
(1986).3 Although the rule does not prohibit such securities
activities outright, it does restrict that activity in a number of ways
and only permits the activities if authorized under state law. Banks
only could maintain ``bona fide'' subsidiaries that engaged in
securities work. The rule defined ``bona fide subsidiary'' so as to
limit the extent to which banks and their securities affiliates and
subsidiaries could share company names or logos, as well as places of
business. 12 CFR 337.4(a)(2)(ii), (iii); 49 FR 46710. The definition
required banks and subsidiaries to maintain separate accounting records
and to observe separate corporate formalities. 12 CFR 337.4(a)(2)(iv),
(v). The two entities were required not to share officers and to
conduct business pursuant to independent policies and procedures,
including the maintenance of separate employees and payrolls. Id.
Sec. 337.4(a)(2)(vi), (vii), (viii); 49 FR 46711-12. Finally, and
perhaps most importantly, the rule required a subsidiary to be
``adequately capitalized.'' 12 CFR 337.4(a)(2)(i).
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\3\ After the regulations were adopted, the representatives of
mutual fund companies and investment bankers brought another action
challenging the regulations allowing insured banks, which are not
members of the Federal Reserve System, to have subsidiary or
affiliate relationships with firms engaged in securities work. The
United States District Court for the District of Columbia, Gerhard
A. Gesell, J., 606 F.Supp. 683, upheld the regulations, and
representatives appealed and also petitioned for review. The Court
of Appeals held that: (1) representatives had standing to challenge
regulations under both the Glass-Steagall Act and the FDI Act, but
(2) regulations did not violate either Act. Investment Company
Institute, v. Federal Deposit Insurance Corporation, 815 F.2d 1540
(U.S.C.A. D.C.1987).
A trade association representing Federal Deposit Insurance
Corporation-insured savings banks also brought suit challenging FDIC
regulations respecting proper relationship between FDIC-insured
banks and their securities-dealing ``subsidiaries'' or
``affiliates.'' On cross motions for summary judgment, the District
Court, Jackson, J., held that: (1) trade association had standing,
and (2) regulations were within authority of FDIC. National Council
of Savings Institutions v. Federal Deposit Insurance Corporation,
664 F.Supp. 572 ( D.C. 1987).
---------------------------------------------------------------------------
The rule has been amended several times since its
adoption.4 The last amendment to this rule was in 1988. When
the FDIC initially implemented
[[Page 47988]]
its regulation on securities activities of subsidiaries of insured
state nonmember banks and bank transactions with affiliated securities
companies, the FDIC determined that some risk may be associated with
those activities. To address that risk, the FDIC regulation: (1)
Defined bona fide subsidiary, (2) required notice of intent to acquire
or establish a securities subsidiary, (3) limited the permissible
securities activities of insured state nonmember bank subsidiaries, and
(4) placed certain other restrictions on loans, extensions of credit,
and other transactions between insured state nonmember banks and their
subsidiaries or affiliates that engage in securities activities.
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\4\ 50 FR 2274, Jan. 16, 1985; 51 FR 880, Jan. 9, 1986; 51 FR
23406, June 27, 1986; 51 FR 45756, Dec. 22, 1986; 52 FR 23544, June
23, 1987; 52 FR 39216, Oct. 21, 1987; 52 FR 47386, Dec. 14, 1987; 53
FR 597, Jan. 8, 1988; 53 FR 2223, Jan. 27, 1988. The FDIC amended
the regulations governing the securities activities of certain
subsidiaries of insured state nonmember banks and the affiliate
relationships of insured state nonmember banks with certain
securities companies to make technical corrections, delete the
requirement that the offices of securities subsidiaries and
affiliates must be accessed through a separate entrance from that
used by the bank (the existing requirement for physically separate
offices was retained), delete the prohibition against securities
subsidiaries and affiliates sharing a common name or logo with the
bank, and to establish a number of affirmative disclosure
requirements regarding securities recommended, offered, or sold by
or through a securities subsidiary or affiliate are not FDIC insured
deposits unless otherwise indicated and that such securities are not
obligations of, nor are guaranteed by the bank.
---------------------------------------------------------------------------
As defined in Sec. 337.4, the term ``bona fide'' subsidiary means a
subsidiary of an insured state nonmember bank that at a minimum: (1) Is
adequately capitalized, (2) is physically separate and distinct in its
operations from the operations of the bank, (3) maintains separate
accounting and other corporate records, (4) observes separate corporate
formalities such as separate board of directors' meetings, (5)
maintains separate employees who are compensated by the subsidiary, (6)
shares no common officers with the bank, (7) a majority of the board of
directors is composed of persons who are neither directors nor officers
of the bank, and (8) conducts business pursuant to independent policies
and procedures designed to inform customers and prospective customers
of the subsidiary that the subsidiary is a separate organization from
the bank and that investments recommended, offered or sold by the
subsidiary are not bank deposits, are not insured by the FDIC, and are
not guaranteed by the bank nor are otherwise obligations of the bank.
This definition was imposed to ensure the separateness of the
subsidiary and the bank. This separation is necessary as the bank would
be prohibited by the Glass-Steagall Act from engaging in many
activities the subsidiary might undertake and the separation safeguards
the soundness of the parent bank.
The regulation provides that the insured state nonmember bank must
give the FDIC written notice of intent to establish or acquire a
subsidiary that engages in any securities activity at least 60 days
prior to consummating the acquisition or commencement of the operation
of the subsidiary. These notices serve as a supervisory mechanism to
apprise the FDIC that insured state nonmember banks are conducting
securities activities through their subsidiaries that may expose the
banks to potential risks.
The regulation adopted a tiered approach to the activities of the
subsidiary and limited the underwriting of securities that would
otherwise be prohibited to the bank itself under the Glass-Steagall Act
unless the subsidiary met the bona fide definition and the activities
were limited to underwriting of investment quality securities. A
subsidiary may engage in additional underwriting if it meets the
definition of bona fide 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.
A bona fide subsidiary is required 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 the Glass-
Steagall Act is not counted toward the bank's capital, that is, the
investment in the subsidiary is deducted before compliance with capital
requirements is measured.
An insured state nonmember bank that has a subsidiary or affiliate
engaging in the sale, distribution, or underwriting of stocks, bonds,
debentures or notes, or other securities, or acting as an investment
advisor to any investment company is prohibited under Sec. 337.4 from
engaging in any of the following transactions:
(1) Purchasing in its discretion as fiduciary any security
currently distributed, underwritten or issued by the subsidiary unless
the purchase is authorized by a trust instrument or is permissible
under applicable law;
(2) Transacting business through the trust department with the
securities firm unless the transactions are at least comparable to
transactions with an unaffiliated company;
(3) Extending credit or making any loan directly or indirectly to
any company whose obligations are underwritten or distributed by the
securities firm unless the securities are of investment quality;
(4) Extending credit or making any loan directly or indirectly to
any investment company whose shares are underwritten or distributed by
the securities company;
(5) Extending credit or making any loan where the purpose of the
loan is to acquire securities underwritten or distributed by the
securities company;
(6) Making any loans or extensions of credit to a subsidiary or
affiliate of the bank that distributes or underwrites securities or
advises an investment company in excess of the limits and restrictions
set by section 23A of the Federal Reserve Act;
(7) Making any loan or extension of credit to any investment
company for which the securities company acts as an investment advisor
in excess of the limits and restrictions set by section 23A of the
Federal Reserve Act; and
(8) Directly or indirectly conditioning any loan or extension of
credit to any company on the requirement that the company contract with
the bank's securities company to underwrite or distribute the company's
securities or condition a loan to a person on the requirement that the
person purchase any security underwritten or distributed by the bank's
securities company.
An insured state nonmember bank is prohibited under Sec. 337.4 from
becoming affiliated with any company that directly engages in the sale,
distribution, or underwriting of stocks, bonds, debentures, notes, or
other securities unless: (1) The securities business of the affiliate
is physically separate and distinct from the operation of the bank; (2)
the bank and the affiliate share no common officers; (3) a majority of
the board of directors of the bank is composed of persons who are
neither directors nor officers of the affiliate; (4) any employee of
the affiliate who is also an employee of the bank does not conduct any
securities activities of the affiliate on the premises of the bank that
involve customer contact; and (5) the affiliate conducts business
pursuant to
[[Page 47989]]
independent policies and procedures designed to inform customers and
prospective customers of the affiliate that the affiliate is a separate
organization from the bank and that investments recommended, offered or
sold by the affiliate are not bank deposits, are not insured by the
FDIC, and are not guaranteed by the bank nor are otherwise obligations
of the bank. The FDIC chose not to require notices relative to
affiliates because it would normally find out about the affiliation in
a deposit insurance application or a change of bank control notice.
The FDIC created an atmosphere where bank affiliation with entities
engaged in securities activities is very controlled. The FDIC has
examination authority over bank subsidiaries. Under section 10(b) of
the FDI Act, the FDIC has the authority to examine affiliates to
determine the effect of that relationship on the insured institution.
Nevertheless, the FDIC generally has allowed these entities to be
functionally regulated, that is FDIC usually examines the insured state
nonmember bank and primarily relies on SEC and NASD oversight of the
securities subsidiary or affiliate.
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 can not be conducted in the bank itself is very small.
These subsidiaries engage in the underwriting of debt and equity
securities and distribution and management of mutual funds. The FDIC
has received notices from 444 banks that have subsidiaries that engage
in activities that do not require the subsidiary to meet the definition
of bona fide such as investment advisory activities, sale of
securities, and management of the bank's securities portfolio.
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 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.
The FRB permits a nonbank subsidiary of a bank holding company to
underwrite and deal in securities through its orders under the Bank
Holding Company Act and section 20 of the Glass-Steagall Act. The FDIC
has reviewed its securities underwriting activity regulations in light
of the FRB recently adopted operating standards that modify the FRB's
section 20 orders.5 The FDIC also reviewed the comments
received by the FRB. The FRB conducted a comprehensive review of the
prudential limitations established in its decisions. The FRB sought
comment on modifying these limitations to allow section 20 subsidiaries
to operate more efficiently and serve their customers more
effectively.6 The FDIC found the analysis of the FRB
instructive and has determined that its regulation already incorporates
many of the same modifications that the FRB has made. The FDIC is
proposing other changes consistent with the FRB approach and will
endeavor to explain the differences in the approach taken by the FDIC.
Consistent with the approach adopted by the FRB, the FDIC proposes to
have the securities underwriting subsidiaries and the insured state
nonmember banks use the disclosures adopted in the Interagency
Statement where applicable. Thus, the Interagency Statement will be
applicable when sales of these products occur on bank premises. The
FDIC agrees with the FRB that using these interagency disclosure
standards promotes uniformity, makes it easier for banks to train their
employees, and enhances compliance.
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\5\ August 21, 1997.
\6\ 61 FR 57679, November 7, 1996, and 62 FR 2622, January 17,
1997.
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In contrast, FDIC will be taking a different approach on some of
these safeguards because it is not proposing a separate statement of
operating standards. Thus, the FDIC will retain safeguards in its rule
that FRB is shifting to or handling in a different way through the
FRB's still to be released statement of operating standards. With
respect to other safeguards that the FDIC is proposing to continue to
apply to the securities underwriting activities conducted by insured
state nonmember banks through their ``eligible subsidiaries,'' FDIC has
determined that each of these safeguards provides appropriate
protections for bank subsidiaries engaged in underwriting activities.
For these purposes, the FDIC has modified the safeguard requiring
that banks and their securities underwriting subsidiaries maintain
separate officers and employees. As discussed below, that modification
would be consistent with the Interagency Statement. However, the chief
executive officer of the subsidiary may not be an employee of the bank
and a majority of its board of directors must not be directors or
officers of the bank. This standard is the same as the operating
standard on interlocks adopted by the FRB to govern its section 20
orders.
One of the reasons for these safeguards involves the FDIC's
continuing concerns that the bank should be protected from liability
for the securities underwriting activities of the subsidiary. Under the
securities laws, a parent company may have liability as a ``controlling
person.'' 7 The FDIC views management and board of director
separation as enhanced protection from controlling person liability as
well as protection from disclosures of material nonpublic information.
Protection from disclosures of material nonpublic information also may
be enhanced by the use of appropriate policies and
procedures.8
[[Page 47990]]
The FDIC requests comment on the retention of these safeguards, 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, P.L. 104-67, the efficacy of more
limited restrictions on officer and director interlocks to prevent both
liability and information sharing and any related issues.
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\7\ 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. Sec. 77o and
section 20 of the Securities and Exchange Act of 1934, 15 U.S.C.
Sec. 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 Sec. 77o or Sec. 78t(a). 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); and
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, P.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 an
underwriting subsidiary.
\8\ See ``Anti-manipulation Rules Concerning Securities
Offerings,'' Regulation M, 17 CFR 200 (1997) where the SEC grapples
with limiting trading advantages that might otherwise accrue to
affiliates by limiting trading in prohibited securities by
affiliates. The SEC is attempting to prevent trading on material
nonpublic information. To reduce the danger of such trading, the SEC
has a broad ban on affiliated purchasers. To narrow that exception
while continuing to limit access to the nonpublic information that
might otherwise occur, the SEC has limited access to material
nonpublic information through restraints on common officers.
Alternatively, the SEC could prohibit trading by affiliates that
shared any common officers or employees. In narrowing this exception
to ``those officers or employees that direct, effect or recommend
transactions in securities,'' the SEC stated that it ``believes that
this modification will resolve substantially commenters'' concerns
that sharing one or more senior executives with a distribution
participant, issuer, or selling security holder would preclude an
affiliate from availing itself of the exclusion.'' 62 FR 520 at 523,
fn. 22 (January 3, 1997). As the SEC also stated, the requirement
would not preclude the affiliates from sharing common executives
charged with risk management, compliance or general oversight
responsibilities.
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Substantive Changes to the Subsidiary Underwriting Activities
Generally, the regulations governing the securities underwriting
activity of state nonmember banks 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 eliminated those constraints that were
deemed to overlap other requirements or that could be eliminated while
maintaining safety and soundness standards. For example, the FDIC
proposes to eliminate the notice requirement for all state nonmember
banks subsidiaries that engage in any securities activities that are
permissible for a national bank. Under the proposal, a notice would be
required only of state nonmember bank subsidiaries that engage in
securities activities that would be impermissible for a national bank.
The FDIC has determined that it can adequately monitor the other
securities activities through its regular reporting and examination
processes. We invite comment on whether the elimination of these
notices is appropriate.
As indicated in the following discussion on core eligibility
requirements, the proposed regulation establishes new criteria which
must be met to qualify for the notice procedures to conduct, as
principal, activities through a subsidiary that are not permissible for
a national bank. The insured state bank must be an ``eligible
depository institution'' and the subsidiary must be an ``eligible
subsidiary.'' The terms are defined below but to summarize briefly, an
``eligible depository institution'' must be chartered and operating for
at least three years, have satisfactory composite and management
ratings under the Uniform Financial Institution Rating System (UFIRS)
as well as satisfactory compliance and CRA ratings, and not be subject
to any formal or informal corrective or supervisory order or agreement.
These requirements would be uniform with other part 362 notice
procedures for insured state banks to engage in activities not
permissible for national banks and recognize the level of risk present
in securities underwriting activities. These requirements are not
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. Other banks that want to
enter these activities should be subject to the scrutiny of the
application process. Although management and operations not permissible
for a national bank are conducted 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.
One of the other notable differences in the proposed regulation is
the substitution of the ``eligible subsidiary'' criteria for that of
the ``bona fide subsidiary'' definition contained in Sec. 337.4(a)(2).
The definitions are similar, but changes have been made to the existing
capital and physical separation requirements. Also, new requirements
have been added to ensure that the subsidiary's business is conducted
according to independent policies and procedures. With regard to those
subsidiaries which engage in the public sale, distribution or
underwriting of securities that are not permissible for a national
bank, additional conditions must also be met. The conditions are that
(1) the state-chartered depository institution must adopt policies and
procedures, including appropriate limits on exposure, to govern the
institution's participation in financing transactions underwritten or
arranged by an underwriting majority-owned subsidiary; (2) the state-
chartered depository institution may not express an opinion on the
value or the advisability of the purchase or sale of securities
underwritten or dealt in by a majority-owned subsidiary unless the
state-chartered depository institution notifies the customer that the
majority-owned subsidiary is underwriting, making a market,
distributing or dealing in the security; (3) the majority-owned
corporate subsidiary is registered and is a member in good standing
with the appropriate SROs, and promptly informs the appropriate
regional director of the Division of Supervision (DOS) in writing of
any material actions taken against the majority-owned subsidiary or any
of its employees by the state, the appropriate SROs or the SEC; and (4)
the state-chartered depository institution does not knowingly purchase
as principal or fiduciary during the existence of any underwriting or
selling syndicate any securities underwritten by the majority-owned
subsidiary unless the purchase is approved by the state-chartered
depository institution's board of directors before the securities are
initially offered for sale to the public. These requirements are also
similar to but simplify the requirements currently contained in
Sec. 337.4.
In addition, the FDIC proposes to eliminate the five-year period
limiting the securities activities of a state nonmember bank's
underwriting subsidiary's business operations. Rather, with notice and
compliance with the safeguards, a state nonmember bank's securities
subsidiary may conduct any securities business set forth in its
business plan after the notice period has expired without an objection
by the FDIC. The reasons the FDIC initially chose the more conservative
posture are rooted in the time they were adopted. When the FDIC
approved establishment of the initial underwriting subsidiaries, it had
no experience supervising investment banking operations in the United
States. Because affiliation between banks and securities underwriters
and dealers was long considered impractical or illegal, banks had not
operated such entities since enactment of the Glass-Steagall Act in
[[Page 47991]]
1933. Moreover, pre-Glass-Steagall affiliations were considered,
rightly or wrongly, to have caused losses to the banking industry and
investors, although some modern research questions this
view.9 Thus, the affiliation of banks and investment banks
presented unknown risks that were considered substantial in 1983. In
addition, although the FDIC recognized that supervision and regulation
of broker-dealers by the SEC provided significant protections, the FDIC
had little experience with how these protections operated. The FDIC has
now gained experience with supervising the securities activities of
banks and is better able to assess the appropriate safeguards to impose
on these operations to protect the bank and the deposit insurance
funds. For those reasons, the limitations and restrictions contained in
Sec. 337.4 on underwriting other than ``investment quality debt
securities'' or ``investment quality equity securities'' have been
eliminated from the proposed regulation. It should also be noted that
certain safeguards have been added to the system since Sec. 337.4 was
adopted. These safeguards include risk-based capital standards and the
Interagency Statement. The FDIC proposes the removal of the disclosures
currently contained in Sec. 337.4. Instead, the FDIC will be relying on
the Interagency Statement for the appropriate disclosures on bank
premises. 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\ See, e.g., George J. Benston, The Separation of Commercial
and Investment Banking: The Glass-Steagall Act Revisited and
Reconsidered 41 (1990).
---------------------------------------------------------------------------
Finally, 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 of section 23B of the Federal
Reserve Act (12 U.S.C. 371c-1). Although section 23B did not exist
until 1987 10 and only covers transactions where banks and
their subsidiaries are on one side and other affiliates are on the
other side, the FDIC had included some similar constraints in the
original version of Sec. 337.4. Now, most of the transaction
restrictions imposed by section 23B are being added to promote
consistency with the restrictions imposed by other banking agencies on
similar activities. Briefly, section 23B requires inter-affiliate
transactions to be on arm's length terms, prohibits representing that a
bank is responsible for the affiliate's (in this case subsidiary's)
obligations, and prohibits a bank from purchasing certain products from
an affiliate. While imposing the 23B-like transaction restrictions, the
FDIC is eliminating any overlapping safeguards. 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 invites comment on the restrictions it has modeled
on 23A and 23B. Specifically, the FDIC would like to know if the
restrictions it has proposed address the identified risks without
overburdening the industry with duplicative or ambiguous requirements.
The FDIC invites suggestions for further improvements.
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\10\ Aug. 10, 1987, Pub. L. 100-86, Title I, s 102(a), 101 Stat.
564.
---------------------------------------------------------------------------
In contrast to the section 23B transaction restrictions, section
23A did exist and was incorporated into Sec. 337.4 by reference. To
simplify compliance for transactions between state nonmember banks and
their own subsidiaries, the FDIC has restated the constraints of both
sections 23A and 23B in the regulatory text language and only included
the restrictions that are relevant to a particular activity. The FDIC
hopes that this restatement will clarify the standards being imposed on
state nonmember banks and their subsidiaries without requiring banks to
undertake extensive analysis of the provisions of sections 23A and 23B
that are inapplicable to the direct bank-subsidiary relationship or to
particular activities. In addition, the FDIC has sought to eliminate
transaction restrictions that would duplicate the restrictions on
information flow or transactions imposed by the SROs and/or by the
SEC.11 The FDIC does not seek to eliminate the obligation to
protect material nonpublic information nor does it seek to undercut or
minimize the importance of the restrictions imposed by the SROs and
SEC. Rather, the FDIC seeks to avoid imposing burdensome overlapping
restrictions merely because a securities underwriting entity is owned
by a bank. Further, the FDIC seeks to avoid restrictions where the risk
of loss or manipulation is small or the costs of compliance are
disproportionate to the purposes the restrictions serve. In addition,
the FDIC defers to the expertise of the SEC which has found that
greater flexibility for market activities during public offerings is
appropriate due to greater securities market transparency, the
surveillance capabilities of the SROs, and the continuing application
of the anti-fraud and anti-manipulation provisions of the federal
securities laws.12
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\11\ See ``Anti-manipulation Rules Concerning Securities
Offerings,'' 62 FR 520 (January 3, 1997); 15 U.S.C. 78o(f),
requiring registered brokers or dealers to maintain and enforce
written policies and procedures reasonably designed to prevent the
misuse of material nonpublic information; and ``Broker-Dealer
Policies and Procedures Designed to Segment the Flow and Prevent the
Misuse of Material Nonpublic Information,'' A Report by the Division
of Market Regulation, U.S. SEC, (March 1990).
\12\ Id. at 520.
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The FDIC requests comment on whether the restrictions that the FDIC
has restated from sections 23A and 23B provide adequate restrictions
for a securities underwriting subsidiary of a bank, whether any other
restrictions currently in Sec. 337.4 should be retained, whether any
additional restrictions would be appropriate, and any other issues of
concern regarding the appropriate restrictions that should be
applicable to a bank's securities underwriting subsidiary. In addition,
the FDIC requests comment on the adequacy of the best practices
requirements that would be imposed by the SROs and, indirectly, by the
SEC on transactions and information flow. The FDIC also requests
comment on the adequacy of the ethical walls that would prevent the
flow of information from a securities underwriting subsidiary of a bank
to its parent, thus eliminating the necessity of additional transaction
restrictions. To the extent that these ethical walls may be
insufficient barriers to the flow of nonpublic information due to
management and/or employee interlocks or other issues that may not be
readily apparent, the FDIC requests comment on any weaknesses that
might be noted in the more limited transaction restrictions imposed
under this proposal.
Consistent with the current notice procedure found in Sec. 337.4,
an insured state nonmember bank may indirectly through a majority-owned
subsidiary engage in the public sale, distribution or underwriting of
securities that would be impermissible for a national bank provided
that the bank files notice prior to initiating the activities, the FDIC
does not object prior to the expiration of the notice period and
certain conditions are, and continue to be, met. The FDIC proposes that
the notice period be shortened from the existing 60 days to 30 days and
that required filing procedures be contained in subpart E of part 362.
Previously, specific instructions and guidelines on the form
[[Page 47992]]
and content of any applications or notices required under Sec. 337.4
were found within that section. With regard to those insured state
nonmember banks that have been engaging in a securities activity under
a notice filed and in compliance with Sec. 337.4, Sec. 362.5(b) of the
proposed regulation would allow those activities to continue as long as
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). We will require
these securities subsidiaries to meet the additional conditions
specified in Sec. 362.4(b)(5)(ii) that require securities subsidiaries
to adopt appropriate policies and procedures, register with the SEC and
take steps to avoid conflicts of interest. We also require the state
nonmember bank to adopt policies concerning the financing of issues
underwritten or distributed by the subsidiary. The state nonmember bank
and its securities subsidiary would have one year from the effective
date of the regulation to meet these restrictions and would be expected
to be working toward full compliance over that time period. Failure to
meet the restrictions within a year after the adoption of a final rule
would necessitate an application for the FDIC's consent to continue
those activities to avoid supervisory concern.
To qualify for the streamlined notice procedure, a bank must be
well-capitalized after deducting from its tier one capital the equity
investment in the subsidiary as well as the bank's pro rata share of
any retained earnings of the subsidiary. The deduction must be
reflected on the bank's consolidated report of income and condition and
the resulting capital will be used for assessment risk classification
purposes under part 327 and for prompt corrective action purposes under
part 325. However, the capital deduction will not be used to determine
whether the bank is ``critically undercapitalized'' under part 325.
Since the risk-based capital requirements had not been adopted when the
current version of Sec. 337.4 was adopted, no similar capital level was
required of banks to establish an underwriting subsidiary, although the
capital deduction has always been required. This requirement is uniform
with the requirements found in the other part 362 notice procedures for
insured state banks to engage in activities not permissible for
national banks. We believe the well-capitalized standard and the
capital deduction recognize the level of risk present in securities
underwriting activities by a subsidiary of a state nonmember bank. This
risk includes the potential that a bank could reallocate capital from
the insured depository institution to the underwriting subsidiary.
Thus, it is appropriate for the FDIC to retain the capital deduction
even though the FRB eliminated the requirement that a holding company
deduct its investment in a section 20 subsidiary on August 21, 1997.
Additional Requests for Comments
With regard to securities activities, the FDIC is specifically
requesting comments that address the following:
(1) Whether it is inherently unsafe or unsound for insured state
nonmember banks to establish or acquire subsidiaries that will engage
in securities activities or for insured state nonmember banks to be
affiliated with a business engaged in securities activities;
(2) Whether certain securities activities when engaged in by
subsidiaries of insured state nonmember banks pose safety and soundness
problems whereas others do not;
(3) Whether, and in what circumstances, securities activities of
insured state nonmember banks should be considered unsafe or unsound;
(4) Whether securities activities of subsidiaries present conflicts
of interest that warrant restricting the manner in which the bank may
deal with its securities subsidiary (or its securities affiliate), or
the manner in which common officers or employees may function, etc.;
(5) Should securities activities be limited to subsidiaries of
insured state banks of a certain asset size, with a certain composite
rating, etc.;
(6) Should insured state nonmember banks obtain the FDIC's prior
approval before establishing or acquiring subsidiaries that will engage
in securities activities in all cases, in some cases, or not at all;
(7) Should revenue limits similar to those that the FRB has
established for section 20 subsidiaries be imposed on securities
subsidiaries of insured state nonmember banks;
(8) Do the potential benefits, if any that would be available to
insured state nonmember banks as a result of competing in the
securities area through subsidiaries offset potential disadvantages to
the institutions;
(9) Why haven't more banks availed themselves of the powers
available under 337.4 and will the proposed regulation result in
increased activity in the securities area;
(10) Alternately, are there other approaches or methods which would
facilitate access without compromising traditional safety and soundness
concerns;
(11) Are there any perceived public harms in insured state
nonmember banks embarking on such activities; and
(12) The FDIC is also requesting comment on how to determine if a
securities subsidiary is in fact a true subsidiary and not the alter
ego of the parent bank.
Comments addressing these issues and any other aspects of the
general subject of permitting subsidiaries and affiliates of insured
state nonmember banks to engage in securities activities will be
welcomed.
Notice for Change in Circumstances
The proposal requires the bank to provide written notice to the
appropriate Regional Office of the FDIC within 10 business days of a
change in circumstances. Under the proposal, a change in circumstances
is described as a material change in subsidiary's business plan or
management. The FDIC believes that it can address a bank's falling out
of compliance with any of the other conditions of approval through the
normal supervision and examination process. We request comment on
whether specific language should be included in the regulation text
that a bank must continue to meet all eligibility, capital, and
investment and transaction criteria.
The FDIC is concerned about changes in circumstances which result
from changes in management or changes in a subsidiary's business plan.
If material changes to either condition occur, the rule requires the
institution to submit a notice of such changes to the appropriate FDIC
regional director (DOS) within 10 days of the material change. The
standard of material change would indicate such events as a change in
chief executive officer of the subsidiary or a change in investment
strategy or type of business or activity engaged in by the subsidiary.
The regional director also may address other changes that come to the
attention of the FDIC during the normal supervisory process.
In the case of a state member bank, the FDIC will communicate our
concerns with the appropriate persons in the Federal Reserve System
regarding the continued conduct of an activity after a change in
circumstances. The FDIC will work with the identified persons within
the Federal Reserve System to develop the appropriate response to the
new circumstances.
[[Page 47993]]
It is not the FDIC's intention to require any bank which falls out
of compliance with eligibility conditions to immediately cease any
activity in which the bank had been engaged subject to a notice to the
FDIC. The FDIC will deal with such eventuality rather on a case-by-case
basis through the supervision and examination process. In short, the
FDIC intends to utilize the supervisory and regulatory tools available
to it in dealing with the bank's failure to meet eligibility
requirements on a continuing basis. The issue of the bank's ongoing
activities will be dealt with in the context of that effort. The FDIC
is of the opinion that the case-by-case approach to whether a bank will
be permitted to continue an activity is preferable to forcing a bank
to, in all instances, immediately cease the activity in question. Such
an inflexible approach could exacerbate an already poor situation.
Core Eligibility Requirements
The proposed regulation has been organized much differently from
the current regulation where separation standards between an insured
state bank and its subsidiary are contained in the regulation's
definition of ``bona fide'' subsidiary. The proposed regulation
introduces the concept of core eligibility requirements. These
requirements are used to determine those institutions that qualify to
use the notice processes introduced in this regulation and to establish
general criteria that the Board will be reviewing in considering
applications. These requirements are defined in two parts. The first
part defines the eligible depository institution criteria and the
second part defines the eligible subsidiary standards.
An ``eligible depository institution'' is a depository institution
that has been chartered and operating for at least three years;
received an FDIC-assigned composite UFIRS rating of 1 or 2 at its most
recent examination; received a rating of 1 or 2 under the
``management'' component of the UFIRS at its most recent examination;
received at least a satisfactory CRA rating from its primary federal
regulator at its last examination; received a compliance rating of 1 or
2 from its primary federal regulator at its last examination; and is
not subject to any corrective or supervisory order or agreement. The
FDIC believes that this criteria is appropriate to ensure that the
notice procedures are available only to well-managed institutions that
do not present any supervisory, compliance or CRA concerns.
The standards for an ``eligible depository institution'' are being
standardized with similar requirements for other types of notices and
applications made to the FDIC. In developing the eligibility standards,
several items have been added that previously were not a stated
standard for banks wishing to engage in activities not permissible for
a national bank.
The requirement that the institution has been chartered and
operated for three or more years reflects the experience of the FDIC
that newly formed depository institutions need closer scrutiny.
Therefore, a request by this type of institution to become involved in
activities not permissible for a national bank should receive
consideration under the application process rather than being eligible
for a notice process.
The FDIC's existing standard is that only well-managed, well-
capitalized banks should be eligible for engaging in activities not
permissible for national banks through a notice procedure. Banks which
have composite ratings of 1 or 2 have shown that they have the
requisite financial and managerial resources to run a financial
institution without presenting a significant risk to the deposit
insurance fund. While lower-rated financial institutions may have the
requisite financial and managerial resources and skills to undertake
such activities, the FDIC believes that those institutions should be
subject to the formal part 362 application process as opposed to the
streamlined notice process described herein. Such institutions are not
on their face as sound on an overall basis as those rated 1 or 2. For
that reason, the FDIC feels that it is more prudent to require
institutions rated 3 or below to utilize the application process.
In addition, the FDIC is adding to the proposed rule a requirement
that the management component of the bank's most recent rating be a 1
or 2 also. The FDIC believes that both capital and management are
extremely important to the safety and soundness of a financial
institution. As noted above, a bank with a composite rating of 1 or 2
has shown that it is strong when taking into account all components of
the uniform financial institutions rating system. While there are few
financial institutions with 1 or 2 composite ratings with weak
management, we believe that only those institutions that are well-
managed should be eligible for the notice processes.
Banks which wish to become involved in activities not permissible
for a national bank through the notice process should be exemplary in
all areas of its operations. Therefore, the proposal requires that the
institution have a satisfactory or better CRA rating, a 1 or 2
compliance rating, and not be subject to any formal or informal
enforcement action.
A filing may be removed from notice processing if: (1) A CRA
protest is received that warrants additional investigation or review,
or the appropriate regional director of the Division of Consumer
Affairs (DCA) determines that the filing presents a significant CRA or
compliance concern; (2) the appropriate regional director (DOS)
determines that the filing presents a significant supervisory concern,
or raises a significant legal or policy issue; or (3) the appropriate
regional director (DOS) determines that other good cause exists for
removal. If a filing is removed from notice processing procedures, the
applicant will be promptly informed in writing of the reason.
The FDIC specifically requests comment on whether the standards for
eligibility are appropriate.
Eligible Subsidiary
The FDIC's support of the concepts of expansion of bank powers is
based in part on establishing a corporate separateness between the
insured depository institution and the entity conducting activities
that are not permissible for the depository institution directly. The
proposal establishes these separations as well as standards for
operations through the concept of ``eligible subsidiary.'' An entity is
an ``eligible subsidiary'' if it: (1) Meets applicable statutory or
regulatory capital requirements and has sufficient operating capital in
light of the normal obligations that are reasonably foreseeable for a
business of its size and character; (2) is physically separate and
distinct in its operations from the operations of the state-chartered
depository institution, provided that this requirement shall not be
construed to prohibit the state-chartered depository institution and
its subsidiary from sharing the same facility if the area where the
subsidiary conducts business with the public is clearly distinct from
the area where customers of the state-chartered depository institution
conduct business with the institution--the extent of the separation
will vary according to the type and frequency of customer contact; (3)
maintains separate accounting and other business records; (4) observes
separate business formalities such as separate board of directors'
meetings; (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-
[[Page 47994]]
chartered depository institution; (7) conducts business pursuant to
independent policies and procedures designed to inform customers and
prospective customers of the subsidiary that the subsidiary is a
separate organization from the state-chartered depository institution
and that the state-chartered depository institution is not responsible
for and does not guarantee the obligations of the subsidiary; (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 for the type of activity
contemplated, including appropriate licenses and memberships, and
complies with industry standards; 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.
The separations are currently outlined in the definitions of ``bona
fide'' subsidiary contained in Sec. 337.4 and part 362. The broad
principles of separtion upon which the ``bona fide'' subsidiary
definition and the ``eligible subsidiary'' definition are based
include: (1) Adequate capitalization of the subsidiary; (2) separate
corporate functions; (3) separation of facilities; (4) separation of
personnel; and (5) advertising the bank and the subsidiary as separate
entities.
While the ``bona fide'' subsidiary definitions currently used are
substantially similar, there is one substantial difference. Each
regulation has a different approach to the issue of common officers
between the bank and the subsidiary. The language in the current part
362 allows the subsidiary and the parent bank to share officers so long
as a majority of the subsidiary's executive officers were neither
officers nor directors of the bank. Section 337.4 contains a
requirement that there be no shared officers. The ``eligible
subsidiary'' concept adopts a more limited standard. The eligible
subsidiary requirements loosen the separations among employees and
officers from those in place under the bona fide subsidiary definitions
in both Sec. 337.4 and part 362 and in Board orders authorizing most
real estate activities. The eligible subsidiary only requires that the
chief executive officer not be an employee of the institution. We
consider officers to be employees of the institution. This limitation
would allow the chief executive officer to be an employee of an
affiliated entity or be on the board of directors of the institution.
Are there other methods of achieving the concept of separation without
requiring different public contact employees and officers for the bank
and the subsidiary?
In deciding the standards to become an ``eligible subsidiary,'' the
FDIC not only has reconciled the differing standards on shared
officers, but also has modified some of the previous standards used in
the definition of ``bona fide'' subsidiary. The changes are found in
the capital requirement, the physical separation requirement, the
separate employee standard, and the requirement that the subsidiary's
business be conducted pursuant to independent policies and procedures.
The requirement that the subsidiary be adequately capitalized was
revised to provide that the subsidiary must meet any applicable
statutory or regulatory capital requirements, that the subsidiary have
sufficient operating capital in light of the normal obligations that
are reasonably foreseeable for a business of its size and character,
and that the subsidiary's capital meet any commonly accepted industry
standard for a business of its size and character. This definition
clarifies that the FDIC expects the subsidiary to meet the capital
requirements of its primary regulator, particularly those subsidiaries
involved in securities and insurance.
The physical separation requirement was clarified by the addition
of a sentence which indicates that the extent to which the bank and the
subsidiary must carry on operations in physically distinct areas will
vary according to the type and frequency of public contacts. It is not
the intent of the FDIC to require physical separation where such a
standard adds little value. For instance, a subsidiary engaged in
developing commercial real estate would not require the same physical
separation from the bank as a subsidiary engaged in retail securities
activities. The possibility of customer confusion should be the
determining factor in deciding the separation requirements for the
subsidiary.
The proposal has eliminated the provision contained in the bona
fide subsidiary definition that required the bank and subsidiary to
have separately compensated employees who have contact with the public.
This provision was imposed to reduce confusion relating to whether
customers were dealing with the bank or the subsidiary. Since the
adoption of the bona fide subsidiary definition, the Interagency
Statement was issued. This interagency statement recognizes the concept
of employees who work both for a registered broker-dealer and the bank.
Because of the disclosures required in the Interagency Statement
informing the customer of the nature of the product being sold and the
physical separation requirements, the need for separate public contact
employees is diminished. Comment is requested concerning the need for
separate public contact employees. Specifically, is there a need for
separate employees when an insured depository institution sells a
financial instrument underwritten by a subsidiary or real estate
developed by a subsidiary? Are the disclosures concerning the
affiliation between the bank and the underwriter required by the
Interagency Statement sufficient to protect customers from confusion
about who is responsible for the product?
Language was added that the subsidiary must conduct business so as
to inform customers that the bank is not responsible for and does not
guarantee the obligations of the subsidiary. This language is taken
from section 23B of the Federal Reserve Act which prohibits banks from
entering into any agreement to guarantee the obligations of their
affiliates and prohibits banks and well as their affiliates from
advertising that the bank is responsible for the obligations of its
affiliates. This type of disclosure is intended to reduce customer
confusion concerning who is responsible for the products purchased.
After issuing its proposal last August, the FDIC received comment
concerning the requirement that a majority of the board of the
subsidiary be neither directors nor officers of the bank. The comment
questioned if this restriction extended to directors and officers of
the holding company. The FDIC is primarily concerned about risk to the
deposit insurance funds and is therefore looking to establish
separation between the insured bank and its subsidiary. The eligible
subsidiary requirement is designed to assure that the subsidiary is in
fact a separate and distinct entity from the bank. This requirement
should prevent ``piercing of the corporate veil'' and insulate the
bank, and the deposit insurance fund, from any liabilities of the
subsidiary.
We recognize that a director or officer employed by the bank's
parent holding company or sister affiliate is not as ``independent'' as
a totally disinterested third party. The FDIC is, however, attempting
to strike a reasonable balance between prudential safeguards and
regulatory burden. The requirement that a majority of the board not be
directors or officers of the bank will provide certain benefits that
the FDIC thinks are very important in the context of subsidiary
operation. The FDIC expects
[[Page 47995]]
these persons to act as a safeguard against conflicts of interest and
be independent voices on the board of directors. While the presence of
``independent'' directors may not, in and of itself, prevent piercing
of the corporate veil, it will add incremental protection and in some
circumstances may be key to preserving the separation of the bank and
its subsidiary in terms of liability. In view of the other standards of
separateness that have been established under the eligible subsidiary
standard as well as the imposition of investment and transaction
limits, we do not believe that a connection between the bank's parent
or affiliate will pose undue risk to the insured bank.
The FDIC requests comment on the appropriateness of the proposed
separation standards. In particular, comment is requested concerning
the provision requiring that a majority of the board of the subsidiary
not be directors or officers of the state chartered depository
institution. What impact does this requirement have on finding
qualified directors? Should the standard be the same for different
types of activities?
In addition to the separation standards, the ``eligible
subsidiary'' concept introduces operational standards that were not
part of the ``bona fide'' subsidiary definition. These standards
provide guidance concerning the organization of the subsidiary that the
FDIC believes are important to the independent operation of the
subsidiary.
The proposed regulation requires that a subsidiary engaged in
insurance, real estate or securities have only one business purpose
among those categories. Because the FDIC is limiting a bank's
transactions with subsidiaries engaged in insurance, real estate, or
securities activities that are not permissible for a subsidiary of a
national bank, and the aggregate limitations only extend to
subsidiaries engaged in the same type of business, the FDIC is limiting
the scope of the subsidiary's activities. The FDIC is seeking comment
on the effect of limiting the subsidiary's activities to one business
purpose. Should the term ``one business purpose'' be defined more
broadly? For instance, should a subsidiary engaged in real estate
investment activities also be allowed to be engaged in real estate
brokerage in the same subsidiary?
The proposal requires that the subsidiary have a current written
business plan that is appropriate to its type and scope of business.
The FDIC believes that an institution that is contemplating involvement
with activities that are not permissible for a national bank or a
subsidiary of a national bank should have a carefully conceived plan
for how it will operate the business. We recognize that certain
activities do not require elaborate business plans; however, every
activity should be given board consideration to determine the scope of
the activity allowed and how profitability is to be attained.
The requirement for adequate management of the subsidiary
establishes the FDIC's desire that the insured depository institution
consider the importance of management in the success of an operation.
The requirement to obtain appropriate licenses and memberships and to
comply with industry standards indicates the FDIC's support of
securities and insurance industry standards in determining adequacy of
subsidiary management.
An important factor in controlling the spread of liabilites from
the subsidiary to the insured depository institution is that the
subsidiary establishes necessary internal controls, accounting systems,
and audit standards. The FDIC does not expect to supplement this
requirement with specific guidance since the systems must be tailored
to specific activities, some of which are otherwise regulated.
The FDIC seeks comments on the appropriateness of the restrictions
contained in the ``eligible subsidiary'' standard. Are there other
restrictions that should be considered? Are there standards that are
unnecessary to achieve separation between the insured depository
institution and the subsidiary?
Investment and Transaction Limits
The proposal contains investment limits and other requirements that
apply to an insured state bank and its subsidiaries that engage as
principal in activities that are not permissible for a national bank if
the requirements are imposed by order or expressly imposed by
regulation. The provision is not contained in the current regulation;
however, Sec. 337.4 imposes by reference the limitations of section 23A
of the Federal Reserve Act (Sec. 337.4 was adopted prior to the
adoption of section 23B of the Federal Reserve Act), and both section
23A and section 23B restrictions have been imposed by the Board on
insured state banks seeking the FDIC's consent to engage in activities
not permissible for a national bank.
On August 23, 1996, the FDIC issued a proposed revision to part
362. The proposed rule would have imposed sections 23A and 23B on bank
investments and transactions with subsidiaries that hold equity
investments in real estate not permissible for a national bank. The
FDIC received a significant number of negative comments regarding the
imposition of sections 23A and 23B on real estate subsidiaries. After a
thorough review, the FDIC has determined that several of the major
points in this area have merit. Some of the provisions of section 23A
and 23B are inapplicable while others duplicate existing legal
requirements. The FDIC believes that merely incorporating sections 23A
and 23B by reference raises significant interpretative issues, as
pointed out by the commenters, and only promotes confusion in an
already complex area.
For these reasons, in this proposal the FDIC is proposing a
separate subsection which sets forth the specific investment limits and
arm's length transaction requirements which the FDIC believes are
necessary. In general, the provisions impose investment limits on any
one subsidiary and an aggregate investment on all subsidiaries that
engage in the same activity, requires that extensions of credit from a
bank to its subsidiaries be fully-collateralized when made, prohibits
the bank from taking a low quality asset as collateral on such loans,
and requires that transactions between the bank and its subsidiaries be
on an arm's length basis.
The proposal expands the definition of bank for the purposes of the
investment and transaction limitations. A bank includes not only the
insured entity but also any subsidiary that is engaged in activities
that are not subject to these investment and transaction limits.
Sections 23A and 23B of the Federal Reserve Act combine the bank
and all of its subsidiaries in imposing investment limitations on all
affiliates. The FDIC is using the same concept in separating
subsidiaries conducting activities that are subject to investment and
transaction limits from the bank and any other subsidiary that engages
in activities not subject to the investment and transaction limits.
This rule will prohibit a bank from funding a subsidiary subject to
the investment and transaction limits through a subsidiary that is not
subject to the limits. The FDIC invites comment on the appropriateness
of this restriction on subsidiary to subsidiary transactions.
Investment Limit
Under the proposal, a bank may be restricted in its investments in
certain of its subsidiaries. Those limits are basically the same as
would apply
[[Page 47996]]
between a bank and its affiliates under section 23A. As is the case
with covered transactions under section 23A, extensions of credit and
other transactions that benefit the bank's subsidiary would be
considered part of the bank's investment. The only exception would be
for arm's length extensions of credit made by the bank to finance sales
of assets by the subsidiary to third parties. These transactions would
not need to comply with the collateral requirements and investment
limitations of section 23A, provided that they met certain arm's length
standards. The imposition of section 23A-type restrictions is intended
to make sure that adequate safeguards are in place for the dealings
between the bank and its subsidiary.
When the August proposal was published for comment, the FDIC
invited comment on whether all provisions of sections 23A should be
imposed or whether just certain restrictions are necessary. For
instance, should the regulation simply provide that the bank's
investment in the subsidiary is limited to 10 percent of capital and
that there is an aggregate investment limit of 20 percent for all
subsidiaries rather than, in effect, subjecting transactions between
the bank and its subsidiary to all of the restrictions of section 23A.
Eight of the seventeen commenters addressed this issue. Two commenters
supported the incorporation of all the limits and restrictions in
sections 23A stating that it encourages uniformity in approach for
structuring transactions between the bank and its subsidiary. The
remaining commenters generally considered the imposition of section 23A
requirements to be unduly restrictive. One comment challenged that the
wholesale incorporation of section 23A limitations is inappropriate
since Congress has already determined that transactions with
subsidiaries present little risk to banks. In fact, in the words of the
commenter, if the subsidiary is wholly-owned, the bank is really
dealing with itself.
In contrast to the bank-affiliate relationship being governed by
the statutory limits of sections 23A and 23B, inherent in the idea of a
subsidiary is the subsidiary's value to the bank as an asset. That
value increases as the subsidiary earns profits and decreases as the
subsidiary loses money. The increases are reflected in the subsidiary's
retained earnings and the consolidated retained earnings of the bank as
a whole. The FDIC wants to dissociate the bank's equity investment in
the subsidiary from any lending to or covered transactions with the
subsidiary. Thus, the FDIC proposes to treat the bank's equity
investment as a deduction from capital, while treating any lending to
or covered transactions with the subsidiary as transactions subject to
10% and 20% limits that are similar to those that govern the bank-
affiliate relationship. Then, the question arises as to how to properly
treat retained earnings at the subsidiary level. If retained earnings
at the subsidiary level were treated as subject to the 10% and 20%
limits, the bank could be forced to take the retained earnings out of
the subsidiary to stay under the applicable limits. If retained
earnings are allowed to accumulate without limit, then the bank could
declare dividends to its shareholders based on the retained earnings at
the subsidiary. Later, in the event that the subsidiary incurred
losses, the bank's capital could become inadequate based on the
subsidiary's losses. Thus, the FDIC requires that retained earnings be
deducted from capital in the same way as the equity investment is
deducted.
The definition of ``investment'' under this provision has four
components. The first component is any extension of credit by the bank
to the subsidiary. The term ``extension of credit'' is defined in part
362 to have the same meaning as that under section 22(h) of the Federal
Reserve Act and would therefore apply not only to loans but also to
commitments of credit. The second component is ``any debt securities of
the subsidiary'' held by the bank. This component recognizes that debt
securities are very similar to extensions of credit. The third
component is the acceptance of securities issued by the subsidiary as
collateral for extensions of credit to any person or company. The
fourth and final component addresses any extensions or commitments of
credit to a third party for investment in the subsidiary, investment in
a project in which the subsidiary has an interest, or extensions of
credit or commitments of credit which are used for the benefit of, or
transferred to, the subsidiary.
Two of the components of the definition of ``investment'' are
borrowed from and consistent with sections 23A and 23B. It is the
FDIC's intent to include the types of investments or extensions of
credit which would normally be subject to the 23A and 23B investment
limits. We note in particular that the fourth component of the
definition of ``investment'' includes language similar to the
``attribution rule.'' Indirect investments and extensions of credit by
a bank to its subsidiaries will be included in the calculation of the
10%/20% investment limits.
In addition to the differences in coverage created by the proposed
definition of investment versus the section 23A covered transactions,
the percentage restrictions are calculated differently from section
23A. The proposal calulates the 10%/20% limits based on tier one
capital while section 23A uses total capital. As was discussed earler,
the FDIC is using tier one capital as its measure to create consistency
throughout the regulation.
Also, the proposal limits the aggregate investment to all
subsidiaries conducting the same activity. There is not a ``same
activity'' standard in section 23A. The FDIC believes that the
aggregate limitations should reflect a restriction on concentrations in
a particular activity and not a general limitation on activities that
are not permissible for a national bank. For the purposes of this
paragraph, the FDIC intends to interpret the ``same activity'' standard
to mean broad categories of activities such as real estate investment
activities or securities underwriting. The FDIC specifically requests
comments on this provision of the proposal. The FDIC has consistently
maintained that it applies section 23A and 23B-like standards. It
believes that its proposal continues to do so, but would like comment
on the effect of the proposed change.
Arm's Length Transaction Requirement
A major provision of 23B of the Federal Reserve Act is that any
transaction between a bank and its affiliates must be on terms and
conditions that are substantially the same as those prevailing at the
time for comparable transactions with unaffiliated parties. This type
of requirement, which is generally referred to as an ``arm's length
transaction'' requirement, is intended to make sure that an affiliate
does not take advantage of the bank. The proposal requires transactions
between the bank and its real estate subsidiaries to meet this
requirement. The arm's length transaction requirement found in the
proposal is modeled on the statutory provisions of section 23B. The
types of transactions covered by the requirement include: (1)
Investments in the subsidiary, (2) the purchase from or sale to the
subsidiary of any assets, including securities, (3) entering into any
contract, lease or other agreement with the subsidiary, and (4) paying
compensation to the subsidiary or any person who has an interest in the
subsidiary. The proposal indicates, however, that the restrictions do
not apply to an insured state bank giving immediate credit to a
subsidiary for
[[Page 47997]]
uncollected items received in the ordinary course of business.
The arm's length transaction requirement is meant to protect the
bank from abusive practices. To the extent that the subsidiary offers
the parent bank a transaction which is at or better than market terms
and conditions, the bank may accept such transaction since the bank is
receiving a benefit, as opposed to being harmed. It may be the case,
however, that a bank will be unable to meet the regulatory standard
because there are no known comparable transactions between unaffiliated
parties. In these situations, the FDIC will review the transactions and
expect the bank to meet the ``good faith'' standard found in section
23B.
When engaging in transactions with a subsidiary, banks and bank
counsel should be aware of the FDIC's separate corporate existence
concerns. Bank subsidiaries should be organized and operated as
separate corporate entities. Subsidiaries should be adequately
capitalized for the business they are engaged in and separate corporate
formalities should be observed. Frequent transactions between the bank
and its subsidiary which are not on an arm's length basis may lead to
questions as to whether the subsidiary is actually a separate corporate
entity or merely the alter ego of the bank. One of the primary reasons
for the FDIC requiring that certain activities be conducted through an
eligible subsidiary is to provide the bank, and the deposit insurance
funds, with liability protection. To the extent a bank ignores the
separate corporate existence of the subsidiary, this liability
protection is jeopardized.
This section and the language therein is not a substantive change
from the proposal. The FDIC is merely setting forth the substantive
requirements of sections 23A and 23B which were proposed to be
incorporated by reference. We believe setting forth the exact
requirements will reduce regulatory burden and confusion as banks and
bank counsel will more readily know what requirements are to be
followed.
Banks will be prohibited from buying low quality assets from their
subsidiaries. The FDIC has taken the definition of ``low quality
asset'' from section 23A without modification.
The proposal deviates from the section 23B standards in that it
contains provisions addressing insider transactions and product tying.
The proposal's arm's length standard addresses transactions between an
insured depository institution and its subsidiaries. The FDIC is adding
a provision that an arm's length standard for transactions between the
subsidiary and insiders of the insured depository institution. The
proposal requires that any transactions with insiders must meet the
section 23B requirements that transactions be on substantially the same
terms and conditions as available generally to unaffiliated parties.
Rather than requiring an application and approval by the FDIC for
transactions with insiders as we had proposed last August, the FDIC has
decided to set forth the legal standard to be applied to such
transactions and let banks and their legal advisors determine whether
the transactions meet the arm's length requirement. Banks engaging in
such transactions should retain proper documentation showing that the
transactions meet the arm's length requirement. The FDIC will review
transactions with insiders in the normal course of the examination
process and take such actions as may be necessary and appropriate if
problems arise. Questionable transactions will have to be justified
under the 23B standard.
The proposal also contains a requirement that neither the insured
state bank nor the majority-owned subsidiary may require a customer to
either buy a product or use a service from the other as a condition of
entering into a transaction. While the condition may duplicate existing
standards for banks, it is not clear that all circumstances are
adequately covered by the existing statutory and regulatory
restrictions. The FDIC wishes to confirm that we consider tying to be
unacceptable when there are no alternative financial services
available. However, we recognize that a complete prohibition may be too
rigid.
Banks are subject to statutory anti-tying restrictions. (12 U.S.C.
1972). In 1970 when these restrictions were enacted, Congress was
concerned that the unique role banks played in the economy,
particularly in providing financial services, would allow them to gain
a competitive advantage in other markets. The FRB extended the anti-
tying restrictions to bank holding companies and their non-banking
subsidiaries by regulation in 1971. The FRB's experience since
extending the anti-tying provisions has shown that non-banking
companies generally operate in competitive markets. As a result, the
FRB eliminated the extension of the anti-tying rules to bank holding
companies and their non-bank subsidiaries this year (12 CFR 225),
leaving restriction of any anti-competitive behavior to the general
antitrust laws which govern the competitors of the bank holding
companies and their non-bank subsidiaries. The extension of the tying
restrictions to savings and loan holding companies is statutory.
Consequently, the Office of Thrift Supervision is not authorized to
except savings and loan holding companies and their non-bank affiliates
entirely from all tying restrictions. 62 FR 15819. The Office of the
Comptroller of the Currency extends anti-tying provisions to
subsidiaries. See OCC Bulletin 95-20.
Based on the competitive marketplace in which nonbanking
subsidiaries operate and the applicability of general antitrust laws,
the FDIC is seeking comment as to whether the anti-tying language
contained in the proposed regulation is appropriate. If the proposed
rule is thought to be unnecessary, should we consider adopting a rule
that would be applicable only in situations where there are no options
for financial services?
The proposal does not contain the advertising restrictions
contained in section 23B which prohibit a bank from publishing
advertisements which suggest, state or infer that the bank is or shall
be responsible for the obligations of an affiliate. Instead, the
proposal incorporates the advertising prohibition from 23B as part of
the definition of the eligible subsidiary. An eligible subsidiary is
required to have policies and procedures which are designed to inform
customers and potential customers that the subsidiary is a separate
organization from the bank and to inform customers that the bank is not
responsible for, nor guarantees, the obligations of the subsidiary.
Collateralization Requirements
Section 23A requires that loans, extensions of credit, guarantees
or letters of credit issued by the bank to or on behalf of an affiliate
be fully-collateralized at the time the bank makes the loan or
extension of credit. This requirement is intended to protect the bank
in the event of a loan default. ``Fully collateralized'' under the
proposal means extensions of credit secured by collateral with a market
value at the time the extension of credit is entered into of at least
100 percent of the extension of credit amount for government securities
or a segregated deposit in a bank; 110 percent of the extension of
credit amount for municipal securities; 120 percent of the extension of
credit amount for other debt securities; and 130 percent of the
extension of credit amount for other securities, leases or other real
or personal property. The FDIC intends to look to the collateralization
schedule as minimum guidance, but wants to retain flexibility in making
the determination
[[Page 47998]]
if additional collateral is necessary. Therefore, this proposal differs
from the section 23A requirements in that the proposal uses the
collateral schedule as a minumum requirement.
The FDIC is seeking comment as to whether the proposal gives the
industry enough certainty to make decisions concerning collateral
adequacy? Are the collateral requirements appropriate or should some
other measure of collateral adequacy be used?
Capital Requirements
Under the proposed rule, a bank using the notice process to invest
in a subsidiary engaging in certain activities not permissible for a
national bank would be required to deduct its equity investment in the
subsidiary as well as its pro rata share of retained earnings of the
subsidiary when reporting its capital position on the bank's
consolidated report of income and condition, in assessment risk
classification and for prompt corrective action purposes (except for
the purposes of determining if an institution is critically
undercapitalized). This capital deduction may be required as a
condition of an Order issued by the FDIC, is required to use the notice
procedure to request consent for real estate investment activities and
securities underwriting and distribution, and is required to engage in
grandfathered insurance underwriting. The purpose of the restriciton is
to ensure that the bank has sufficient capital devoted to its banking
operations and to ensure that the bank would not be adversely impacted
even if its entire investment in the subsidiary is lost.
This treatment of the bank's investment in subsidiaries engaged in
activities not permissible for a national bank creates a regulatory
capital standard. After issuing its proposal last August, the FDIC
received comment that this capital treatment is inconsistent with
generally accepted accounting principles. Although section 37 of the
FDI Act generally requires that accounting principles applicable to
depository institutions for regulatory reporting purposes must be
consistent with, or not less stringent than, GAAP, the FDIC believes
that the requirements of section 37 do not extend to the Federal
banking agencies' definitions of regulatory capital. It is well
established that the calculation of regulatory capital for supervisory
purposes may differ from the measurement of equity capital for
financial reporting purposes. For example, statutory restrictions
against the recognition of goodwill for regulatory capital purposes may
lead to differences between the reported amount of equity capital and
the regulatory capital calculation for tier one capital. Other types of
intangible assets are also subject to limitations under the agencies'
regulatory capital rules. In addition, subordinated debt and the
allowance for loan and lease losses are examples of items where the
regulatory reporting and the regulatory capital treatments differ.
We note that the capital deduction as contained in the proposal is
not a new concept for the federal banking regulators. The FDIC has
required capital deduction for investments by state nonmember banks in
securities underwriting subsidiaries for years. See 12 CFR 325.5(c).
The FRB has required bank holding companies to deduct from capital
their investment in section 20 subsidiaries, although the FRB
eliminated that requirement on August 21, 1997, by adopting new
operating standards. In addition, the Comptroller of the Currency
recently endorsed the idea of deducting from capital a national bank's
investments in certain types of operating subsidiaries. See 12 CFR
5.34(f)(3)(i), 61 FR 60342, 60377 (Nov. 27, 1996).
The calculation of the amount deducted from capital in this
proposal includes the bank's equity investment in the subsidiary as
well as the bank's share of retained earnings. The calculation does not
require the deduction of any loans from the bank to the subsidiary or
the bank's investment in the debt securities of the subsidiary. The
FDIC requests comment on this method of calculating the capital
deduction. Should there be a differentiation in the treatment of the
bank's equity investment in the subsidiary and loans made to or debt
purchased from the subsidiary?
Notice of Grandfathered Insurance Underwriting Activities
Section 362.5 of the current regulation provides that insured state
banks that are permitted to engage in insurance underwriting under the
grandfather found in section 24(d)(2)(B) of section 24 of the FDI Act
must file a notice with the FDIC by February 9, 1992. That notice
requirement is deleted under the proposal as no longer necessary given
the passage of time.
Other Underwriting Activities
The proposed regulatory text does not directly address the
underwriting of annuities. The FDIC has opined that annuities are not
an insurance product and are not subject to the insurance underwriting
prohibitions of section 24. The FDIC has approved one request from an
insured state bank to engage in annuity underwriting activities through
a majority-owned subsidiary. The proposed regulation does not provide a
notice procedure to engage in such activities. Comment is requested as
to whether such a notice procedure would be beneficial. What types of
restrictions should the Board consider if it determines that annuities
underwriting may be conducted after submission of a notice?
Section 362.5 Approvals Previously Granted
As is discussed above, there are a number of areas in which this
proposal differs in approach from the current part 362. Because of
these differing approaches, the proposal contains a section dealing
with approvals previously granted. The FDIC proposes that insured state
banks that have previously received consent by order or notice from
this agency should not be required to reapply to continue the activity,
including real estate investment activities, provided the bank and
subsidiary, as applicable, continue to comply with the conditions of
the order of approval. It is not the intent of the FDIC to require
insured state banks to request consent to engage in an activity which
has already been approved previously by this agency.
Because previously granted approvals may contain conditions that
are different from the standards that are established in this proposal,
in certain circumstances, the bank may elect to operate under the
restrictions of this proposal. Specifically, the bank may comply with
the investment and transaction limitations between the bank and its
subsidiaries contained in Sec. 362.4(d), the capital requirement
limitations detailed in Sec. 362.4(e), and the subsidiary restrictions
as outlined in the term ``eligible subsidiary'' and contained in
Sec. 362.4(c)(2) in lieu of similar requirements in its approval order.
Any conditions that are specific to a bank's situation and do not fall
within the above limitations will continue to be effective. The FDIC
intends that once a bank elects to follow these proposed restrictions
instead of those in the approval order, it may not elect to revert to
the applicable conditions of the order.
An insured state bank that qualifies for the exception in proposed
Sec. 362.4(b)(4)(i) relating to real estate investment activities that
do not exceed 2 percent of the bank's tier one capital may take
advantage of the exceptions contained in that section. A bank which
uses this exception must limit its real estate investment activities to
one
[[Page 47999]]
subsidiary and may engage in additional real estate investment
activities without fully complying with the application or notice
requirements contained in the proposal. The FDIC requests comment on
the appropriateness of allowing banks which have previously received
approval from the FDIC to operate under the guidelines of this
proposal. Should banks which have been previously approved be allowed
to use the 2% of capital exception?
The FDIC has also approved certain activities through its current
regulations. Specifically, the FDIC has incorporated and modified the
restrictions of Sec. 337.4 in this proposal. The proposed rule will
allow an insured state nonmember bank engaging in a securities activity
in accordance with Sec. 337.4 to continue those activities if the bank
and its subsidiary meet the restrictions of Sec. 362.4 (b)(5)(ii), (c),
(d), and (e). The FDIC intends that these requirements replace the
restrictions contained in Sec. 337.4.
The FDIC recognizes that the requirements of this proposal differ
from the requirements of Sec. 337.4. Because the transition from the
current Sec. 337.4 requirements to the new regulatory requirements may
have unforeseen implementation problems, the bank and its subsidiary
will have one year from the effective date to comply with new
restrictions and conditions without further application or notice to
the FDIC. If the bank and its subsidiary are unable to comply within
the one-year time period, the bank must apply in accordance with
Sec. 362.4(b)(1) and subpart E of the proposed regulation to continue
with the securities underwriting activity. Comment is requested
concerning the reasonableness of this transition requirement.
The proposed restrictions for engaging in grandfathered insurance
underwriting through a subsidiary have also been changed. The current
regulation prescribes disclosures, requires that the subsidiary be a
bona fide subsidiary, and requires that the bank be adequately
capitalized after deducting the bank's investment in the grandfathered
insurance subsidiary. The proposal requires that disclosures are
consistent with, but not the same as, those in the current regulation,
that the subsidiary meet the requirements of an eligible subsidiary,
and that the bank be well-capitalized after deducting its investment in
the grandfathered insurance subsidiary. The FDIC recognizes that these
requirements are not the same as previous standards, and the capital
requirement in particular is more stringent. An insured state bank
which is engaged in providing insurance as principal may continue that
activity if it complies with the proposed provisions within 90 days of
the effective date of the regulation.
Similarly, banks which have subsidiaries that have been operating
under the bank stock and grandfathered equity securities exemption of
the current regulation are subject to additional requirements in the
proposal. In particular, insured state banks continuing with these
exemptions must now deduct their investment in the subsidiary from
capital. An insured state nonmember bank that is engaging in securities
underwriting activities under notice filed pursuant to Sec. 337.4 may
continue those activities if the bank and its majority-owned subsidiary
comply with the proposed restrictions within one year of the effective
date of the regulation.
The FDIC also proposes that an insured state bank that converts
from a savings association charter and which engages in activities
through a subsidiary, even if such activity was permissible for a
subsidiary of a federal savings association, shall make application or
provide notice, whichever applies, to the FDIC to continue the activity
unless the activity and manner and amount in which the activity is
operated is one that the FDIC has determined by regulation does not
pose a significant risk to the deposit insurance fund. Since the
statutory and regulatory systems developed for savings associations are
different from the bank systems, the FDIC believes that any institution
that converts its charter should be subject to the same regulatory
requirements as other institutions with a like charter.
If, prior to conversion, the savings association had received
approval from the FDIC to continue through a subsidiary the activity of
a type or in an amount that was not permissible for a federal savings
association, the converted insured state bank need not reapply for
consent provided the bank and subsidiary continue to comply with the
terms of the approval order, meet all the conditions and restrictions
for being an eligible subsidiary contained in Sec. 362.4(c)(2), comply
with the investment and transactions limits of Sec. 362.4(d), and meet
the capital requirement of Sec. 362.4(e). If the converted bank or its
subsidiary, as applicable, does not comply with all these requirements,
the bank must obtain the FDIC's consent to continue the activity. The
FDIC has imposed these conditions to fill a regulatory gap that would
otherwise be present. Savings associations and their service
corporations are subject to regulatory standards of separation, the
savings association is limited in the amount it may invest in the
service corporation, and the savings association must deduct its
investment in the service corporation from its capital if the service
corporation engages in activities that are not permissible for a
national bank. The eligible subsidiary standard, the investment and
transaction limits, and the capital requirements replace these
standards once the savings association has converted its charter to a
bank.
If the bank does not receive the FDIC's consent for its subsidiary
to continue an activity, the bank must divest its nonconforming
investment in the subsidiary within two years of the date of conversion
either by divesting itself of its subsidiary or by the subsidiary
divesting itself of the impermissible activity.
B. Subpart B--Safety and Soundness Rules Governing State Nonmember
Banks
Section 362.6 Purpose and Scope
This subpart, along with the notice and application provisions of
subpart E of this chapter, applies to certain banking practices that
may have adverse effects on the safety and soundness of insured state
nonmember banks. The FDIC intends to allow insured state nonmember
banks and their subsidiaries to undertake only safe and sound
activities and investments that would not present a significant risk to
the deposit insurance fund and that are consistent with the purposes of
federal deposit insurance and other law. The safety and soundness
standards of this subpart apply to activities undertaken by insured
state nonmember banks when conducting real estate investment activities
through a subsidiary if those activities that are permissible for a
national bank subsidiary. Neither a national bank nor a state bank
would not be permitted to engage in these real estate investment
activities directly. The FDIC has a long history of considering the
risks from real estate investment activities to be unsafe and unsound
for a bank to undertake without appropriate safeguards to address that
risk.
Additionally, this subpart sets forth the standards that apply when
affiliated organizations of insured state nonmember banks that are not
affiliated with a bank holding company conduct securities activities.
The collective business enterprises of these entities are commonly
described as nonbank bank holding company affiliates. The FDIC has a
long history of considering the risks from the conduct of securities
[[Page 48000]]
activities by affiliates of insured state nonmember banks to be unsafe
and unsound without appropriate safeguards to address those risks. This
rule incorporates many of the standards currently applicable to these
entities through Sec. 337.4 of the FDIC's regulations. The scope of
this regulation is narrower than Sec. 337.4 due to intervening
regulations by other appropriate Federal banking agencies that render
more comprehensive rules superfluous. In addition, the FDIC has updated
the restrictions and brought them into line with modern views of
appropriate securities safeguards between affiliates and insured banks.
Section 362.7 Restrictions on Activities of Insured State Nonmember
Banks
Real Estate
Since national banks are generally prohibited from owning and
developing real estate, insured state banks have been required to apply
to the FDIC before undertaking or continuing such real estate
activities. The FDIC has reviewed 95 applications under part 362 since
December 1992 in which insured state banks have requested permission to
undertake some type of real estate investment activity. The FDIC has
concluded as a result of its experience in reviewing these applications
that while real estate investments generally possess many risks that
are not readily comparable to other equity investments, institutions
may contain these risks by undertaking real estate investments within
certain parameters. The FDIC has considered the manner under which an
insured state nonmember bank may undertake real estate investment
activities and determined that insured state nonmember banks and their
subsidiaries should generally meet certain standards before engaging in
real estate investment activities that are not permissible for national
banks. As a result, the FDIC is proposing to establish standards under
which insured state nonmember banks may participate in real estate
investment activities. Providing notice of such standards will allow
insured state nonmember banks to initiate investment activities with
knowledge of what the FDIC considers when evaluating the safety and
soundness of the operations of the institution and its subsidiaries.
The FDIC believes its proposal simplifies and clarifies the standards
under which insured state nonmember banks may conduct their investment
activities while providing comprehensive and flexible regulation of the
dealings between a bank and its subsidiaries.
This proposal is consistent with the views expressed by the FDIC's
then Chairman Ricki Helfer in her letter of May 30, 1997, to Eugene
Ludwig, Comptroller of the Currency, in regard to the NationsBank
operating subsidiary notices. In that letter, the FDIC's Chairman
stated her view ``that real estate development activities present risks
to the deposit insurance funds and therefore should be permitted for
bank subsidiaries only where there is a clear legal separation from the
insured bank, stringent firewalls and limited exposure of the capital
of the consolidated organization.''
Under the FDIC's proposal, if an institution and its real estate
investment operations meet the standards established, the institution
need only file notice with the FDIC as outlined in subpart E. However,
if the institution and its operations do not meet the general standards
set forth in this rule, or if the institution so chooses, it may file
application with the FDIC under Sec. 362.4(b)(1) and subpart E. We
request comment on the overall goal of the proposed regulation,
particularly in light of the application filed with the Office of the
Comptroller of the Currency by NationsBank, National Association,
Charlotte, North Carolina to engage in limited real estate development
activities and the proposal of the Board of Governors of the Federal
Reserve System to apply sections 23A and 23B of the Federal Reserve Act
to transactions between an insured depository institution and its
subsidiary.
The following discussion summarizes some of the developments that
have taken place in the area of real estate investment that the FDIC
considered in establishing the general standards under which an insured
state nonmember bank may undertake real estate investment activities.
We request comment on all facets of this proposal.
The cyclical downturn in the real estate market in the late 1980s
and early 1990s, and the impact of that downturn on financial
institutions, provides an illustration of the market risk presented by
real estate investment activities. In addition to the high degree of
variability, real estate markets are, for the most part, localized;
investments are normally not securitized; financial information flow is
often poor; and the market is generally not very liquid.
A financial institution--like any other investor--faces substantial
risks when it takes an equity position in a real estate venture. The
function of an equity investor is to bear the economic risks of the
venture. Economic risk is traditionally defined as the variability of
returns on an investment. If a single investor undertakes a project
alone, all the risk is borne by the investor. An investor typically
will have a required rate of return based on the historical track
record of a particular company and/or type of investment project.
Market participants face a general trade-off: the riskier the project,
the higher the required rate of return. A key aspect of that trade-off
is the notion that a riskier project will entail a higher probability
of significant losses for the investor. Assessments of the degree of
risk will depend on factors affecting future returns such as cyclical
economic developments, technological advances, structural market
changes, and the project's sensitivity to financial market changes.
The actual return on an investment, however, will depend on
developments beyond the investor's control. If the actual return is
higher than the expected rate, the investor benefits. If the project
falls short of expected returns, the investor suffers. At the extreme,
an investor may lose all or some of the original investment.
Investments in real estate ventures follow this pattern. In fact,
equity investments in commercial real estate have long been considered
fairly risky because of the uncertainties in the income stream they
generate.
It is possible for the investor to deflect some of the risk of the
project. When a project is partially financed by debt, the risks are
shared with the lender. Nonetheless, the equity investor typically
still bears the bulk of the variation in the risk and rewards of an
investment. As a rule, the lender is compensated at an agreed amount
(or formula in the case of a variable rate loan). The lender is paid--
both interest and principal--before the equity investor/borrower
receives any rewards or return of investment. Thus, any downside
outcome is borne first by the equity investor. In properly underwritten
loan arrangements, the lender bears the economic risk of significant
losses only in the case of extremely negative outcomes. Since the legal
priority of the debt holder is higher in a liquidation or bankruptcy
than that of the equity holder, the debt holders are hurt if the
investment entity has very limited resources. Of course, the borrower/
equity investor receives all of the up-side potential returns from the
investment.
While a leveraged investor has less of his/her own funds at stake,
the use of borrowed funds to finance an investment greatly magnifies
the variability of the returns to the equity investor. That is to say,
leverage increases the risks involved. For
[[Page 48001]]
instance, a small decline in income in an unleveraged investment may
only mean less positive returns; to the leveraged investor, it may mean
out of pocket losses, as debt service may have already absorbed any
income generated by the project. Conversely, a small increase in
generated income may just moderately increase the rate of return on an
all equity investment but have a major positive effect on the highly
leveraged investor.
The fact that most commercial real estate investments are highly
leveraged also affects overall market volatility. For instance, high
interest rates will lower the expected rate of return for highly
leveraged investments which will, in turn, lower effective demand.
Thus, prices offered for commercial real estate during periods of high
interest rates typically are lowered. For example, to the extent that
there was a ``credit crunch'' for commercial real estate in the early
1990s and lenders were unwilling to extend credit, diminished effective
demand for a property could have resulted in the elimination of a broad
class of potential investors, rather than simply a lower price being
bid.
The economic viability of any investment in real estate ultimately
depends on the economic demand for the services it provides. Thus,
fluctuations in the economy in general are translated into
uncertainties in the underlying economics of most real estate
investments. National economic trends, regional developments, and even
local economic developments will affect the volatility of returns. A
traditional problem for real estate investors in that regard is that
when the economy as a whole reaches capacity during an economic
expansion, they are one of the sectors seriously affected by the
resulting run-up in interest rates.
Much of the uncertainty associated with real estate investment,
however, comes from the nature of the production itself--how new supply
is brought to market. Investments in the construction of real estate
typically have a long gestation period; this long planning period is
especially characteristic of large commercial development projects.
Given the cyclical nature of the economy and financial markets, the
economic prospects for an investment may change radically during that
period, altering timing and terms of transactions.
Moreover, real estate investors also typically have trouble getting
full information on current market conditions. Unlike highly organized
markets where participants may easily obtain data on market
developments such as price and supply considerations, information in
the commercial real estate market is often difficult, or impossible, to
obtain. Also inherent in the investment process for commercial real
estate is the fact that the market is relatively illiquid--particularly
for very large projects. Thus, instead of having numerous frequent
transactions that incorporate the latest market information and ensure
that prices reflect true economic value, markets may be thin and the
timing of a sale or rental contract may affect the value of the
underlying investments.
In addition to the inherent illiquidity of commercial real estate
markets, transactions often are ``private deals'' in which the major
parameters of the investment are not available to the public in general
and, in particular, to rival developers. For instance, the costs of
construction are a private transaction between the developer and his
contractor. Likewise, evaluating selling prices or rental income is
difficult since: (1) There are no statistical data on transaction
prices available as there are for single-family structures and (2) even
if there were data available, it is impossible to account for the many
creative financing techniques involved in commercial sales and in
rental agreements (e.g., tenant improvements and rent discounting).
Because of imperfect market information and the length of the
production process, prices of existing structures are often
artificially bid up in market upswings. That is, short-term shortages
fuel speculative price increases. Speculative price increases (whether
it be for raw land, developed construction sites, or completed
buildings) typically encourage even more construction to take place,
leading to additional future overbuilding relative to underlying
demand.
In addition to the inherent cyclicality of real estate markets,
several underlying factors create additional uncertainties in the
investment process. Changes in tax laws will affect the profitability
of real estate investments. For example, tax changes were a major
consideration in the 1980s, but changes in depreciation allowances and
in tax rates have been commonplace in the post-World War II era.
Another uncertainty is the effect of other governmental actions,
especially in the area of regulations. A prime example is Federal
mandates requiring clean-up of existing environmental hazards that
imposed unexpected costs on investors at the time they were passed.
Similar uncertainties result from state and local laws that effect real
estate and how it may be developed. For instance, changes in
environmental restrictions of new construction may add unexpected costs
to a project or even bar its intended use. Similarly, a zoning change
may positively or negatively affect investment prospects unexpectedly.
All of these factors add to the uncertainty of returns and thereby
increase the risk of the investment.
Two other considerations often play into increasing risks in real
estate investment. First, the efficient execution of a real estate
investment usually requires a ``hands on'' approach by an experienced
manager. This level of involvement is especially true of a construction
project where developers have to deal with a wide variety of problems
ranging from governmental approvals to sub-contractors and changing
commodity markets. For an investment in developed real estate,
maintenance problems, replacing lost tenants, and adjusting rents to
retain tenants all must be addressed in an environment of ever changing
market conditions.
Many equity investors solve these problems by ``hiring'' someone
else to manage the investment. The experience of the 1980s shows that
there are specific risks involved in separating ownership from
management. For instance, many tax-oriented investors in the early
1980s arguably knew little about the basic economics of the investments
they were undertaking. In a perfect world, ``passive'' investment would
work just as efficiently as direct, active investment. In reality,
investment outcomes are likely to be more uncertain for equity
investors when someone else is making decisions that affect the
ultimate return. The experience and expertise of management is a
critical factor, and there is much anecdotal evidence to suggest that
the lack of adequate management creates a significant level of risk of
loss.
The FDIC recognizes its ongoing responsibility to ensure the safe
and sound operation of insured state nonmember banks and their
subsidiaries. Thus, the Board of Directors of the FDIC has determined
that there may be a need to restrict or prohibit certain real estate
investment activities of subsidiaries of insured state nonmember banks.
Therefore, the FDIC will not automatically follow the safety and
soundness restrictions of an interpretation, order, circular or
official bulletin issued by the OCC regarding real estate investment
activities that are permissible for the subsidiary of a national bank
when these activities are not permissible for a national bank.
Section 362.7(a) of the proposal is intended to address the FDIC's
ongoing
[[Page 48002]]
supervisory concerns regarding real estate investment activities and to
impose adequate limitations to address the FDIC's concerns about the
safety and soundness of these activities. Depending upon the facts, the
potential risks inherent in a bank subsidiary's involvement in real
estate investment activities may make these restrictions and
limitations necessary to protect the bank and ultimately the deposit
insurance funds from losses associated with the significant risks
inherent in real estate investment activities.
To address its safety and soundness concerns about real estate
investment activities not permissible for a national bank, the FDIC has
adopted the same standards when insured state banks conduct those real
estate investment activities regardless of whether those real estate
investment activities are permissible for a national bank subsidiary.
This subpart is intended to address the impact on insured state
nonmember banks if the OCC were to approve recent applications
submitted by national banks to conduct real estate investment
activities through operating subsidiaries. The FDIC invites comment on
its approach to its safety and soundness concerns about real estate
investment activities.
Unless the FDIC has previously approved the real estate investment
activity that is not permissible for a national bank, an insured state
nonmember bank must file a notice or application with the FDIC in order
to directly or indirectly undertake a real estate investment activity,
even if the real estate investment activity is permissible for the
subsidiary of a national bank. To qualify for the notice provision
proposed under this new regulation, the insured state nonmember bank
and its subsidiary must meet the standards established in
Sec. 362.4(b)(5)(i). After filing a notice as provided for in subpart E
to which the FDIC does not object, the institution may then proceed
with its investment activities. If the insured state nonmember bank and
its subsidiary do not meet the standards established under the proposed
rule, or if the institution so chooses, an application may be filed as
described in Sec. 362.4(b)(1) and subpart E.
Affiliation With Securities Companies
Section 362.7(b) reflects the FDIC Board's longstanding view that
an unrestricted affiliation with a securities company may have adverse
effects on the safety and soundness of insured state nonmembers banks.
This section reiterates the Sec. 337.4 prohibition against any
affiliation by an insured state nonmember bank with any company that
directly engages in the underwriting of stocks, bonds, debentures,
notes, or other securities which is not permissible for a national bank
unless certain conditions are met. As proposed, the affiliation is only
allowed if:
(1) The securities business of the affiliate is physically separate
and distinct in its operations from the operations of the bank,
provided that this requirement shall not be construed to prohibit the
bank and its affiliate from sharing the same facility if the area where
the affiliate conducts retail sales activity with the public is
physically distinct from the routine deposit taking area of the bank;
(2) Has a chief executive officer of the affiliate who is not an
employee of the bank;
(3) A majority of the affiliate's board of directors are not
directors, officers, or employees of the bank;
(4) The affiliate conducts business pursuant to independent
policies and procedures designed to inform customers and prospective
customers of the affiliate that the affiliate is a separate
organization from the bank;
(5) The bank adopts policies and procedures, including appropriate
limits on exposure, to govern their participation in financing
transactions underwritten by an underwriting affiliate;
(6) The bank does not express an opinion on the value or the
advisability of the purchase or sale of securities underwritten or
dealt in by an affiliate unless it notifies the customer that the
entity underwriting, making a market, distributing or dealing in the
securities is an affiliate of the bank;
(7) The bank does not purchase as principal or fiduciary during the
existence of any underwriting or selling syndicate any securities
underwritten by the affiliate unless the purchase is approved by the
bank's board of directors before the securities are initially offered
for sale to the public;
(8) The bank does not condition any extension of credit to any
company on the requirement that the company contract with, or agree to
contract with, the bank's affiliate to underwrite or distribute the
company's securities;
(9) The bank does not condition any extension of credit or the
offering of any service to any person or company on the requirement
that the person or company purchase any security underwritten or
distributed by the affiliate; and
(10) The bank complies with the investment and transaction
limitations of Sec. 362.4(d).
Many of the restrictions and prohibitions listed above are
currently contained in Sec. 337. 4. Additionally, the conditions that
will be imposed on subsidiaries which engage in the public sale,
distribution, or underwriting securities such as adopting independent
policies and procedures governing participation in financing
transactions underwritten by an affiliate, expressing opinions on the
advisability of the purchase or sale of particular securities, and
purchasing securities as principal or fiduciary only with prior board
approval have been added. As indicated earlier, the prohibition against
shared officers has been eased and now only refers to the chief
executive officer. Comments on the appropriateness of the restrictions
and prohibitions are solicited. As written, the proposal only applies
these restrictions to an insured state nonmember bank affiliated with a
company not treated as a bank holding company pursuant to section 4(f)
of the Bank Holding Company Act (12 U.S.C. 1843(f)), that directly
engages in the underwriting of stocks, bonds, debentures, notes, or
other securities which are not permissible for a national bank. Other
affiliates now covered by the safeguards of Sec. 337.4 would no longer
be covered under the FDIC's regulations. We believe that these other
affiliates are adequately separated from the banks by the restrictions
imposed by the FRB. We invite comment on whether we should include more
entities in the coverage of these restrictions and whether these
restrictions appropriately address the risks being undertaken by the
affiliate and through the affiliate relationship.
C. Subpart C--Activities of Insured State Savings Associations
Section 362.8 Purpose and Scope
This subpart, together with the notice and application procedures
of subpart F, implements the provisions of section 28 of the FDI Act
(12 U.S.C. 1831e) that restrict and prohibit insured state savings
associations and their service corporations from engaging in activities
and investments of a type that are not permissible for federal savings
associations and their service corporations. The phrase ``activity
permissible for a federal savings association'' means any activity
authorized for federal savings associations under any statute including
the Home Owners Loan Act (HOLA) (12 U.S.C. 1464 et seq.), as well as
activities recognized as permissible for a federal savings association
in regulations, official thrift bulletins, orders or written
interpretations issued by the Office of Thrift Supervision (OTS), or
its predecessor, the Federal Home Loan
[[Page 48003]]
Bank Board. Regarding insured state savings associations, this subpart
governs only activities conducted ``as principal'' and therefore does
not govern activities conducted as agent for a customer, conducted in a
brokerage, custodial, advisory, or administrative capacity, or
conducted as trustee. This subpart does not restrict any interest in
real estate in which the real property is (a) used or intended in good
faith to be used within a reasonable time by an insured savings
association or its service corporations as offices or related
facilities for the conduct of its business or future expansion of its
business or (b) used as public welfare investments of a type and in an
amount permissible for federal savings associations. Equity investments
acquired in connection with debts previously contracted that are held
within the shorter of the time limits prescribed by state or federal
law are not subject to the limitations of this subpart.
The FDIC intends to allow insured state savings associations and
their service corporations to undertake only safe and sound activities
and investments that do not present a significant risk to the deposit
insurance funds and that are consistent with the purposes of federal
deposit insurance and other applicable law. This subpart does not
authorize any insured state savings association to make investments or
conduct activities that are not authorized or that are prohibited by
either federal or state law.
Section 362.9 Definitions
Section 362.9 of the proposal contains definitions used in this
subpart. Rather than repeating terms defined in subpart A, the
definitions contained in Sec. 362.2 are incorporated into subpart C by
reference. Included in the proposed definitions are most of the terms
currently defined in Sec. 303.13(a) of the FDIC's regulations. Editing
changes are primarily intended enhance clarity without changing the
meaning. However, certain deliberate changes are intended to alter the
meaning of these terms and are identified in this discussion.
The terms ``Corporate debt securities not of investment grade'' and
``Qualified affiliate'' have been directly imported into subpart C from
Sec. 303.13(a) without substantive change. Substantially the same
``Control'' and ``Equity security'' definitions are incorporated by
reference to subpart A. The last sentence of the current ``Equity
security'' definition, which excludes equity securities acquired
through foreclosure or settlement in lieu of foreclosure, would be
deleted for the same reason that similar language has been deleted from
several definitions in subpart A. Similar language is now included in
the purpose and scope paragraph explaining that equity investments
acquired through such actions are not subject to the regulation. No
substantive change was intended by this modification.
Modified versions of ``Activity,'' ``Equity investment,''
``Significant risk to the fund,'' and ``Subsidiary'' are also carried
forward by reference to subpart A. The definition of activity has been
broadened to encompass all activities including acquiring or retaining
equity investments. Sections of this part governing activities other
than acquiring or retaining equity investments include statements
specifically excluding the activity of acquiring or retaining equity
investments. This change was made to conform the ``Activity''
definition used in the regulation to that provided in the governing
statutes. Both sections 24 and 28 of the FDI Act define activity to
include acquiring or retaining any investment. We invite comment on
whether this change enhances clarity or whether the longer definition
found in the current regulation should be reinstated.
The ``Equity investment'' definition was also modified to better
identify its components. The proposed definition includes any ownership
interest in any company. This change was made to clarify that ownership
interests in limited liability companies, business trusts,
associations, joint ventures and other entities separately defined as a
``company'' are considered equity investments. The definition was
likewise expanded to include any membership interest that includes a
voting right in any company. Finally, a sentence was added excluding
from the definition any of the identified items when taken as security
for a loan. The intended effect of these changes is not to broaden the
scope of the regulation, but instead to clarify the FDIC's position
that such investments are all considered equity investments
notwithstanding the form of business organization. We invite comment on
whether these changes are helpful in defining equity investments.
Comments are also requested on whether additional changes to this
definition are needed.
The definition of ``Significant risk'' is effectively retitled
``Significant risk to the fund'' by the reference to subpart A.
Additionally, a second sentence has been added to the definition
explaining that a significant risk to the fund may be present either
when an activity or an equity investment contributes or may contribute
to the decline in condition of a particular state-chartered depository
institution or when a type of activity or equity investment is found by
the FDIC to contribute or potentially contribute to the deterioration
of the overall condition of the banking system. This sentence is
intended to elaborate on the FDIC Board's position that the absolute
size of a projected loss in comparison to the deposit insurance funds
is not determinative of the issue. Additionally, it clarifies the
FDIC's position that risk to the fund may be present even if a
particular activity or investment may not result in the imminent
failure of a bank. Additional comments are included in the discussion
of the relevant definition in subpart A. We invite comments on whether
this language is appropriate or whether is should be further expanded.
With the exception of substituting the separately defined term
``company'' for the list of entities such as corporations, business
trusts, associations, and joint ventures currently in the
``Subsidiary'' definition, the ``Subsidiary'' definition would be
mostly unchanged. It is noted that limited liability companies are now
included in the company definition and, by extension, are included in
the subsidiary definition. The only other change is that the exclusion
of ``Insured depository institutions'' for purposes of current
Sec. 303.13(f) has been moved to the purpose and scope section of
proposed subpart D. No substantive changes are intended by these
modifications. Comments are requested regarding whether the FDIC has
inadvertently changed the intended meaning through these modifications.
While proposed subpart C retains substantially the same ``Service
corporation'' definition, the word ``only'' has been deleted from the
phrase ``available for purchase only by savings associations.'' This
change is intended to make it clear that a service corporation of an
insured state savings association may invest in lower-tier service
corporations if allowed by this part or FDIC order, and it is
consistent with the recently amended part 559 of the Office of Thrift
Supervision's regulations (12 CFR 559). The change is not intended to
alter the nature of the requirements governing the savings
association's equity investment in the first-tier service corporation.
Comments are requested regarding whether the FDIC has inadvertently
altered the intended meaning through these changes.
As in subpart A, the definition of ``Equity investment in real
estate'' is deleted in the proposal. The descriptions of real estate
investments permissible for federal savings associations that were
excepted from the
[[Page 48004]]
current definition provided by Sec. 303.13(a)(5) were moved to the
purpose and scope paragraph. As a result, readers are now informed that
these excepted real estate investments are not subject to the
regulation. Additionally, the FDIC believes that the remaining content
of the current definition fails to provide any meaningful clarity or
understanding. Therefore, the FDIC would instead rely on the ``equity
investment'' definition to include relevant real estate investments. A
related change was made to the ``equity investment'' definition by
deleting the reference to ``equity interest in real estate'' and
replacing it with language to include any interest in real estate
(excluding real estate that is not within the scope of this part). No
substantive changes were intended by these modifications. The FDIC
invites comments on whether these changes have clarified the subject
definitions. Comments are also requested concerning whether the FDIC
has inadvertently changed the meaning of these definitions through
these actions.
The only new definition specifically added to subpart C is the term
``Insured state savings association.'' Because this term is not
explicitly defined in section 3 of the FDI Act, the proposal has added
this term to ensure that readers clearly understand that an insured
state savings association means any state chartered savings association
insured by the FDIC. Comments are invited on whether this definition
eliminates any ambiguity or whether it is actually needed.
Additionally, applicable terms that were previously undefined but are
added by the general incorporation of the definitions in subpart A
should not result in any substantive changes to the meanings of those
terms as currently used in Sec. 303.13 of the FDIC's regulations.
Section 362.10 Activities of Insured State Savings Associations
Equity Investment Prohibition
Section 362.10(a)(1) of the proposal replaces the provisions of
Sec. 303.13(d) of the FDIC's regulations and restates the statutory
prohibition preventing insured state savings associations from making
or retaining any equity investment of a type, or in an amount, not
permissible for a federal savings association. The prohibition does not
apply if the statutory exception (restated in the current regulation
and carried forward in the proposal) contained in section 28 of the FDI
Act applies. With the exception of deleting items no longer applicable
due to the passage of time, this provision is retained as currently in
effect without any substantive changes.
Exception for Service Corporations
The FDIC proposes to retain the exception now in Sec. 303.13(d)(2)
which allows investments in service corporations as currently in effect
without any substantive change. However, the FDIC has modified the
language of this section using a structure paralleling that found in
proposed subpart A permitting insured state banks to invest in
majority-owned subsidiaries. Similar to the treatment accorded insured
state banks, an insured state savings association must meet and
continue to be in compliance with the capital requirements prescribed
by the appropriate federal banking agency, and the FDIC must determine
that neither the amount of the investment nor the activities to be
conducted by the service corporation present a significant risk to the
relevant deposit insurance fund. The criteria identified in the
preceding sentence is derived directly from the underlying statutory
language. In order for the insured state savings association to qualify
for this exception, the service corporation must be engaging in
activities or acquiring and retaining investments that are described in
proposed Sec. 362.11(b) as regulatory exceptions to the general
prohibition.
Language currently in Sec. 303.13(d) concerning the filing of
applications to acquire an equity investment in a service corporation
would be deleted and moved to subpart F of this regulation.
Divesting Impermissible Equity Investments
Section 303.13(d)(1) of the FDIC's current regulations requires
savings associations to file divestiture plans with the FDIC concerning
any equity investments held as of August 9, 1989, that were no longer
permissible. Because divestiture was required by statute to occur no
later than July 1, 1994, the proposal omits this provision as it is no
longer necessary due to the passage of time.
Other Activities
Section 362.10(b) of the proposal replaces what are now
Secs. 303.13(b), 303.13(c), and 303.13(e) of the FDIC's regulations.
Some portions of the existing sections would be eliminated because they
are no longer necessary due to the passage of time, and other portions
have been edited and reformatted in a manner consistent with the
corresponding sections of subpart A. Language currently in the
referenced sections of Sec. 303.13 concerning notices and applications
has likewise been edited, reformatted, and moved to subpart F of this
regulation.
Other Activities Prohibition
Section 362.10(b)(1) of the proposal restates the statutory
prohibition that insured state savings associations may not directly
engage as principal in any activity of a type, or in an amount, that is
not permissible for a federal savings association unless the activity
meets a statutory or regulatory exception. Like subpart A for insured
state banks, language has been added to clarify that this prohibition
does not supercede the equity investment exception of
Sec. 362.10(a)(2). We added this language because acquiring or
retaining any investment is defined as an activity.
The statutory prohibition preventing state and federal savings
associations from directly, or indirectly through a subsidiary (other
than a subsidiary that is a qualified affiliate), acquiring or
retaining any corporate debt that is not of investment grade after
August 9, 1989, is also carried forward from what is now Sec. 303.13(e)
of the FDIC's regulations. However, the proposal deletes the
Sec. 303.13(e) requirement that savings institutions file divestiture
plans concerning corporate debt that is not of investment grade and
that is held in a capacity other than through a qualified affililate.
Divestiture was required by no later than July 1, 1994, rendering that
provision unnecessary due to the passage of time.
Exceptions to the Other Activities Prohibition
We left the statutory exception to the other activities prohibition
contained in section 28 of the FDI Act to function in a manner similar
to that now in the relevant provisions of Sec. 303.13; we intend no
substantive change from the current regulation through any language
changes we have made. The regulation continues to permit an insured
state savings association to retain any asset (including a
nonresidential real estate loan) acquired prior to August 9, 1989.
However, corporate debt securities that are not of investment grade may
only be purchased or held by a qualified affiliate. Whether or not the
security is of investment grade is measured only at the time of
acquisition.
Additionally, the FDIC has provided regulatory exceptions to the
other activities prohibition. The first exception retains the
application process currently in Sec. 303.13(b)(1) and provides insured
state savings associations with the option of applying to the FDIC for
approval to engage in an
[[Page 48005]]
activity of a type that is not permissible for a federal savings
association. The notice process from Sec. 303.13(c)(1) has been
retained for insured state savings associations that want to engage in
activities of a type permissible for a federal savings association, but
in an amount exceeding that permissible for federal savings
associations. The proposal adds a regulatory exception enabling insured
state savings associations to acquire and retain adjustable rate and
money market preferred stock without submitting an application to the
FDIC if the acquisition is done within the prescribed limitations. We
added an exception to allow insured state savings associations to
engage as principal in any activity that is not permissible for a
federal savings association provided that the Federal Reserve has found
the activity to be closely related to banking. This provision is
similar to the exception for insured state banks and, similarly, this
provision does not allow an insured state savings association to hold
equity securities that a federal savings association may not hold.
Consent Obtained Through Application
Insured state savings associations are prohibited from directly
engaging in activities of a type or in an amount not permissible for a
federal savings association unless: (1) The association meets and
continues to meet the capital standards prescribed by the appropriate
federal financial institution regulator; and (2) the FDIC determines
that conducting the activity in the additional amount will not present
a significant risk to the relevant deposit insurance fund. Section
362.10(b)(2)(i) establishes an application option for savings
associations that meet the relevant capital standards and that seek the
FDIC's consent to engage in activities that are otherwise prohibited.
The substance of this process is unchanged from the relevant sections
of Sec. 303.13 of the FDIC's current regulations.
Nonresidential Realty Loans Permissible for a Federal Savings
Association Conducted in an Amount Not Permissible
The proposal carries forward and modifies the provision now in
Sec. 303.13(b)(1) of this chapter requiring an insured state savings
association wishing to hold nonresidential real estate loans in amounts
exceeding the limits described in section 5(c)(2)(B) of HOLA (12 U.S.C.
1464 (c)(2)(B)) to apply for the FDIC's consent. The proposal enables
the insured state savings association to submit a notice instead of an
application. This change is nonsubstantive and is made simply to
expedite the process for insured state savings associations wanting to
exceed the referenced limits.
Acquiring and Retaining Adjustable Rate and Money Market Preferred
Stock
The proposal extends to insured state savings associations a
revised version of the regulatory exception allowing an insured state
bank to invest in up to 15 percent of its tier one capital in
adjustable rate preferred stock and money market (auction rate)
preferred stock without filing an application with the FDIC. By
statute, however, insured savings associations are restricted in their
ability to purchase debt that is not of investment grade. This
regulatory exception does not override that statutory prohibition and
any instruments purchased must comply with that statutory constraint.
Additionally, this exception is only extended to savings associations
meeting and continuing to meet the applicable capital standards
prescribed by the appropriate federal financial institution regulator.
When this regulatory exception was adopted for insured state banks
in 1992, the FDIC found that adjustable rate preferred stock and money
market (auction rate) preferred stock were essentially substitutes for
money market investments such as commercial paper and that their
characteristics are closer to debt than to equity securities.
Therefore, money market preferred stock and adjustable rate preferred
stock were excluded from the definition of equity security. As a
result, these investments are not subject to the equity investment
prohibitions of the statute and the regulation and are considered an
``other activity'' for the purposes of this regulation.
This exception focuses on two categories of preferred stock. This
first category, adjustable rate preferred stock refers to shares where
dividends are established by contract through the use of a formula in
based on Treasury rates or some other readily available interest rate
levels. Money market preferred stock refers to those issues where
dividends are established through a periodic auction process that
establishes yields in relation to short term rates paid on commercial
paper issued by the same or a similar company. The credit quality of
the issuer determines the value of the security, and money market
preferred shares are sold at auction.
The FDIC continues to believe that the activity of investing up to
15 percent of an institution's tier one capital does not represent a
significant risk to the deposit insurance funds. Furthermore, the FDIC
believes the same funding option should be available to insured state
savings associations and proposes extending a like exception subject to
the same revised limitation. The fact that prior consent is not
required by this subpart does not preclude the FDIC from taking any
appropriate action with respect to the activities if the facts and
circumstances warrant such action.
The FDIC seeks comment on whether this treatment of money market
preferred stock and adjustable rate preferred stock is appropriate and
whether this exception should be extended to insured state savings
associations. Is this exception useful and it is needed? Comment is
requested on the proposed limit, particulary whether the limit is
either too restrictive or overly generous. Comment is also requested
concerning whether other, similar types of investments should be given
similar treatment.
Activities That Are Closely Related to Banking Conducted by the Savings
Association or a Service Corporation of an Insured Savings Association
The FDIC added an exception allowing an insured state savings
association to engage in any activity ``as principal'' included on the
FRB's list of activities (found at 12 CFR 225.28) or where the FRB has
issued an order finding that the activity is closely related to
banking. This exception is similar to that provided for insured state
banks in subpart A. The FDIC believes that insured federal savings
associations are permitted to do most of the activities covered by this
exception and determined that the remaining activities do not present
any substantially different risk when conducted by an insured savings
association than when conducted by an insured state bank. The FDIC
seeks comment on whether adding this express exception is helpful,
redundant, or expands the powers of insured savings associations. We
note that we did not propose a reference to activities found by OTS
regulation or order to be reasonably related to the operation of
financial institutions. Comment is invited on whether we should include
this exception and, if so, how it should be incorporated into the
regulation. Comment is requested concerning the appropriateness of the
FRB's closely related to banking standard for savings associations. Is
there another standard which would be more meaningful for state-
chartered savings associations?
Guarantee Activities
The FDIC considered adding an exception for guarantee activities
[[Page 48006]]
including credit card guarantee programs and comparable arrangements
that would have been similar to that deleted from subpart A in this
proposal. These programs typically involve a situation where an
institution guarantees the credit obligations of its retail customers.
While we continue to believe that these activities present no
significant risk to the deposit insurance funds, this provision has
been deleted from subpart A of this proposal because the FDIC has
determined that national banks, and therefore insured state banks, may
already engage in the activities. We determined that federal savings
associations, and by extension insured state savings associations, may
engage in these activities as well. Nonetheless, the FDIC seeks comment
on whether adding this language would be helpful to make it clear that
insured state savings association may engage in these activities.
Commenters advocating that the FDIC retain this exception in the final
rule are asked to address how the exception might be incorporated into
the regulation.
Section 362.11 Service Corporations of Insured State Savings
Associations
Section 362.11 of the proposal governs the activities of service
corporations of insured state savings associations and generally
replaces what is now Sec. 303.13(d)(2) of the FDIC's regulations. As
proposed, the section reorganizes the substance of the current
regulation and consolidates all provisions concerning the activities of
service corporations into the same section of the regulation. Language
currently in Sec. 303.13(d) concerning applications would be revised
and moved to subpart F of this regulation. Additionally, the FDIC
proposes extending several regulatory exceptions that closely resemble
similar exceptions provided to subsidiaries of insured state banks in
subpart A of this proposed regulation. We note that if the service
corporation is a new subsidiary or is a subsidiary conducting a new
activity, all of the exceptions in Sec. 362.11 remain subject to the
notice provisions contained in section 18(m) of the FDI Act which would
now be implemented in subpart D of this proposal.
General Prohibition
A service corporation of an insured state savings association may
not engage in any activity that is not permissible for a service
corporation of a federal savings association unless the savings
association submits an application and receives the FDIC's consent or
the activity qualifies for a regulatory exception. This provision does
not represent a substantive change from the current regulation. The
regulatory language implementing this prohibition has been separated
from the restrictions in Sec. 362.10 prohibiting an insured state
savings association from directly engaging in activities which are not
permissible for federal savings association. By separating the savings
association's activities and those of a service corporation,
Sec. 362.11 deals exclusively with activities that may be conducted by
a service corporation of an insured state savings association.
Consent Obtained Through Application
The proposal continues to allow insured state savings associations
to submit applications seeking the FDIC's consent to engage in
activities that are otherwise prohibited. Section 362.11(b)(1) carries
forward the substance of the application option in
Sec. 303.13(d)(2)(ii) of the FDIC's current regulations. Approval will
be granted only if: (1) The savings association meets and continues to
meet the applicable capital standards prescribed by the appropriate
federal banking agency, and (2) the FDIC determines that conducting the
activity in the corresponding amount will not present a significant
risk to the relevant deposit insurance fund.
Service Corporations Conducting Unrestricted Activities
The FDIC has found that it is not a significant risk to the deposit
insurance fund if a service corporation engages in certain activities.
One of these activities is holding the stock of a company that engages
in: (1) Any activity permissible for a federal savings association; (2)
any activity permissible for the savings association itself under
Sec. 362.10(b)(2) (iii) or (iv); (3) activities that are not conducted
``as principal;'' or (4) activities that are not permissible for a
federal savings association provided that the FRB by regulation or
order has found the activity to be closely related to banking and the
service corporation exercises control over the issuer of the purchased
stock. We provided similar exceptions to majority-owned subsidiaries of
insured state banks in subpart A. We note that we revised the language
in subpart A from that currently found in part 362 to clarify the
intent of this provision. The proposal differentiates between a service
corporation holding stock that is a control interest and investing in
the shares of a company. The FDIC intends that this provision cover a
service corporation's investment in lower level subsidiaries engaged in
activities that the FDIC has found to present no significant risk to
the fund. To comply with this exception, the service corporation must
excercise control over the lower level entity. We expect savings
associations that have lower level subsidiaries engaging in other
activities to conform to the application or notice procedures set forth
in this regulation.
The FDIC seeks comments on whether it is appropriate to extend this
exception to insured state savings associations. Comments are requested
on whether the proposed exception is overly broad, should be further
restricted and, if so, how it should be narrowed.
Section 28 of the FDI Act requires the FDIC's consent before a
service corporation may engage in any activity that is not permissible
for a service corporation of a federal savings association. While the
language of section 28 governs only activities conducted ``as
principal'' by insured state savings associations, the ``as principal''
language was not extended to service corporations in the governing
statute. This means that even if the activity is not conducted ``as
principal,'' subpart C applies if the activity is not permissible for a
service corporation of a federal savings asociation.
Because the FDIC believes that activities conducted other than ``as
principal'' present no significant risk to the relevant deposit
insurance fund, we provided an exception in Sec. 362.11(b)(2)(ii)
allowing a service corporation of an insured state savings association
to act other than ``as principal,'' if the savings association meets
and continues to meet the applicable capital standards prescribed by
its appropriate federal banking agency. Examples of such activities are
serving as a real estate agent or travel agent. The FDIC seeks comment
on whether it is appropriate to extend this exception to service
corporations of insured state savings associations. Comments are also
requested on whether this exception is necessary.
Owning Equity Securities That Do Not Represent a Control Interest
Subject to the eligibility requirements and transaction limitations
discussed below, the FDIC has determined that the activity of owning
equity securities by a service corporation does not present a
significant risk to the relevant deposit insurance fund. Section
362.11(b)(3) enables service corporations of insured state savings
associations to purchase certain equity securities by incorporating
substantially the same exception as that proposed in Sec. 362.4(b)(4)
of subpart A. This exception permits service corporations
[[Page 48007]]
of eligible insured state savings association to acquire and retain
stock of insured banks, insured savings associations, bank holding
companies, savings and loan holding companies. The FDIC is of the
opinion that investments in such entities should not present
significant risk to the relevant deposit insurance fund because these
companies are subject to close regulatory and supervisory oversight.
Furthermore, these entities mostly engage in activities closely related
to banking.
The exception provided by this section also allows the subject
service corporations to acquire and retain equity stock of companies
listed on a national securities exchange. Listed securities are more
liquid than nonlisted securities and companies whose stock is listed
must meet capital and other requirements of the national securities
exchanges. These requirements provide some assurances as to the quality
of the investment. Insured state savings associations wanting to have
their service corporations invest in other securities should be subject
to the scrutiny of the application process.
Service corporations engaging in this activity must limit their
investment to 10 percent of the voting stock of any company. This
limitation reflects the FDIC's intent that this exception be used only
as a vehicle to invest in equity securities. The 10 percent limitation
was chosen because it reflects an investment level that is generally
recognized as not involving control of the business. Additionally, the
service corporation is not permitted to control any issuer of
investment stock. These requirements reflect the FDIC's intent that the
depository institution is not operating a business through investments
in equity securities. Comment is requested concerning the
appropriateness of the 10 percent limitation.
To be eligible for this exception, the insured state savings
association must be well-capitalized exclusive of its investment in the
service corporation. Additionally, the insured state savings
association may not extend credit to the service corporation, purchase
any debt instruments from the service corporation, or originate any
other transaction that is used to benefit the corporation which invests
in stock under this subpart. Finally, the savings association may have
only one service corporation engaged in this activity. These
requirements reflect the FDIC's desire that the scope of the exception
should be limited. Institutions that wish to have multiple service
corporations engaged in purchasing and retaining equity securities and
that wish to extend credit to finance the transactions should use the
applications procedures to request consent.
In addition to requesting comment on the particular exception as
proposed, the FDIC requests comment on whether it is appropriate for
the regulation to extend this exception to insured state savings
associations in the same manner extended to insured state banks in
subpart A. The FDIC also requests comment on the adequacy of the
restrictions and constraints that it has proposed for the savings
associations and service corporations that would hold these
investments. What additional constraints, if any, should we consider
adding for the savings associations and service corporations that would
hold these investments?
Securities Underwriting
Section 362.11(b)(4) of the proposal allows an insured state
savings association to acquire or retain an investment in a service
corporation that underwrites or distributes securities that would not
be permissible for a federal savings association to underwrite or
distribute if notice is filed with the FDIC, the FDIC does not object
to the notice before the end of the notice period, and a number of
conditions are and continue to be met.
The proposed exception enabling service corporations to underwrite
or distribute securities is patterned on the exception found in subpart
A (see proposed Sec. 362.4(b)(5)(ii)). In both cases, the state-
chartered depository institution must conduct the securities activity
in compliance with the core eligibility requirements, the same
additional requirements listed for this activity in subpart A, and the
investment and transaction limits. The savings association also must
meet the capital requirements and the service corporation must meet the
``eligible subsidiary'' requirements as an ``eligible service
corporation.'' Since the requirements are the same as those imposed in
subpart A and the risks of the activity also are identical, the
discussion in subpart A will not be repeated here.
Notice of Change in Circumstance
Like subpart A, the proposal requires the insured state savings
association to provide written notice to the appropriate Regional
Office of the FDIC within 10 business days of a change in
circumstances. Under the proposal, a change in circumstances is
described as a material change in the service corporation's business
plan or management. Together with the insured state savings
association's primiary federal financial institution regulator, the
FDIC believes that it may address a savings association's falling out
of compliance with any of the other conditions of approval through the
normal supervision and examination process.
The FDIC is concerned about changes in circumstances which result
from changes in management or changes in an service corporation's
business plan. If material changes to either condition occur, the rule
requires the association to submit a notice of such changes to the
appropriate FDIC regional director (DOS) within 10 days of the material
change. The standard of material change would indicate such events as a
change in chief executive officer of the service corporation or a
change in investment strategy or type of business or activity engaged
in by the service corporation.
The FDIC will communicate its concerns regarding the continued
conduct of an activity after a change in circumstances with the
appropriate persons from the insured state savings association's
primary federal banking agency. The FDIC will work with the identified
persons from the primary federal banking agency to develop the
appropriate response to the new circumstances.
It is not the FDIC's intention to require any savings association
which falls out of compliance with eligibility conditions to
immediately cease any activity in which the savings association had
been engaged subject to a notice to the FDIC. The FDIC will instead
deal with such eventuality on a case-by-case basis through the
supervision and examination process. In short, the FDIC intends to
utilize the supervisory and regulatory tools available to it in dealing
with the savings association's failure to meet eligibility requirements
on a continuing basis. The issue of the savings association's ongoing
activities will be dealt with in the context of that effort. The FDIC
is of the opinion that the case-by-case approach to whether a savings
association will be permitted to continue an activity is preferable to
forcing a savings association to, in all instances, immediately cease
the activity in question. Such an inflexible approach could exacerbate
an already unfortunate situation that probably is receiving supervisory
attention.
Core Eligibility Requirements
The proposed regulation imports by reference the core eligibility
requirements listed in subpart A. Refer to the discussion on this topic
provided under subpart A for additional information. When reading the
[[Page 48008]]
referenced discussion, ``Subsidiary'' and ``Majority-owned subsidiary''
should be replaced with ``Service corporation.'' Additionally,
``eligible subsidiary'' should be replaced with ``Eligible service
corporation.'' Finally, ``Insured state savings association'' shall be
read to replace ``Bank'' or ``Insured state bank.'' Comments are
requested concerning whether these standards are appropriate for
insured state savings associations and their service corporations.
Should other restrictions be considered? Have standards been imposed
that are unnecessary to achieve separation between an insured state
savings association and its service corporation?
Investment and Transaction Limits
The proposal contains investment limits and other requirements that
apply to an insured state savings association and its service
corporations engaging in activities that are not permissible for a
federal savings association if the requirements are imposed by FDIC
order or expressly imposed by regulation. In general, the provisions
impose limits on a savings association's investment in any one service
corporation, impose an aggregate limit on a savings association's
investment in all service corporations that engage in the same
activity, require extensions of credit from a savings association to
its service corporations to be fully-collateralized when made, prohibit
low quality assets from being taken as collateral on such loans, and
require that transactions between the savings association and its
service corporations be on an arm's length basis.
The proposal expands the definition of insured state savings
association for the purposes of the investment and transaction
limitations. A savings association includes not only the insured
entity, but also any service corporation or subsidiary that is engaged
in activities that are not subject to these investment and transaction
limits.
Sections 23A and 23B of the Federal Reserve Act combine the bank
and all of its subsidiaries in imposing investment limitations on all
affiliates. The FDIC is using the same concept in separating
subsidiaries and service corporations conducting activities that are
subject to investment and transaction limits from the insured state
savings association and any other service corporations and subsidiaries
engaging in activities not subject to the investment and transaction
limits.
Investment Limits
Under the proposal, a savings association's investment in certain
service corporations may be restricted. Those limits are basically the
same as would apply between a bank and its affiliates under section
23A: 10 percent of tier one capital for each service corporation and 20
percent for each activity. As is the case with covered transactions
under section 23A, extensions of credit and other transactions with
third parties that benefit the savings association's service
corporation would be considered as being part of the savings
association's investment. The only exception would be for arm's length
extensions of credit made by the savings association to finance sales
of assets by the service to third parties. These transactions would not
need to comply with the collateral requirements and investment
limitations, provided that they met certain arm's-length standards. The
imposition of section 23A-type restrictions is intended to make sure
that adequate safeguards are in place for the dealings between the
insured state savings association and its service corporations.
The ``investment'' definition resembles that used in the relevant
section of proposed subpart A, but it differs somewhat due to
underlying statutory differences. The definition of investment for
insured state savings associations includes only: (1) Extensions of
credit to any person or company for which an insured state savings
association accepts securities issued by the service corporation as
collateral; and (2) any extensions or commitments of credit to a third
party for investment in the subsidiary, investment in a project in
which the subsidiary has an interest, or extensions of credit or
commitments of credit which are used for the benefit of, or transferred
to, the subsidiary.
The investment definition differs from that used in subpart A in
that it excludes extensions of credit provided to the service
corporation and any debt securities owned by the savings association
that were issued by the service corporation. While these items are
included in the investment definition in subpart A, insured state banks
are not required to deduct the corresponding amounts from regulatory
capital. The investment definition coverage in subpart C has been
limited because an insured state savings association is required by the
Home Owners' Loan Act to deduct from its regulatory capital any
extensions of credit provided to a service corporation and any debt
securities owned by the savings association that were issued by a
service corporation engaging in activities that are not permissible for
a national bank. Since the regulatory exceptions provided in subpart C
that invoke the investment limits are not permissible for a national
bank, insured state savings associations are required by the referenced
statute to deduct these items from regulatory capital. The FDIC finds
no reason to impose investment limits on amounts completely deducted
from capital and therefore imposes the investment limitation only on
items that are not deducted from regulatory capital.
The FDIC seeks comment on whether this definition of investment is
appropriate. Commenters are asked to address whether this treatment is
equitable given the underlying statutory differences and the FDIC
welcomes suggested alternatives.
Like subpart A, the proposal calulates the 10 percent and 20
percent limits based on tier one capital while section 23A uses total
capital. As was discussed earlier, the FDIC is using tier one capital
as its measure to create consistency throughout the regulation. The
proposal also limits the aggregate investment to all service
corporations conducting the same activity. There is not a ``same
activity'' standard in section 23A. The FDIC believes that the
aggregate limitations should restrict concentrations in a particular
activity and not impose a general limitation on activities that are not
permissible for a service corporation of a federal savings association.
For the purposes of this paragraph, the FDIC intends to interpret the
``same activity'' standard to mean broad categories of activities such
as securities underwriting.
Transaction Requirements
The arm's length transaction requirement, prohibition on purchasing
low quality assets, anti-tying restriction, and insider transaction
restriction are applicable between an insured state savings association
and a service corporation to the same extent and in the same manner as
that described in subpart A between an insured state bank and certain
majority-owned subsidiaries. Refer to the discussion of this topic in
subpart A for comments.
Collateralization Requirement
The collateralization requirement in proposed Sec. 362.4(d)(4) is
also applicable between an insured state savings association and a
service corporation to the same extent and in the same manner as that
described in subpart A. Refer to
[[Page 48009]]
the discussion of this topic in subpart A for comments.
Capital Requirements
Under the proposed rule, an insured state savings association using
the notice process to invest in a service corporation engaging in
certain activities not permissible for a federal savings association
must be ``well-capitalized'' after deducting from its regulatory
capital any amount required by section 5(t) of the Home Owners Loan
Act. The bank's risk classification assessment under part 327 is also
determined after making the same deduction. This standard reflects the
FDIC's belief that only well-capitalized institutions should be
allowed, either without notice or by using the notice process, to
engage through service corporations in activities that are not
permissible for service corporations of federal savings associations.
All savings associations failing to meet this standard and wanting to
engage in such activities should be subject to the scrutiny of the
application process. The FDIC seeks comments on whether this
requirement is too restrictive.
Approvals Previously Granted
The FDIC proposes that insured state savings associations that have
previously received consent by order or notice from this agency should
not be required to reapply to continue the activity, provided the
savings association and service corporation, as applicable, continue to
comply with the conditions of the order of approval. It is not the
intent of the FDIC to require insured state savings associations to
request consent to engage in an activity which has already been
approved previously by this agency.
Because previously granted approvals may contain conditions that
are different from the standards that are established in this proposal,
in certain circumstances, the insured state savings association may
elect to operate under the restrictions of this proposal. Specifically,
the insured state savings association bank may comply with the
investment and transaction limitations between the savings association
and its service corporations contained in Sec. 362.11(c), the capital
requirement limitations detailed in Sec. 362.4(d), and the service
corporation restrictions as outlined in the term ``eligible service
corporation'' (by substitution) and contained in Sec. 362.4(c)(2) in
lieu of similar requirements in its approval order. Any conditions that
are specific to a savings association's situation and do not fall
within the above limitations will continue to be effective. The FDIC
intends that once a savings association elects to follow these proposed
restrictions instead of those in the approval order, it may not elect
to revert to the applicable conditions of the order. The FDIC requests
comment on this approach to approvals previously granted by this
agency.
Other Matters on Which the FDIC Requests Comments
Comments describing the contents of subpart A include an extensive
discussion of the FDIC's concerns with real estate investment
activities. It is also noted that subpart A of the proposed regulation
contains significant provisions regarding the real estate investment
activities of majority-owned subsidiaries of insured state banks.
Additionally, proposed subpart B in part addresses real estate
activities of majority-owned subsidiaries that may become permissible
for national bank subsidiaries.
The FDIC believes real estate investment activities present similar
risks when conducted by a service corporation of an insured state
savings association. However, subpart C of this proposal does not
incorporate any of the requirements imposed in subparts A and B on real
estate activities conducted by bank subsidiaries. While the FDIC has
attempted to conform the treatment of insured state banks and their
subsidiaries and that of insured state savings associations and their
service corporation, differences in the governing statutes result in
some variances.
Service corporations of federal savings associations may engage in
numerous real estate investment activities and, therefore, the
activities are permissible for service corporations of insured state
savings associations. However, because real estate investment
activities are not permissible for a national bank, insured state
savings associations are required by the Home Owners' Loan Act to
deduct from their regulatory capital any investment in a service
corporation engaging in these activities. This deduction includes both
the savings association's investments in (debt and equity) and
extensions of credit to the service corporation. There are also
statutory limitations on the amount of a savings association's
investments in and credit extensions to service corporations.
Given the fact that: (1) Real estate investment activities are
permissible for service corporations of federal savings associations;
(2) there are statutory requirements regarding the capital deduction;
and (3) there are statutory limitations on investments and credit
extensions, this proposal does not contain any provisions concerning
the real estate investment activities of service corporations of
insured savings associations. As a result, the arm's length transaction
requirements, prohibition on purchasing low quality assets, anti-tying
restriction, insider transaction restriction, and the collateralization
requirements are not applicable between an insured savings association
and a service corporation engaging in real estate investment
activities. Additionally, neither the insured savings association nor
the service corporation are required to meet the eligibility standards;
nor is a notice required to be submitted to the FDIC (unless a notice
is needed pursuant to proposed subpart D).
Comment is invited on whether provisions should be added to part
362 subjecting service corporations of insured savings associations to
the eligibility requirements and various restrictions that the FDIC has
found necessary to implement in the proposed subparts A and B. Comments
are requested regarding how the FDIC should implement any such
provisions. If provisions are added, they would implement section 18(m)
of the FDI Act which provides the FDIC with authority to adopt
regulations prohibiting any specific activity that poses a serious
threat to the Savings Association Insurance Fund.
Notice That a Federal Savings Association is Conducting Activities
Grandfathered Under Section 5(I)(4) of HOLA
Section 303.13(g) of the FDIC's current regulations requires any
federal savings association that is authorized by section 5(I)(4) of
HOLA to conduct activities that are not normally permitted for federal
savings associations to file a notice of that fact with the FDIC.
Section 5(I)(4) of HOLA provides that any federal savings bank
chartered as such prior to October 15, 1982, may continue to make
investments and continue to conduct activities it was permitted to
conduct prior October 15, 1982. It also provides that any federal
savings bank organized prior to October 15, 1982, that was formerly a
state mutual savings bank may continue to make investments and engage
in activities that were authorized to it under state law. Finally, the
provision confers this grandfather on any federal savings association
that acquires by merger or consolidation any federal savings bank that
enjoys the grandfather.
The notice requirement contained in Sec. 303.13(g) is deleted under
the
[[Page 48010]]
proposal. The notice is not required by law and is currently imposed by
the FDIC as an information gathering tool. The FDIC has determined that
eliminating the notice will reduce burden and will not materially
affect the FDIC's supervisory responsibilities.
D. Subpart D of Part 362 Acquiring, Establishing, or Conducting New
Activities Through a Subsidiary by an Insured Savings Association
Section 362.13 Purpose and Scope
Subpart D implements the statutory requirement of section 18(m) of
the FDI Act. Section 18(m) requires that prior notice be given to the
FDIC when an insured savings association, both federal and state,
establishes or acquires a subsidiary or engages in any new activity in
a subsidiary. This requirement is based on the FDIC's role of ensuring
that activities and investments of insured savings associations do not
represent a significant risk to the affected deposit insurance fund. In
fulfilling that role, the FDIC needs to be aware of the activities
contemplated by subsidiaries of insured savings associations. It is
noted that for purposes of this subpart, a service corporation is a
subsidiary, but the term subsidiary does not include any insured
depository institution as that term is defined in the FDI Act. Because
this requirement applies to both federal and state savings
associations, the proposal would segregate the implementing
requirements of the FDIC's regulations into a separate subpart D. In
that manner, the requirement is highlighted for both federal and state
savings associations.
Notice of the Acquisition or Establishment of a Subsidiary, or Notice
That an Existing Subsidiary Will Conduct New Activities
Section 303.13(f) of the FDIC's current regulations (1) requires
savings associations to file a notice with the FDIC by January 29,
1990, listing subsidiaries held by the association at that time
(essentially a ``catch up'' notice), (2) establishes an abbreviated
notice procedure concerning subsidiaries created to hold real estate
acquired pursuant to DPC (after the first notice, additional real
estate subsidiaries created to hold real estate acquired through DPC
could be established after providing the FDIC with 14 days prior
notice), and (3) lists the content of the notice. The proposed section
would delete the first item because it no longer necessary due to the
passage of time. The second item is also deleted because the FDIC seeks
to conform all notice periods used in this regulation. While proposed
Sec. 362.14 continues to require a prior notice, the required content
of the notice would be revised in a manner consistent with that
required for other notices under this regulation and moved to subpart F
of this regulation. The FDIC wants to make it clear that any notice or
application submitted to the FDIC pursuant to a provision of subpart C
of this regulation will satisfy the notice requirement of this subpart
D.
The FDIC seeks comment on whether deleting the abreviated notice
period currently in Sec. 303.13(f) imposes a substantial burden, or if
the benefits gained by applying the concept of uniform notice periods
exceed any potential burden. Comment is also requested on whether
explicit references are needed in the regulation to clarify that the
notice required under this subpart also applies to newly acquired or
established service corporations and service corporations conducting
new activitities.
E. Subpart E--Applications and Notices; Activities and Investments of
Insured State Banks
Overview
This proposed rule includes a separate subpart E containing
application procedures and delegations of authority for the substantive
matters covered by the proposal for insured state banks.13
As discussed above, the FDIC is currently preparing a complete revision
of part 303 of the FDIC's rules and regulations containing the FDIC's
applications procedures and delegations of authority. As part of these
revisions to part 303, subpart G of part 303 will address application
requirements relating to the activities of insured state nonmember
banks. It is the FDIC's intent that at such time as part 362 and part
303 are both final, the application procedures proposed in subpart E of
this proposal will be relocated to subpart G of part 303 to centralize
all banking application and notice procedures in one convenient place.
---------------------------------------------------------------------------
\13\ Under the FDIC's current rules, these application
requirements are located in various sections of three different
regulations: 12 CFR 303, 12 CFR 337.4 and 12 CFR 362.
---------------------------------------------------------------------------
Section 362.15 Scope
This subpart contains the procedural and other information for any
application or notice that must be submitted under the requirements
specified for activities and investments of insured state banks and
their subsidiaries under subparts A and B, including the format,
information requirements, FDIC processing deadlines, and other
pertinent guidelines or instructions. The proposal also contains
delegations of authority from the Board of Directors to the director
and deputy director of the Division of Supervision.
Section 362.16 Definitions
This subpart contains practical, procedural definitions of the
following terms: ``Appropriate regional director,'' ``Appropriate
deputy regional director,'' ``Appropriate regional office,''
``Associate director,'' ``Deputy Director,'' ``Deputy regional
director,'' ``DOS,'' ``Director,'' and ``Regional director.'' These
definitions should be self-explanatory. When this subpart is moved to
part 303 as subpart G, most, if not all, of these definitions should be
contained in the general definitions to that part and will no longer be
necessary in the subpart. Comments are requested on the clarity of
these definitions.
Section 362.17 Filing Procedures
This section explains to insured state banks where they should
file, how they should file and the contents of any filing, including
any copies of any application or notice filed with another agency. This
section also explains that the appropriate regional director may
request additional information. Comments are requested on the clarity
of these explanations.
Section 362.18 Processing
This section explains the procedures for the expedited processing
of notices and the regular processing of applications and notices that
have been removed from expedited processing. This section also explains
how a notice is removed from expedited processing. The expedited
processing period for notices will normally be 30 days, subject to
extension for an additional 15 days upon written notice to the bank.
The FDIC will normally review and act on applications within 60 days
after receipt of a completed application, subject to extension for an
additional 30 days upon written notice to the bank. Comments are
requested on the clarity of these explanations of the processing
procedures.
Section 362.19 Delegations of Authority
The authority to review and act upon applications and notices is
delegated in this section. The only substantive change to the existing
delegation is the addition of the deputy director of the Division of
Supervision.
[[Page 48011]]
F. Subpart F--Applications and Notices; Activities and Investments of
Insured Savings Associations
Overview
This proposed rule includes a separate subpart F containing
application procedures and delegations of authority for the substantive
matters covered by the proposal for savings associations. As discussed
above, the FDIC is currently preparing a complete revision of part 303
of the FDIC's rules and regulations containing the FDIC's applications
procedures and delegations of authority. As part of these revisions to
part 303, subpart H of part 303 will address application requirements
relating to the activities of savings associations. It is the FDIC's
intent that at such time as part 362 and part 303 are both final, the
application procedures proposed in subpart F of this proposal will be
relocated to subpart H of part 303 to centralize application and notice
procedures governing all savings associations in one convenient place.
Section 362.20 Scope
This subpart contains the procedural and other information for any
application or notice that must be submitted under the requirements
specified for activities and investments of insured savings
associations and their subsidiaries under subparts C and D, including
the format, information requirements, FDIC processing deadlines, and
other pertinent guidelines or instructions. The proposal also contains
delegations of authority from the Board of Directors to the director
and deputy director of the Division of Supervision.
Section 362.21 Definitions
This subpart contains practical, procedural definitions of the
following terms: ``Appropriate regional director,'' ``Appropriate
deputy regional director,'' ``Appropriate regional office,''
``Associate director,'' ``Deputy Director,'' ``Deputy regional
director,'' ``DOS,'' ``Director,'' and ``Regional director.'' These
definitions should be self-explanatory. When this subpart is moved to
part 303 as subpart H, most, if not all, of these definitions should be
contained in the general definitions to that part and will no longer be
necessary in the subpart. Comments are requested on the clarity of
these definitions.
Section 362.22 Filing Procedures
This section explains to insured savings associations where they
should file, how they should file and the contents of any filing,
including any copies of any application or notice filed with another
agency. This section also explains that the appropriate regional
director may request additional information. Comments are requested on
the clarity of these explanations.
Section 362.23 Processing
This section explains the procedures for the expedited processing
of notices and the regular processing of applications and notices that
have been removed from expedited processing. This section also explains
how a notice is removed from expedited processing. The expedited
processing period for notices will normally be 30 days, subject to
extension for an additional 15 days upon written notice to the bank.
The FDIC will normally review and act on applications within 60 days
after receipt of a completed application, subject to extension for an
additional 30 days upon written notice to the bank. Comments are
requested on the clarity of these explanations of the processing
procedures.
Section 362.24 Delegations of Authority
The authority to review and act upon applications and notices is
delegated in this section. The only substantive change to the existing
delegation is the addition of the deputy director of the Division of
Supervision.
The FDIC requests public comments about all aspects of the
proposal. In addition, the FDIC is raising specific questions for
public comment throughout the preamble discussion.
IV. Paperwork Reduction Act
The collection of information contained in this proposed rule and
identified below have been submitted to the Office Of Management and
Budget (OMB) for review and approval in accordance with the
requirements of the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C.
3501 et. seq.). Comments are invited on: (a) Whether the collection of
information is necessary for the proper performance of the FDIC's
functions, including whether the information has practical utility; (b)
the accuracy of the estimates of the burden of the information
collection; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; and (d) ways to minimize the burden of
the information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology.
Comments should be addressed to the Office of Information and
Regulatory Affairs, Office of Management and Budget, Attention: Desk
Officer Alexander Hunt, New Executive Office Building, Room 3208,
Washington, D.C. 20503, with copies of such comments to Steven F.
Hanft, Assistant Executive Secretary (Regulatory Analysis), Federal
Deposit Insurance Corporation, room F-400, 550 17th Street, NW,
Washington, D.C. 20429. All comments should refer to ``Part 362.'' OMB
is required to make a decision concerning the collections of
information contained in the proposed regulations between 30 and 60
days after the publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of this publication. This does not
affect the deadline for the public to comment to the FDIC on the
proposed regulation.
Title of the collection of information: Activities and Investments
of Insured State Banks, OMB Control number 3064-0111.
Summary of the collection: A 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, as detailed at Sec. 362.17.
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 Sec. 24 of the FDI
Act and proposed Part 362.
Respondents: Banks or their subsidiaries desiring to engage in
activities that would be impermissible absent the FDIC's consent or
nonobjection.
Estimated annual burden:
Frequency of response: Occasional
Number of responses: 18
Average number of hours to
prepare an application or
notice: 7 hours
Total annual burden: 126 hours
Title of the collection of information: Activities and Investments
of Insured Savings Associations, OMB Control number 3064-0104.
Summary of the collection: A description of the activity in which
an insured state savings association or its service corporation
proposes to engage that would be impermissible absent notification to
the FDIC or absent the FDIC's consent or nonobjection and information
about the relationship of the proposed activity to the savings
association's and/or service
[[Page 48012]]
corporation's operation and compliance with applicable laws and
regulations, as detailed at Sec. 362.22 and Sec. 362.23(c). Also, a
notice of the new activities to be conducted by a subsidiary or the
activities to be conducted by a newly formed or acquired subsidiary of
insured state and federal savings associations in accordance with
Sec. 362.23(c).
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 savings association or its service corporation to engage
in the proposed activity that otherwise would be impermissible for the
savings association or service corporation under Sec. 28 of the FDI Act
and proposed Part 362. The FDIC also collects information under
Sec. 18(m) of the FDI Act regarding activities of existing or acquired
subsidiaries to monitor the types of activities being conducted by
subsidiaries of savings associations.
Respondents: Insured state savings associations or their
subsidiaries desiring to engage in activities that would be
impermissible absent notification or the FDIC's consent or
nonobjection. All insured savings associations must give notice prior
to acquiring or establishing a new subsidiary or initiating a new
activity through a subsidiary.
Estimated annual burden:
Frequency of response: Occasional
Number of responses: 24
Average number of hours to
prepare an application or
notice: 5 hours
Total annual burden: 120 hours
V. 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
impact on a substantial number of small entities. The proposed rule
streamlines requirements for all insured state banks and insured state
savings associations. The requirements for insured federal savings
associations are statutory and remain unchanged by this rule. It
simplifies the requirements that apply when insured state banks and
insured state savings associations create, invest in, or conduct new
activities through majority-owned corporate subsidiaries and service
corporations, respectively, by eliminating requirements for any filing
or reducing the burden from filing an application to filing a notice in
other instances. The rule also simplifies the information required for
both notices and applications. Whenever possible, the rule clarifies
the expectations of the FDIC when it requires notices or applications
to consent to activities by insured state banks and insured state
savings associations. The proposed rule will make it easier for small
insured state banks and insured state savings associations 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,
Reporting and recordkeeping requirements, Savings associations.
12 CFR Part 337
Banks, banking, reporting and recordkeeping requirements,
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--APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF
AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR
REGULATION
1. The authority citation for part 303 continues to read as
follows:
Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817(j), 1818, 1819
(Seventh and Tenth), 1828, 1831e, 1831o, 1831p-1; 15 U.S.C. 1607.
Sec. 303.13 [Removed]
2. Sec. 303.13 is removed.
PART 337--UNSAFE AND UNSOUND BANKING PRACTICES
3. 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, 1819, 1820(d)(10), 1821(f), 1828(j)(2), 1831f, 1831f-1.
Sec. 337.4 [Removed and Reserved]
4. Sec. 337.4 is removed and reserved.
5. Part 362 is revised to read as follows:
PART 362--ACTIVITIES OF INSURED STATE BANKS AND INSURED SAVINGS
ASSOCIATIONS
Subpart A--Activities of Insured State Banks
Sec.
362.1 Purpose and scope.
362.2 Definitions.
362.3 Activities of insured state banks.
362.4 Subsidiaries of insured state banks.
362.5 Approvals previously granted.
Subpart B--Safety and Soundness Rules Governing Insured State Nonmember
Banks
362.6 Purpose and scope.
362.7 Restrictions on activities of insured state nonmember banks.
Subpart C--Activities of Insured State Savings Associations
362.8 Purpose and scope.
362.9 Definitions.
362.10 Activities of insured state savings associations.
362.11 Service corporations of insured state savings associations.
362.12 Approvals previously granted.
Subpart D--Acquiring, Establishing, or Conducting New Activities
through a Subsidiary by an Insured Savings Association
362.13 Purpose and scope.
362.14 Acquiring or establishing a subsidiary; conducting new
activities through a subsidiary.
Subpart E--Applications and Notices; Activities of Insured State Banks
362.15 Scope.
362.16 Definitions.
362.17 Filing procedures.
362.18 Processing.
362.19 Delegations of authority.
Subpart F--Applications and Notices; Activities of Insured Savings
Associations
362.20 Scope.
362.21 Definitions.
362.22 Filing procedures.
362.23 Processing.
362.24 Delegations of authority.
Authority: 12 U.S.C. 1816, 1818, 1819 (Tenth), 1828(m), 1831a,
1831(e).
Subpart A--Activities of Insured State Banks
Sec. 362.1 Purpose and scope.
(a) This subpart, along with the notice and application procedures
in subpart E, implements the provisions of section 24 of the Federal
Deposit Insurance Act (12 U.S.C. 1831a) that restrict and prohibit
insured state banks and their subsidiaries from engaging in activities
and investments that are not permissible for national banks and their
subsidiaries. The phrase ``activity permissible for a national bank''
means any activity authorized for national banks under any statute
including the National Bank Act (12 U.S.C. 21 et seq.),
[[Page 48013]]
as well as activities recognized as permissible for a national bank in
regulations, official circulars, bulletins, orders or written
interpretations issued by the Office of the Comptroller of the Currency
(OCC).
(b) This subpart does not cover the following activities:
(1) Activities conducted other than ``as principal.'' Therefore,
this subpart does not restrict activities conducted as agent for a
customer, conducted in a brokerage, custodial, advisory, or
administrative capacity, or conducted as trustee;
(2) Interests in real estate in which the real property is used or
intended in good faith to be used within a reasonable time by an
insured state bank or its subsidiaries as offices or related facilities
for the conduct of its business or future expansion of its business or
used as public welfare investments of a type permissible for national
banks; and
(3) Equity investments acquired in connection with debts previously
contracted that are held within the shorter of the time limits
prescribed by state or federal law.
(c) A majority-owned subsidiary of an insured state bank may not
engage in real estate investment activities that are not permissible
for a subsidiary of a national bank unless the bank does so through a
majority-owned subsidiary, is in compliance with applicable capital
standards, and the FDIC has determined that the activity poses no
significant risk to the appropriate deposit insurance fund. Subpart A
provides standards for insured state banks engaging in real estate
investment activities that are not permissible for a subsidiary of a
national bank. Because of safety and soundness concerns relating to
real estate investment activities, subpart B reflects special rules for
subsidiaries of insured state nonmember banks that engage in real
estate investment activities of a type that are not permissible for a
national bank, but may be otherwise permissible for a subsidiary of a
national bank.
(d) The FDIC intends to allow insured state banks and their
subsidiaries to undertake only safe and sound activities and
investments that do not present significant risks to the deposit
insurance funds and that are consistent with the purposes of federal
deposit insurance and other applicable law. This subpart does not
authorize any insured state bank to make investments or to conduct
activities that are not authorized or that are prohibited by either
state or federal law.
Sec. 362.2 Definitions.
(a) For the purposes of this subpart, the terms ``bank,'' ``state
bank,'' ``savings association,'' ``state savings association,''
``depository institution,'' ``insured depository institution,''
``insured state bank,'' ``federal savings association,'' and ``insured
state nonmember bank'' shall each have the same respective meaning
contained in section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813), and the following definitions shall apply:
(b) Activity means the conduct of business by a state-chartered
depository institution, including acquiring or retaining an equity
investment or other investment.
(c) As principal means any activity conducted other than as agent
for a customer, is conducted other than in a brokerage, custodial,
advisory, or administrative capacity, or is conducted other than as
trustee.
(d) Change in control means (1) any transaction for which a notice
is required to be filed with the FDIC, or the Board of Governors of the
Federal Reserve System (FRB), pursuant to section 7(j) of the Federal
Deposit Insurance Act (12 U.S.C. 1817(j)) except a transaction that is
presumed to be an acquisition of control under the FDIC's or FRB's
regulations implementing section 7(j), or (2) any transaction as a
result of which a depository institution eligible for the exception
described in Sec. 362.3(b)(2)(B) is acquired by or merged into a
depository institution that is not eligible for the exception.
(e) Company means any corporation, partnership, limited liability
company, business trust, association, joint venture, pool, syndicate or
other similar business organization.
(f) Control means the power to vote, directly or indirectly, 25 per
cent or more of any class of the voting securities of a company, the
ability to control in any manner the election of a majority of a
company's directors or trustees, or the ability to exercise a
controlling influence over the management and policies of a company.
(g) Convert its charter means an insured state bank undergoes any
transaction that causes the bank to operate under a different form of
charter than it had as of December 19, 1991, except a change from
mutual to stock form shall not be considered a charter conversion.
(h) Equity investment means an ownership interest in any company;
any membership interest that includes a voting right in any company;
any interest in real estate; any transaction which in substance falls
into any of these categories even though it may be structured as some
other form of business transaction; and includes an equity security.
The term ``equity investment'' does not include any of the foregoing if
the interest is taken as security for a loan.
(i) Equity security means any stock (other than adjustable rate
preferred stock and money market (auction rate) preferred stock)
certificate of interest or participation in any profit-sharing
agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, or voting-trust
certificate; any security immediately convertible at the option of the
holder without payment of substantial additional consideration into
such a security; any security carrying any warrant or right to
subscribe to or purchase any such security; and any certificate of
interest or participation in, temporary or interim certificate for, or
receipt for any of the foregoing.
(j) Extension of credit, executive officer, director, principal
shareholder, and related interest each has the same respective meaning
as is applicable for the purposes of section 22(h) of the Federal
Reserve Act (12 U.S.C. 375) and Sec. 337.3 of this chapter.
(k) Institution shall have the same meaning as ``state-chartered
depository institution.''
(l) Majority-owned subsidiary means any corporation in which the
parent insured state bank owns a majority of the outstanding voting
stock.
(m) National securities exchange means a securities exchange that
is registered as a national securities exchange by the Securities and
Exchange Commission pursuant to section 6 of the Securities Exchange
Act of 1934 (15 U.S.C. 78f) and the National Market System, i.e., the
top tier of the National Association of Securities Dealers Automated
Quotation System.
(n) Real estate investment activity means any interest in real
estate (other than as security for a loan) held directly or indirectly
that is not permissible for a national bank and is not real estate
leasing.
(o) Residents of the state includes individuals living in the
state, individuals employed in the state, any person to whom the
company provided insurance as principal without interruption since such
person resided in or was employed in the state, and companies or
partnerships incorporated in, organized under the laws of, licensed to
do business in, or having an office in the state.
(p) Security has the same meaning as it has in part 344 of this
chapter.
[[Page 48014]]
(q) Significant risk to the deposit insurance fund shall be
understood to be present whenever the FDIC determines there is a high
probability that any insurance fund administered by the FDIC may suffer
a loss. Such risk may be present either when an activity contributes or
may contribute to the decline in condition of a particular state-
chartered depository institution or when a type of activity is found by
the FDIC to contribute or potentially contribute to the deterioration
of the overall condition of the banking system.
(r) State-chartered depository institution means any state bank or
state savings association insured by the FDIC.
(s) Subsidiary means any company controlled by an insured
depository institution.
(t) Tier one capital has the same meaning as set forth in part 325
of this chapter for an insured state nonmember bank. For other state-
chartered depository institutions, the term ``tier one capital'' has
the same meaning as set forth in the capital regulations adopted by the
appropriate Federal banking agency.
(u) Well-capitalized has the same meaning set forth in part 325 of
this chapter for an insured state nonmember bank. For other state-
chartered depository institutions, the term ``well-capitalized'' has
the same meaning as set forth in the capital regulations adopted by the
appropriate Federal banking agency.
Sec. 362.3 Activities of insured state banks.
(a) Equity investments. (1) Prohibited equity investments. No
insured state bank may directly or indirectly acquire or retain as
principal any equity investment of a type that is not permissible for a
national bank unless one of the exceptions in Sec. 362.3(a)(2) applies.
(2) Exceptions. (i) Equity investment in majority-owned
subsidiaries. An insured state bank may acquire or retain an equity
investment in a majority-owned subsidiary, provided that the majority-
owned subsidiary is engaging in activities that are allowed pursuant to
the provisions of or application under Sec. 362.4(b).
(ii) Investments in qualified housing projects. An insured state
bank may invest as a limited partner in a partnership the sole purpose
of which is to invest in the acquisition, rehabilitation, or new
construction of a qualified housing project, provided that the bank's
aggregate investment (including legally binding commitments) does not
exceed, when made, 2 percent of total assets as of the date of the
bank's most recent consolidated report of condition prior to making the
investment. For the purposes of this paragraph, Aggregate investment
means the total book value of the bank's investment in the real estate
calculated in accordance with the instructions for the preparation of
the consolidated report of condition. Qualified housing project means
residential real estate intended to primarily benefit lower income
persons throughout the period of the bank's investment including any
project that has received an award of low income housing tax credits
under section 42 of the Internal Revenue Code (26 U.S.C. 42) (such as a
reservation or allocation of credits) from a state or local housing
credit agency. A residential real estate project that does not qualify
for the tax credit under section 42 of the Internal Revenue Code will
qualify under this exception if 50 percent or more of the housing units
are to be occupied by lower income persons. A project will be
considered residential despite the fact that some portion of the total
square footage of the project is utilized for commercial purposes,
provided that such commercial use is not the primary purpose of the
project. Lower income has the same meaning as ``low income'' and
``moderate income'' as defined for the purposes of Sec. 345.12(n) (1)
and (2) of this chapter.
(iii) Grandfathered investments in common or preferred stock;
shares of investment companies. (A) General. An insured state bank that
is located in a state which as of September 30, 1991, authorized
investment in:
(1)(i) Common or preferred stock listed on a national securities
exchange (listed stock); or
(ii) Shares of an investment company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) (registered
shares); and
(2) Which during the period beginning on September 30, 1990, and
ending on November 26, 1991, made or maintained an investment in listed
stock or registered shares, may retain whatever lawfully acquired
listed stock or registered shares it held and may continue to acquire
listed stock and/or registered shares, provided that the bank files a
notice in accordance with section 24(f)(6) of the Federal Deposit
Insurance Act and the FDIC does not object. The content of the notice
and procedures to process the notice shall conform to the requirements
of Sec. 362.18(a). Approval will not be granted unless the FDIC
determines that acquiring or retaining the stock or shares does not
pose a significant risk to the fund. Approval may be subject to
whatever conditions or restrictions the FDIC determines are necessary
or appropriate.
(B) Loss of grandfather exception. The exception for grandfathered
investments under paragraph (a)(2)(iii)(A) of this section shall no
longer apply if the bank converts its charter or the bank or its parent
holding company undergoes a change in control. If any of these events
occur, the bank may retain its existing investments unless directed by
the FDIC or other applicable authority to divest the listed stock or
registered shares.
(C) Maximum permissible investment. A bank's aggregate investment
in listed stock and registered shares under paragraph (a)(2)(iii)(A) of
this section shall in no event exceed, when made, 100 percent of the
bank's tier one capital as measured on the bank's most recent
consolidated report of condition prior to making any such investment.
Book value of the investment shall be used to determine compliance. The
total book value of the bank's investment in the listed stock and
registered shares is calculated in accordance with the instructions for
the preparation of the consolidated report of condition. The FDIC may
determine when acting upon a notice filed in accordance with
Sec. 362.18(a) that the permissible limit for any particular insured
state bank is something less than 100 percent of tier one capital.
(iv) Stock investment in insured depository institutions owned
exclusively by other banks and savings associations. An insured state
bank may acquire or retain the stock of an insured depository
institution if the insured depository institution engages only in
activities permissible for national banks; the insured depository
institution is subject to examination and regulation by a state bank
supervisor; the voting stock is owned by 20 or more insured depository
institutions, but no one institution owns more than 15 percent of the
voting stock; and the insured depository institution's stock (other
than directors' qualifying shares or shares held under or acquired
through a plan established for the benefit of the officers and
employees) is owned only by insured depository institutions.
(v) Stock investment in insurance companies. (A) Stock of director
and officer liability insurance company. An insured state bank may
acquire and retain up to 10 percent of the outstanding stock of a
corporation that solely provides or reinsures directors'', trustees'',
and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions.
(B) Stock of savings bank life insurance company. An insured state
[[Page 48015]]
bank located in Massachusetts, New York, or Connecticut may own stock
in a savings bank life insurance company, provided that the savings
bank life insurance company provides written disclosures to purchasers
or potential purchasers of life insurance policies, other insurance
products, and annuities that are consistent with the disclosures
described in the Interagency Statement on the Retail Sale of Nondeposit
Investment Products (FIL-9-94,1 February 17, 1994) or any
successor statement which indicate that the policies, products, and
annuities are not FDIC insured deposits, are not guaranteed by the bank
and may involve risk of loss.
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\1\ 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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(b) Activities other than equity investments--(1) Prohibited
activities. An insured state bank may not directly or indirectly engage
as principal in any activity that is not an equity investment and is of
a type not permissible for a national bank unless one of the exceptions
in paragraph (b)(2) of this section applies.
(2) Exceptions. (i) Consent obtained through application. An
insured state bank that meets and continues to meet the applicable
capital standards set by the appropriate Federal banking agency may
conduct activities prohibited by Sec. 362.3(b)(1) if the bank obtains
the FDIC's prior consent. Consent will be given only if the FDIC
determines that the activity poses no significant risk to the affected
deposit insurance fund. Applications for consent should be filed in
accordance with Sec. 362.18(b). Approvals granted under Sec. 362.18(b)
may be made subject to any conditions or restrictions found by the FDIC
to be necessary to protect the deposit insurance funds from risk, to
prevent unsafe or unsound banking practices, and/or to ensure that the
activity is consistent with the purposes of federal deposit insurance
and other applicable law.
(ii) Insurance underwriting--(A) Savings bank life insurance. An
insured state bank that is located in Massachusetts, New York or
Connecticut may provide as principal savings bank life insurance
through a department of the bank, provided that the department meets
the core standards of paragraph (c) of this section.
(B) Federal crop insurance. Any insured state bank that was
providing insurance as principal on or before September 30, 1991, which
was reinsured in whole or in part by the Federal Crop Insurance
Corporation, may continue to do so.
(C) Grandfathered insurance underwriting. A well-capitalized
insured state bank that on November 21, 1991, was lawfully providing
insurance as principal through a department of the bank may continue to
provide insurance as principal to the residents of the state or states
in which the bank did so on such date provided that the bank's
department meets the core standards of paragraph (c) of this section.
(iii) Acquiring and retaining adjustable rate and money market
preferred stock. An insured state bank's investment of up to 15 percent
of the bank's tier one capital in adjustable rate preferred stock or
money market (auction rate) preferred stock does not represent a
significant risk to the deposit insurance funds. An insured state bank
may conduct this activity without first obtaining the FDIC's consent,
provided that the bank meets and continues to meet the applicable
capital standards as prescribed by the appropriate Federal banking
agency. The fact that prior consent is not required by this subpart
does not preclude the FDIC from taking any appropriate action with
respect to the activities if the facts and circumstances warrant such
action.
(iv) Activities that are closely related to banking. An insured
state bank may engage as principal in any activity that is not
permissible for a national bank provided that the Federal Reserve Board
by regulation or order has found the activity to be closely related to
banking for the purposes of section 4(c)(8) of the Bank Holding Company
Act (12 U.S.C. 1843(c)(8)) provided that this exception:
(A) Shall not be construed to permit an insured state bank to
directly hold equity securities of a type that a national bank may not
hold;
(B) Does not authorize an insured state bank engaged in real estate
leasing to hold the leased property for more than two years at the end
of the lease unless the property is re-leased; and
(C) Does not authorize an insured state bank to directly hold
equity debt investments in corporations or projects designed primarily
to promote community welfare if such investments are of a type that a
national bank may not hold.
(c) Core standards. For any insured state bank to be eligible to
conduct insurance activities listed in paragraph (b)(2)(ii)(A) or (C)
of this section, the bank must conduct the activities in a department
that meets the following ``core operating standards'' and ``core
separation standards'.
(1) The ``core operating standards'' for a department are:
(i) The department provides purchasers or potential purchasers of
life insurance policies, other insurance products and annuities written
disclosures that are consistent with the disclosures described in the
Interagency Statement on the Retail Sale of Nondeposit Investment
Products (FIL-9-94, February 17, 1994) and any successor statement
which indicate that the policies, products and annuities are not FDIC
insured deposits, are not guaranteed by the bank, and may involve risk
of loss; and
(ii) The department informs its customers that only the assets of
the department may be used to satisfy the obligations of the
department.
(2) The ``core separation standards'' for a department are:
(i) The department is physically distinct from the remainder of the
bank;
(ii) The department maintains separate accounting and other
records;
(iii) The department has assets, liabilities, obligations and
expenses that are separate and distinct from those of the remainder of
the bank; and
(iv) The department is subject to state statute that requires its
obligations, liabilities and expenses be satisfied only with the assets
of the department.
Sec. 362.4 Subsidiaries of insured state banks.
(a) Prohibition. A subsidiary of an insured state bank may not
engage as principal in any activity that is not of a type permissible
for a subsidiary of a national bank, unless it meets one of the
exceptions in paragraph (b) of this section.
(b) Exceptions--(1) Consent obtained through application. A
subsidiary of an insured state bank may conduct otherwise prohibited
activities if the bank obtains the FDIC's prior written consent and the
insured state bank meets and continues to meet the applicable capital
standards set by the appropriate Federal banking agency. Consent will
be given only if the FDIC determines that the activity poses no
significant risk to the affected deposit insurance fund. Applications
for consent should be filed in accordance with Sec. 362.18(b).
Approvals granted under Sec. 362.18(b) may be made subject to any
conditions or restrictions found by the FDIC to be necessary to protect
the deposit insurance funds from risk, to prevent unsafe or unsound
banking practices, and/or to ensure that the activity is consistent
with the purposes of federal deposit insurance and other applicable
law.
[[Page 48016]]
(2) Grandfathered insurance underwriting subsidiaries. A subsidiary
of an insured state bank may:
(i) Engage in grandfathered insurance underwriting if the insured
state bank or its subsidiary on November 21, 1991, was lawfully
providing insurance as principal. The subsidiary may continue to
provide the same types of insurance as principal to the residents of
the state or states in which the bank or subsidiary did so on such date
provided that:
(A) The bank meets the capital requirements of paragraph (e) of
this section;
(B) The subsidiary is an ``eligible subsidiary'' as described in
paragraph (c)(2) of this section; and
(C) The subsidiary provides purchasers or potential purchasers of
life insurance policies, other insurance products and annuities written
disclosures that are consistent with the disclosures described in the
Interagency Statement on the Retail Sale of Nondeposit Investment
Products (FIL-9-94, February 17, 1994) or any successor statement which
indicate that the policies, products and annuities are not FDIC insured
deposits, are not guaranteed by the bank, and may involve risk of loss.
(ii) Continue to provide as principal title insurance, provided the
bank was required before June 1, 1991, to provide title insurance as a
condition of the bank's initial chartering under state law and neither
the bank or its parent holding company undergoes a change in control.
(iii) May continue to provide as principal insurance which is
reinsured in whole or in part by the Federal Crop Insurance Corporation
if the subsidiary was engaged in the activity on or before September
30, 1991.
(3) Majority-owned subsidiaries which own a control interest in
companies engaged in permissible activities. The FDIC has determined
that the following investment activities do not represent a significant
risk to the deposit insurance funds. The following listed activities
may be conducted by a majority-owned subsidiary of an insured state
bank without first obtaining the FDIC's consent, provided that the bank
meets and continues to meet the applicable capital standards as
prescribed by the appropriate Federal banking agency, and the majority-
owned subsidiary controls the issuer of the stock purchased by the
subsidiary. The fact that prior consent is not required by this subpart
does not preclude the FDIC from taking any appropriate action with
respect to the activities if the facts and circumstances warrant such
action.
(i) Stock of a company that engages in authorized activities. A
majority-owned subsidiary may own the stock of a company that engages
in any activity permissible for an insured state bank under
Sec. 362.3(b)(2)(iii).
(ii) Stock of a company that engages in activities closely related
to banking. A majority-owned subsidiary may own the stock of a company
that engages as principal in any activity that is not permissible for a
national bank provided that the Federal Reserve Board by regulation or
order has found the activity to be closely related to banking for the
purposes of section 4(c)(8) of the Bank Holding Company Act (12 U.S.C.
1843(c)(8)) provided that this exception:
(A) Does not authorize a subsidiary engaged in real estate leasing
to hold the leased property for more than two years at the end of the
lease unless the property is re-leased; and
(B) Does not authorize a subsidiary to acquire or hold the stock of
a savings association other than as allowed by paragraph (b)(4) of this
section.
(4) Majority-owned subsidiaries ownership of equity securities that
do not represent a control interest. The FDIC has determined that a
majority-owned subsidiary's investment in the equity securities of any
company, including an insured depository institution, a bank holding
company (as that term is defined for purposes of the Bank Holding
Company Act, 12 U.S.C. 1841 et seq.), or a savings and loan holding
company (as that term is defined in 12 U.S.C. 1467a), does not
represent a significant risk to the deposit insurance funds and may be
conducted by a majority-owned subsidiary of an insured state bank
without first obtaining the FDIC's consent, provided that the insured
state bank and its majority-owned subsidiary meet the eligibility
requirements of paragraph (b)(4)(i) of this section and transaction
limitation of paragraph (b)(4)(ii) of this section; and the insured
state bank meets the capital requirements of paragraph (e) of this
section. The fact that prior consent is not required by this subpart
does not preclude the FDIC from taking any appropriate action with
respect to the activities if the facts and circumstances warrant such
action.
(i) Eligibility requirements. (A) The state-chartered depository
institution may have only one majority-owned subsidiary engaging in
this activity;
(B) The majority-owned subsidiary's investment in equity securities
(except stock of an insured depository institution, a bank holding
company or a savings and loan holding company) must be limited to
equity securities listed on a national securities exchange.
(C) The state-chartered depository institution and/or the majority-
owned subsidiary do not control any issuer of equity securities
purchased by the subsidiary.
(D) The majority-owned subsidiary may not purchase equity
securities representing more than 10% of the outstanding voting stock
of any one issuer.
(ii) Transaction limitation. A state-chartered depository
institution and any of its subsidiaries may not extend credit to the
majority-owned subsidiary, purchase any debt instruments issued by the
majority-owned subsidiary, or originate any other transaction that is
used to benefit the majority-owned subsidiary which invests in stock
under paragraph (b)(4) of this section.
(iii) Portfolio management. For the purposes of this section,
investment in the equity securities of any company does not include
pursuing active short-term trading strategies.
(5) Majority-owned subsidiaries conducting real estate investment
activities and securities underwriting. The FDIC has determined that
the following activities do not represent a significant risk to the
deposit insurance funds, provided that the activities are conducted by
a majority-owned subsidiary in compliance with the core eligibility
requirements listed in paragraph (c) of this section; any additional
requirements listed in paragraph (b)(5) (i) or (ii) of this section;
the bank complies with the investment and transaction limitations of
paragraph (d) of this section; and the bank meets the capital
requirements of paragraph (e) of this section. Subject to the stated
requirements and limitations, the FDIC consents that these listed
activities may be conducted by a majority-owned subsidiary of an
insured state bank if the bank files a notice in compliance with
Sec. 362.18(a) and the FDIC does not object to the notice. The FDIC is
not precluded from taking any appropriate action or imposing additional
requirements with respect to the activities if the facts and
circumstances warrant such action. If changes to the management or
business plan of the majority-owned subsidiary at any time result in
material changes to the nature of the majority-owned subsidiary's
business or the manner in which its business is conducted, the insured
state bank shall advise the appropriate regional director (Supervision)
in writing within 10 business days after such change. Such a majority-
owned subsidiary may:
(i) Engage in real estate investment activities. However, the
requirements of
[[Page 48017]]
paragraph (c)(2) (ii), (v), (vi), and (xi) of this section need not be
met if the bank's investment in the equity securities of the subsidiary
does not exceed 2 percent of the bank's tier one capital; the bank has
only one subsidiary engaging in real estate investment activities; and
the bank's total investment in the subsidiary does not include any
extensions of credit from the bank to the subsidiary, any debt
instruments issued by the subsidiary, or any other transaction
originated by the bank that is used to benefit the subsidiary.
(ii) Engage in the public sale, distribution or underwriting of
securities that are not permissible for a national bank under section
16 of the Banking Act of 1933 (12 U.S.C. 24 Seventh), provided that the
following additional conditions are, and continue to be, met:
(A) The state-chartered depository institution adopts policies and
procedures, including appropriate limits on exposure, to govern the
institution's participation in financing transactions underwritten or
arranged by an underwriting majority-owned subsidiary;
(B) The state-chartered depository institution may not express an
opinion on the value or the advisability of the purchase or sale of
securities underwritten or dealt in by a majority-owned subsidiary
unless the state-chartered depository institution notifies the customer
that the majority-owned subsidiary is underwriting or distributing the
security;
(C) The majority-owned subsidiary is registered with the Securities
and Exchange Commission, is a member in good standing with the
appropriate self-regulatory organization, and promply informs the
appropriate regional director (Supervision) in writing of any material
actions taken against the majority-owned subsidiary or any of its
employees by the state, the appropriate self-regulatory organizations
or the Securities and Exchange Commission; and
(D) The state-chartered depository institution does not knowingly
purchase as principal or fiduciary during the existence of any
underwriting or selling syndicate any securities underwritten by the
majority-owned subsidiary unless the purchase is approved by the state-
chartered depository institution's board of directors before the
securities are initially offered for sale to the public.
(6) Subsidiaries may engage in authorized activities. A subsidiary
of an insured state bank may engage in any activity permissible for an
insured state bank under Sec. 362.3(b)(2)(iii) or Sec. 362.3(b)(2)(iv),
provided that this exception does not authorize a subsidiary to acquire
or hold the stock of a savings association other than as allowed by
paragraph (b)(4) of this section.
(c) Core eligibility requirements. If specifically required by this
part or by FDIC order, any state-chartered depository institution that
wishes to be eligible and continue to be eligible to conduct as
principal activities through a subsidiary that are not permissible for
a subsidiary of a national bank must be an ``eligible depository
institution'' and the subsidiary must be an ``eligible subsidiary''.
(1) A state-chartered depository institution is an ``eligible
depository institution'' if it:
(i) Has been chartered and operating for 3 or more years;
(ii) Has a composite rating of 1 or 2 assigned under the Uniform
Financial Institutions Rating System (UFIRS) or such other comparable
rating system as may be adopted in the future by the institution's
appropriate Federal banking agency;
(iii) Received a rating of 1 or 2 under the ``management''
component of the UFIRS as assigned by the institution's appropriate
Federal banking agency;
(iv) Has a satisfactory or better Community Reinvestment Act rating
at its most recent examination conducted by the institution's
appropriate Federal banking agency;
(v) Has a compliance rating of 1 or 2 at its most recent
examination conducted by the institution's appropriate Federal banking
agency; and
(vi) Is not subject to a cease and desist order, consent order,
prompt corrective action directive, formal or informal written
agreement, or other administrative agreement with its appropriate
Federal banking agency or chartering authority.
(2) A subsidiary of a state-chartered depository institution is an
``eligible subsidiary'' if it:
(i) Meets applicable statutory or regulatory capital requirements
and has sufficient operating capital in light of the normal obligations
that are reasonably foreseeable for a business of its size and
character within the industry;
(ii) Is physically separate and distinct in its operations from the
operations of the state-chartered depository institution, provided that
this requirement shall not be construed to prohibit the state-chartered
depository institution and its subsidiary from sharing the same
facility if the area where the subsidiary conducts business with the
public is clearly distinct from the area where customers of the state-
chartered depository institution conduct business with the institution.
The extent of the separation will vary according to the type and
frequency of customer contact;
(iii) Maintains separate accounting and other business records;
(iv) Observes separate business entity formalities such as separate
board of directors' meetings;
(v) Has a chief executive officer of the subsidiary who is not an
employee of the institution;
(vi) Has a majority of its board of directors who are neither
directors nor officers of the state-chartered depository institution;
(vii) Conducts business pursuant to independent policies and
procedures designed to inform customers and prospective customers of
the subsidiary that the subsidiary is a separate organization from the
state-chartered depository institution and that the state-chartered
depository institution is not responsible for and does not guarantee
the obligations of the subsidiary;
(viii) Has only one business purpose within the types described in
paragraphs (b)(2) and (b)(5) of this section;
(ix) Has a current written business plan that is appropriate to the
type and scope of business conducted by the subsidiary;
(x) Has qualified management and employees for the type of activity
contemplated, including all required licenses and memberships, and
complies with industry standards; and
(xi) Establishes policies and procedures to ensure adequate
computer, audit and accounting systems, internal risk management
controls, and has necessary operational and managerial infrastructure
to implement the business plan.
(d) Investment and transaction limits.--(1) General. If
specifically required by this part or FDIC order, the following
conditions and restrictions apply to an insured state bank and its
majority-owned subsidiaries that engage in and wish to continue to
engage in activities which are not permissible for a national bank
subsidiary.
(2) Investment limits--(i) Investment in one subsidiary. An insured
state bank may not invest more than 10 percent of the insured state
bank's tier one capital in any majority-owned subsidiary subject to
this paragraph (d).
(ii) Aggregate investment in subsidiaries. An insured state bank's
investments in majority-owned subsidiaries conducting the same activity
subject to this paragraph (d)
[[Page 48018]]
shall not exceed, in the aggregate, 20 percent of the insured state
bank's tier one capital.
(iii) Definition of investment. (A) For purposes of this
subsection, the term investment means:
(1) Any extension of credit to the majority-owned subsidiary by the
insured state bank;
(2) Any debt securities, as such term is defined in part 344 of
this chapter, issued by the majority-owned subsidiary held by the
insured state bank;
(3) The acceptance by the insured state bank of securities issued
by the majority-owned subsidiary as collateral for an extension of
credit to any person or company; and
(4) Any extensions of credit by the insured state bank to any third
party for the purpose of making a direct investment in the majority-
owned subsidiary, making any investment in which the majority-owned
subsidiary has an interest, or which is used for the benefit of, or
transferred to, the majority-owned subsidiary.
(B) For the purposes of paragraph (d)(2) of this section, the term
``investment'' does not include:
(1) Extensions of credit by the insured state bank to finance sales
of assets by the majority-owned subsidiary which do not involve more
than the normal degree of risk of repayment and are extended on terms
that are substantially similar to those prevailing at the time for
comparable transactions with or involving unaffiliated persons or
companies;
(2) An extension of credit by the insured state bank to a majority-
owned subsidiary that is fully collateralized by government securities,
as such term is defined in Sec. 344.3 of this chapter; or
(3) An extension of credit by the insured state bank to a majority-
owned subsidiary that is fully collateralized by a segregated deposit
in the insured state bank.
(3) Transaction requirements--(i) Arm's length transaction
requirement. An insured state bank may not:
(A) Make an investment in a majority-owned subsidiary;
(B) Purchase from or sell to a majority-owned subsidiary any assets
(including securities);
(C) Enter into a contract, lease, or other type of agreement with a
majority-owned subsidiary; or
(D) Pay compensation to a majority-owned subsidiary or any person
or company who has an interest in the majority-owned subsidiary unless
the transaction is on terms and conditions that are substantially the
same as those prevailing at the time for comparable transactions with
unaffiliated parties, provided that an insured state bank may give
immediate credit to a majority-owned subsidiary for uncollected items
received in the ordinary course of business. This requirement also
shall apply in the case of any transaction the proceeds of which are
used for the benefit of, or that are transferred to, the majority-owned
subsidiary.
(ii) Prohibition on purchase of low quality assets. An insured
state bank is prohibited from purchasing a low quality asset from a
majority-owned subsidiary. For purposes of this subsection, low quality
asset means:
(A) An asset classified as ``substandard'', ``doubtful'', or
``loss'' or treated as ``other loans especially mentioned'' in the most
recent report of examination of the bank;
(B) An asset in a nonaccrual status;
(C) An asset on which principal or interest payments are more than
30 days past due; or
(D) An asset whose terms have been renegotiated or compromised due
to the deteriorating financial condition of the obligor.
(iii) Anti-tying restriction. Neither the insured state bank nor
the majority-owned subsidiary may require a customer to either buy any
product or use any service from the other as a condition of entering
into a transaction.
(iv) Insider transaction restriction. Neither the insured state
bank nor the majority-owned subsidiary may enter into any transaction
(exclusive of those covered by Sec. 337.3 of this chapter) with the
bank's executive officers, directors, principal shareholders or related
interests of such persons which relate to the majority-owned
subsidiary's activities unless the transactions are on terms and
conditions that are substantially the same as those prevailing at the
time for comparable transaction with persons not affiliated with the
insured state bank.
(4) Collateralization requirements. (i) An insured state bank is
prohibited from making an extension of credit to or on behalf of a
majority-owned subsidiary unless such transaction is fully-
collateralized at the time the transaction is entered into. No insured
state bank may accept a low quality asset as collateral. An extension
of credit is fully collateralized if it is secured at the time of the
transaction by collateral having a market value equal to at least:
(A) 100 percent of the amount of the transaction if the collateral
is composed of:
(1) Obligations of the United States or its agencies;
(2) Obligations fully guaranteed by the United States or its
agencies as to principal and interest;
(3) Notes, drafts, bills of exchange or bankers acceptances that
are eligible for rediscount or purchase by the Federal Reserve Bank; or
(4) A segregated, earmarked deposit account with the member bank;
(B) 110 percent of the amount of the transaction if the collateral
is composed of obligations of any State or political subdivision of any
State;
(C) 120 percent of the amount of the transaction if the collateral
is composed of other debt instruments, including receivables; or
(D) 130 percent of the amount of the transaction if the collateral
is composed of stock, leases, or other real or personal property.
(ii) An insured state bank may not release collateral prior to
proportional payment of the extension of credit; however, collateral
may be substituted if there is no dimunition of collateral coverage.
(5) Investment and transaction limits extended to insured state
bank subsidiaries. For purposes of applying paragraphs (d)(2) through
(d)(4) of this section, any reference to ``insured state bank'' means
the insured state bank and any subsidiaries of the insured state bank
which are not themselves subject under this part or FDIC order to the
restrictions of this paragraph (d).
(e) Capital requirements. If specifically required by this part or
by FDIC order, any insured state bank that wishes to conduct or
continue to conduct as principal activities through a subsidiary that
are not permissible for a subsidiary of a national bank must:
(1) Be well-capitalized after deducting from its tier one capital
the investment in equity securities of the subsidiary as well as the
bank's pro rata share of any retained earnings of the subsidiary;
(2) Reflect this deduction on the appropriate schedule of the
bank's consolidated report of income and condition; and
(3) Use such regulatory capital amount for the purposes of the
bank's assessment risk classification under part 327 and its
categorization as a ``well-capitalized'', an ``adequately
capitalized'', an ``undercapitalized'', or a ``significantly
undercapitalized'' institution as defined in Sec. 325.103(b) of this
chapter, provided that the capital deduction shall not be used for
purposes of determining whether the bank is ``critically
undercapitalized'' under part 325.
Sec. 362.5 Approvals previously granted.
(a) FDIC consent by order or notice. An insured state bank that
previously filed an application or notice and obtained the FDIC's
consent to engage in
[[Page 48019]]
an activity or to acquire or retain a majority-owned subsidiary
engaging as principal in an activity or acquiring and retaining any
investment that is prohibited under this subpart may continue that
activity or retain that investment without seeking the FDIC's consent,
provided that the insured state bank and its subsidiary, if applicable,
continue to meet the conditions and restrictions of the approval. An
insured state bank which was granted approval based on conditions which
differ from the requirements of Sec. 362.4(c)(2), (d) and (e) will be
considered to meet the conditions and restrictions of the approval
relating to being an eligible subsidiary, meeting investment and
transactions limits, and meeting capital requirements if the insured
state bank and subsidiary meet the requirements of Sec. 362.4(c)(2),
(d) and (e).
(b) Approvals by regulation--(1) Securities underwriting. An
insured state nonmember bank engaging in securities activities under a
notice filed under and in compliance with the restrictions of former
Sec. 337.4 of this chapter may continue those activities if the bank
and its majority-owned subsidiaries comply with the restrictions set
forth in Secs. 362.4(b)(5)(ii) and 362.4 (c), (d), and (e) by [insert
date one year after the effective date of the final rule]. During the
one-year period of transition between the effective date of this
regulation and [insert date one year after the effective date of the
final rule], the bank and its majority-owned subsidiary must meet the
restrictions set forth in the former Sec. 337.4 of this chapter until
Secs. 362.4(b)(5)(ii) and 362.4 (c), (d) and (e) are met. If the banks
fails to meet these restrictions, the bank must apply for the FDIC's
consent to continue those activities under Secs. 362.4(b)(1) and
362.18(b).
(2) Grandfathered insurance underwriting. An insured state bank
which is directly providing insurance as principal pursuant to former
Sec. 362.4(c)(2)(i) may continue that activity if it complies with the
provisions of Sec. 362.3(b)(2)(ii)(C) by [insert date ninety days after
the effective date of the final rule]. An insured state bank indirectly
providing insurance as principal through a subsidiary pursuant to
former Sec. 362.3(b)(7) may continue that activity if it complies with
the provisions of Sec. 362.4(b)(2)(i). During the ninety-day period of
transition between [insert the effective date of the final rule] and
[insert date ninety days after the effective date of the final rule],
the bank and its majority-owned subsidiary must meet the restrictions
set forth in former Sec. 362.4(c)(2)(i) or Sec. 362.3(b)(7), as
applicable, of this chapter until the requirements of
Secs. 362.3(b)(2)(ii)(C) or 362.4(b)(2)(i) are met. If the insured
state bank or its subsidiary fails to comply with the restrictions, as
applicable, the insured state bank must apply for the FDIC's consent
under Secs. 362.4(b)(1) and 362.18(b).
(3) Equity securities. An insured state bank, indirectly through a
subsidiary, owning equity securities pursuant to former
Sec. 362.4(c)(3)(iv) (A) and (B) may continue that activity if it
complies with the provisions of Sec. 362.4(b)(4) by [insert date one
year after the effective date of the final rule]. During the one-year
period of transition between the effective date of this regulation and
[insert date one year after the effective date of the final rule], the
bank and its majority-owned subsidiary must meet the restrictions set
forth in former Sec. 362.4(c)(3)(iv)(A) and (B) of this chapter until
Sec. 362.4(b)(4) is met. If the insured state bank or its subsidiary
fails to meet these restrictions, the insured state bank must apply for
the FDIC's consent under Secs. 362.4(b)(1) and 362.18(b).
(c) Charter conversions. (1) An insured state bank that has
converted its charter from an insured state savings association may
continue activities through a majority-owned subsidiary that were
permissible prior to the time it converted its charter only if the
insured state bank receives the FDIC's consent. Except as provided in
paragraph (c)(2) of this section, the insured state bank should apply
under Sec. 362.4(b)(1), submit a notice required under
Sec. 362.4(b)(5), or comply with the provisions of Sec. 362.4(b) (3),
(4), or (6), if applicable, to continue the activity.
(2) Exception for prior consent. If the FDIC had granted consent to
the savings association under section 28 of the Federal Deposit
Insurance Act (12 U.S.C. 1831(e)) prior to the time it converted its
charter, the insured state bank may continue the activities without
providing notice or making application to the FDIC, provided that the
bank is in compliance with:
(i) The terms of the FDIC approval order and
(ii) The provisions of Sec. 362.4(c)(2), (d), and (e) regarding
operating as an ``eligible subsidiary'', ``investment and transaction
limits'', and ``capital requirements''.
(3) Divestiture. An insured state bank that does not receive FDIC
consent shall divest of the nonconforming investment as soon as
practical but in any event no later than two years from the date of
charter conversion.
Subpart B--Safety and Soundness Rules Governing Insured State
Nonmember Banks
Sec. 362.6 Purpose and scope.
This subpart, along with the notice and application procedures in
subpart E apply to certain banking practices that may have adverse
effects on the safety and soundness of insured state nonmember banks.
The FDIC intends to allow insured state nonmember banks and their
subsidiaries to undertake only safe and sound activities and
investments that would not present a significant risk to the deposit
insurance fund and that are consistent with the purposes of federal
deposit insurance and other law. The following standards shall apply
for insured state nonmember banks to conduct real estate investment
activities through a subsidiary if those activities are permissible for
a national bank subsidiary but are different from activities
permissible for the national bank parent itself. Additionally, the
following standards shall apply for insured state nonmember banks that
are not affiliated with a bank holding company to conduct securities
activities in an affiliated organization.
Sec. 362.7 Restrictions on activities of insured state nonmember
banks.
(a) Real estate investment made by subsidiaries of insured state
nonmember banks. The FDIC Board of Directors has found that real estate
investment activity may have adverse effects on the safety and
soundness of insured state nonmember banks. Notwithstanding any
interpretations, orders, circulars or official bulletins issued by the
Office of the Comptroller of the Currency regarding activities
permissible for operating subsidiaries of a national bank but different
from activities permissible for the parent national bank itself under
12 CFR 5.34(f), insured state nonmember banks may not establish or
acquire a subsidiary that engages in real estate investment activities
not permissible for a national bank itself unless the insured state
nonmember bank:
(1) Has an approval previously granted by the FDIC; or
(2) Meets the requirements for engaging in real estate investment
activities that are not permissible for national banks as set forth in
Sec. 362.4(b)(5), and submits a corresponding notice under
Sec. 362.18(a) without objection, or files an application under
Secs. 362.4(b)(1) and 362.18(b) and receives approval to engage in the
activity.
(b) Affiliation with securities companies. The Board of Directors
of
[[Page 48020]]
the FDIC has found that an unrestricted affiliation between an insured
state nonmember bank and a securities company may have adverse effects
on the safety and soundness of insured state nonmember banks. An
insured state nonmember bank which is affiliated with a company that is
not treated as a bank holding company pursuant to section 4(f) of the
Bank Holding Company Act (12 U.S.C. 1843(f)) is prohibited from
becoming or remaining affiliated with any company that directly engages
in the public sale, distribution or underwriting of stocks, bonds,
debentures, notes, or other securities which is not permissible for a
national bank unless:
(1) The securities business of the affiliate is physically separate
and distinct in its operations from the operations of the bank,
provided that this requirement shall not be construed to prohibit the
bank and its affiliate from sharing the same facility if the area where
the affiliate conducts retail sales activity with the public is
physically distinct from the routine deposit taking area of the bank;
(2) Has a chief executive officer of the affiliate who is not an
employee of the bank:
(3) A majority of the affiliate's board of directors are not
directors, officers, or employees of the bank;
(4) The affiliate conducts business pursuant to independent
policies and procedures designed to inform customers and prospective
customers of the affiliate that the affiliate is a separate
organization from the bank;
(5) The bank adopts policies and procedures, including appropriate
limits on exposure, to govern their participation in financing
transactions underwritten by an underwriting affiliate;
(6) The bank does not express an opinion on the value or the
advisability of the purchase or sale of securities underwritten or
dealt in by an affiliate unless it notifies the customer that the
entity underwriting, making a market, distributing or dealing in the
securities is an affiliate of the bank;
(7) The bank does not purchase as principal or fiduciary during the
existence of any underwriting or selling syndicate any securities
underwritten by the affiliate unless the purchase is approved by the
bank's board of directors before the securities are initially offered
for sale to the public;
(8) The bank does not condition any extension of credit to any
company on the requirement that the company contract with, or agree to
contract with, the bank's affiliate to underwrite or distribute the
company's securities;
(9) The bank does not condition any extension of credit or the
offering of any service to any person or company on the requirement
that the person or company purchase any security underwritten or
distributed by the affiliate; and
(10) The bank complies with the investment and transaction
limitations of Sec. 362.4(d). For the purposes of applying these
restrictions, the term ``affiliate'' shall be substituted wherever the
terms ``subsidiary'' or ``majority-owned subsidiary'' are used in
Sec. 362.4(d)(2), (3), and (4). For the purposes of applying these
limitations, the term ``investment'' as defined in
Sec. 362.4(d)(2)(iii) shall also include any equity securities of the
affiliate held by the insured state bank.
(c) Definitions. For the purposes of this section, the following
definitions apply:
(1) Affiliate shall mean any company that directly or indirectly,
through one or more intermediaries, controls or is under common control
with an insured state nonmember bank.
(2) Company, Control, Equity Security, Insured state nonmember
bank, Security, and Subsidiary have the same meaning as provided in
subpart A.
Subpart C--Activities of Insured State Savings Associations
Sec. 362.8 Purpose and scope.
(a) This subpart, along with the notice and application procedures
in subpart F, implements the provisions of section 28 of the Federal
Deposit Insurance Act (12 U.S.C. 1831e) that restrict and prohibit
insured state savings associations and their service corporations from
engaging in activities and investments of a type that are not
permissible for federal savings associations and their service
corporations. The phrase ``activity permissible for a federal savings
association'' means any activity authorized for federal savings
associations under any statute including the Home Owners' Loan Act
(HOLA, 12 U.S.C. 1464 et seq.), as well as activities recognized as
permissible for a federal savings association in regulations, official
thrift bulletins, orders or written interpretations issued by the
Office of Thrift Supervision (OTS), or its predecessor, the Federal
Home Loan Bank Board.
(b) This subpart does not cover the following activities:
(1) Activities conducted by the insured state savings association
other than ``as principal''. Therefore, regarding insured state savings
associations, this subpart does not restrict activities conducted as
agent for a customer, conducted in a brokerage, custodial, advisory, or
administrative capacity, or conducted as trustee.
(2) Interests in real estate in which the real property is used or
intended in good faith to be used within a reasonable time by an
insured savings association or its service corporations as offices or
related facilities for the conduct of its business or future expansion
of its business or used as public welfare investments of a type and in
an amount permissible for federal savings associations.
(3) Equity investments acquired in connection with debts previously
contracted that are held within the shorter of the time limits
prescribed by state or federal law.
(c) The FDIC intends to allow insured state savings associations
and their service corporations to undertake only safe and sound
activities and investments that do not present a significant risk to
the deposit insurance funds and that are consistent with the purposes
of federal deposit insurance and other applicable law. This subpart
does not authorize any insured state savings association to make
investments or conduct activities that are not authorized or that are
prohibited by either federal or state law.
Sec. 362.9 Definitions.
For the purposes of this subpart, the definitions provided in
Sec. 362.2 apply. Additionally, the following definitions apply to this
subpart:
(a) Affiliate shall mean any company that directly or indirectly,
through one or more intermediaries, controls or is under common control
with an insured state savings association.
(b) Corporate debt securities not of investment grade means any
corporate debt security that when acquired was not rated among the four
highest rating categories by at least one nationally recognized
statistical rating organization. The term shall not include any
obligation issued or guaranteed by a corporation that may be held by a
federal savings association without limitation as to percentage of
assets under subparagraphs (D), (E), or (F) of section 5(c)(1) of HOLA
(12 U.S.C. 1464 (c)(1)(D), (E), (F)).
(c) Insured state savings association means any state-chartered
savings association insured by the Federal Deposit Insurance
Corporation.
(d) Qualified affiliate means, in the case of a stock insured state
savings association, an affiliate other than a subsidiary or an insured
depository institution. In the case of a mutual savings association,
``qualified affiliate'' means a subsidiary other than an
[[Page 48021]]
insured depository institution provided that all of the savings
association's investments in, and extensions of credit to, the
subsidiary are deducted from the savings association's capital.
(e) Service corporation means any corporation the capital stock of
which is available for purchase by savings associations.
Sec. 362.10 Activities of insured state savings associations.
(a) Equity investments.--(1) Prohibited investments. No insured
state savings association may directly acquire or retain as principal
any equity investment of a type, or in an amount, that is not
permissible for a federal savings association unless the exception in
paragraph (a)(2) of this section applies.
(2) Exception: Equity investment in service corporations. An
insured state savings association that is and continues to be in
compliance with the applicable capital standards as prescribed by the
appropriate Federal banking agency may acquire or retain an equity
investment in a service corporation:
(i) Not permissible for a federal savings association to the extent
the service corporation is engaging in activities that are allowed
pursuant to the provisions of or an application under Sec. 362.11(b);
or
(ii) Of a type permissible for a federal savings association, but
in an amount exceeding the investment limits applicable to federal
savings associations, if the insured state savings association obtains
the FDIC's prior consent. Consent will be given only if the FDIC
determines that the amount of the investment in a service corporation
engaged in such activities does not present a significant risk to the
affected deposit insurance fund. Applications should be filed in
accordance with Sec. 362.23(b). Approvals granted under Sec. 362.23(b)
may be made subject to any conditions or restrictions found by the FDIC
to be necessary to protect the deposit insurance funds from significant
risk, to prevent unsafe or unsound practices, and/or to ensure that the
activity is consistent with the purposes of federal deposit insurance
and other applicable law.
(b) Activities other than equity investments.--(1) Prohibited
activities. An insured state savings association may not directly
engage as principal in any activity, that is not an equity investment,
of a type not permissible for a federal savings association, and an
insured state savings association shall not make nonresidential real
property loans in an amount exceeding that described in section
5(c)(2)(B) of HOLA (12 U.S.C. 1464 (c)(2)(B)), unless one of the
exceptions in paragraph (b)(2) of this section applies. This section
shall not be read to require the divestiture of any asset (including a
nonresidential real estate loan), if the asset was acquired prior to
August 9, 1989; however, any activity conducted with such asset must be
in accordance with this subpart. After August 9, 1989, an insured state
savings association directly or through a subsidiary (other than, in
the case of a mutual savings association, a subsidiary that is a
qualified affiliate), may not acquire or retain any corporate debt
securities not of investment grade.
(2) Exceptions.--(i) Consent obtained through application. An
insured state savings association that meets and continues to meet the
applicable capital standards set by the appropriate Federal banking
agency may directly conduct activities prohibited by paragraph (b)(1)
of this section if the savings association obtains the FDIC's prior
consent. Consent will be given only if the FDIC determines that
conducting the activity designated poses no significant risk to the
affected deposit insurance fund. Applications should be filed in
accordance with Sec. 362.22. Approvals granted under Sec. 362.23(b) may
be made subject to any conditions or restrictions found by the FDIC to
be necessary to protect the deposit insurance funds from significant
risk, to prevent unsafe or unsound practices, and/or to ensure that the
activity is consistent with the purposes of federal deposit insurance
and other applicable law.
(ii) Nonresidential realty loans permissible for a federal savings
association conducted in an amount not permissible. An insured state
savings association that meets and continues to meet the applicable
capital standards set by the appropriate Federal banking agency may
make nonresidential real property loans in an amount exceeding that
described in section 5(c)(2)(B) of HOLA (12 U.S.C. 1464 (c)(2)(B)), if
the savings association files a notice in compliance with
Sec. 362.23(a) and the FDIC does not object to the notice. Consent will
be given only if the FDIC determines that engaging in such lending in
the amount designated poses no significant risk to the affected deposit
insurance fund.
(iii) Acquiring and retaining adjustable rate and money market
preferred stock. An insured state savings association's investment of
up to 15 percent of the association's tier one capital in adjustable
rate preferred stock or money market (auction rate) preferred stock
does not represent a significant risk to the relevant deposit insurance
fund. An insured state savings association may conduct this activity
without first obtaining the FDIC's consent, provided that the
association meets and continues to meet the applicable capital
standards as prescribed by the appropriate Federal banking agency. The
fact that prior consent is not required by this subpart does not
preclude the FDIC from taking any appropriate action with respect to
the activities if the facts and circumstances warrant such action.
(iv) Activities that are closely related to banking. An insured
state savings association may engage as principal in any activity that
is not permissible for a federal savings association provided that the
Federal Reserve Board by regulation or order has found the activity to
be closely related to banking for the purposes of section 4(c)(8) of
the Bank Holding Company Act (12 U.S.C. 1843(c)(8)), except that the
insured state savings association shall make no equity investment
directly which is not permissible for a federal savings association.
(3) Activities permissible for a federal savings association
conducted in an amount not permissible. Except as provided in paragraph
(b)(2)(ii) of this section, an insured state savings association may
engage as principal in any activity, which is not an equity investment,
of a type permissible for a federal savings association in an amount in
excess of that permissible for a federal savings association, if the
savings association meets and continues to meet the applicable capital
standards set by the appropriate Federal banking agency, the
institution has advised the appropriate regional director (Supervision)
under the procedure in Sec. 362.23(c) within thirty days before
engaging in the activity, and the FDIC has not advised the insured
state savings association that conducting the activity in the amount
indicated poses a significant risk to the affected deposit insurance
fund. This section shall not be read to require the divestiture of any
asset if the asset was acquired prior to August 9, 1989; however, any
activity conducted with such asset must be conducted in accordance with
this subpart.
Sec. 362.11 Service corporations of insured state savings
associations.
(a) Prohibition. A service corporation of an insured state savings
association may not engage in any activity that is not permissible for
a service corporation of a federal savings association, unless it meets
one of the exceptions in paragraph (b) of this section.
(b) Exceptions.--(1) Consent obtained through application. A
service
[[Page 48022]]
corporation of an insured state savings association may conduct
activities prohibited by paragraph (a) of this section if the savings
association obtains the FDIC's prior written consent and the insured
state savings association meets and continues to meet the applicable
capital standards set by the appropriate Federal banking agency.
Consent will be given only if the FDIC determines that the activity
poses no significant risk to the relevant deposit insurance fund.
Applications for consent should be filed in accordance with
Sec. 362.23(b). Approvals granted under Sec. 362.23(b) may be made
subject to any conditions or restrictions found by the FDIC to be
necessary to protect the deposit insurance funds from risk, to prevent
unsafe or unsound banking practices, and/or to ensure that the activity
is consistent with the purposes of federal deposit insurance and other
applicable law.
(2) Service corporations conducting unrestricted activities. The
FDIC has determined that the following activities do not represent a
significant risk to the deposit insurance funds. The FDIC consents that
the following activities may be conducted by a service corporation of
an insured state savings association without first obtaining the FDIC's
consent, provided that the savings association meets and continues to
meet the applicable capital standards as prescribed by the appropriate
Federal banking agency. The fact that prior consent is not required by
this subpart does not preclude the FDIC from taking any appropriate
action with respect to the activities if the facts and circumstances
warrant such action.
(i) Service corporations which own a control interest in companies
engaged in permissible activities. Provided the service corporation
controls the issuer of owned stock, a service corporation may directly
acquire and retain ownership interests in:
(A) Stock of a company that engages in permissible activities. A
service corporation may own the stock of a company that engages in any
activity permissible for a federal savings association or any activity
permissible for an insured state savings association under
Sec. 362.10(b)(2)(iii) or (iv).
(B) Stock of a company engaged in activities conducted not as
principal. A service corporation may own the stock of a company that
engages solely in activities which are not conducted as principal.
(ii) Activities that are not conducted ``as principal''. A service
corporation may engage in activities which are not conducted ``as
principal'' such as acting as an agent for a customer, acting in a
brokerage, custodial, advisory, or administrative capacity, or acting
as trustee.
(iii) Service corporations may engage in authorized activities. A
service corporation may engage in any activity permissible for an
insured state savings association under Sec. 362.10(b)(2)(iii) or
Sec. 362.10(b)(2)(iv), provided that this exception does not authorize
a service corporation to acquire or hold the stock of a savings
association other than as allowed by paragraph (b)(3) of this section.
(3) Service corporation ownership of equity securities that do not
represent a control interest. The FDIC has determined that a service
corporation's investment in the equity securities of any company,
including an insured depository institution, a bank holding company (as
that term is defined for purposes of the Bank Holding Company Act, 12
U.S.C. 1841, et seq.), or a savings and loan holding company (as that
term is defined in 12 U.S.C. 1467a), does not represent a significant
risk to the deposit insurance funds and may be conducted by a service
corporation without first obtaining the FDIC's consent provided that
the insured state savings association or its service corporation meets
the eligibility requirements of Sec. 362.4(b)(4)(i) and the transaction
limitation contained in Sec. 362.4(b)(4)(ii); and the savings
association meets the capital requirements of paragraph 362.11(d) of
this section. The fact that prior consent is not required by this
subpart does not preclude the FDIC from taking any appropriate action
with respect to the activities if the facts and circumstances warrant
such action. For purposes of applying Sec. 362.4(b)(4) (i) and (ii),
the term ``majority-owned subsidiary'' shall be replaced with ``service
corporation''.
(4) Service corporations conducting securities underwriting. The
FDIC has determined that it does not represent a significant risk to
the relevant deposit insurance fund for a service corporation of an
insured state savings association to engage in the public sale,
distribution or underwriting of securities provided that the activity
is conducted by the service corporation in compliance with the core
eligibility requirements listed in Sec. 362.4(c); any additional
requirements listed in Sec. 362.4(b)(5)(ii); the savings association
complies with the investment and transaction limitations of paragraph
(c) of this section; and the savings association meets the capital
requirements of paragraph (d) of this section. Subject to the stated
requirements and limitations, the FDIC consents that these listed
activities may be conducted by a service corporation of an insured
state savings association if the savings association files a notice in
compliance with Sec. 362.23(a) and the FDIC does not object to the
notice. The FDIC is not precluded from taking any appropriate action or
imposing additional requirements with respect to the activities if the
facts and circumstances warrant such action. If changes to the
management or business plan of the service corporation at any time
result in material changes to the nature of the service corporation's
business or the manner in which its business is conducted, the insured
state savings association shall advise the appropriate regional
director (Supervision) in writing within 10 business days after such
change. For purposes of applying Sec. 362.4 (b)(5)(ii) and (c) to this
paragraph, the terms ``subsidiary'' and ``majority-owned subsidiary''
shall be replaced with ``service corporation''. For the purposes of
applying Sec. 362.4(c), ``eligible subsidiary'' shall be replaced with
``eligible service corporation''.
(c) Investment and transaction limits. The restrictions detailed in
Sec. 362.4(d) apply to transactions between an insured state savings
association and any service corporation engaging in activities which
are not permissible for a service corporation of a federal savings
association if specifically required by this part or FDIC order. For
purposes of applying the investment limits detailed by
Sec. 362.4(d)(2), the term ``investment'' includes only those items
described in Sec. 362.4(d)(2)(iii)(A) (3) and (4). For purposes of
applying Sec. 362.4(d) (2), (3), and (4) to this paragraph, the terms
``insured state bank'' and ``majority-owned subsidiary'' shall be
replaced, respectively, with ``insured state savings association'' and
``service corporation''. For purposes of applying Sec. 362.4(d)(5), the
term ``insured state bank'' shall be replaced by ``insured state
savings association'', and ``subsidiary'' shall be replaced by
``service corporations or subsidiaries''.
(d) Capital requirements. If specifically required by this part or
by FDIC order, an insured state savings association that wishes to
conduct as principal activities through a service corporation which are
not permissible for a service corporation of a federal savings
association must:
(1) Be well-capitalized after deducting from its capital any amount
required by section 5(t) of HOLA.
(2) Use such regulatory capital amount for the purposes of the
insured state savings association's assessment risk classification
under part 327 of this chapter.
[[Page 48023]]
Sec. 362.12 Approvals previously granted.
FDIC consent by order or notice. An insured state savings
association that previously filed an application and obtained the
FDIC's consent to engage in an activity or to acquire or retain an
investment in a service corporation engaging as principal in an
activity or acquiring and retaining any investment that is prohibited
under this subpart may contine that activity or retain that investment
without seeking the FDIC's consent, provided the insured state savings
association and the service corporation, if applicable, continue to
meet the conditions and restrictions of approval. An insured state
savings association which was granted approval based on conditions
which differ from the requirements of Secs. 362.4(c)(2) and 362.11 (c)
and (d) will be considered to meet the conditions and restrictions of
the approval if the insured state savings association and any
applicable service corporation meet the requirements of
Secs. 362.4(c)(2) and 362.11 (c) and (d). For the purposes of applying
Sec. 362.4(c)(2), ``eligible subsidiary'' and ``subsidiary'' shall be
replaced with ``eligible service corporation'' and ``service
corporation'', respectively.
Subpart D--Acquiring, Establishing, or Conducting New Activities
Through a Subsidiary by an Insured Savings Association
Sec. 362.13 Purpose and scope.
This subpart implements section 18(m) of the Federal Deposit
Insurance Act (12 U.S.C. 1828(m)) which requires that prior notice be
given the FDIC when an insured savings association establishes or
acquires a subsidiary or engages in any new activity in a subsidiary.
For the purposes of the subpart, the term ``subsidiary'' does not
include any insured depository institution as that term is defined in
the Federal Deposit Insurance Act. Unless otherwise indictated, the
definitions provided in Sec. 362.2 apply to this subpart.
Sec. 362.14 Acquiring or establishing a subsidiary; conducting new
activities through a subsidiary.
No state or federal insured savings association may establish or
acquire a subsidiary, or conduct any new activity through a subsidiary,
unless it files a notice in compliance with Sec. 362.23(c) and the FDIC
does not object to the notice. This requirement does not apply to any
federal savings bank that was chartered prior to October 15, 1982, as a
savings bank under state law or any savings association that acquired
its principal assets from such an institution.
Subpart E--Applications and Notices; Activities of Insured State
Banks
Sec. 362.15 Scope.
This subpart sets out the procedures for complying with the notice
and application requirements for activities and investments of insured
state banks and their subsidiaries under subparts A and B.
Sec. 362.16 Definitions.
For the purposes of this subpart, the following definitions shall
apply:
(a) Appropriate regional director, appropriate deputy regional
director, and appropriate regional office mean the regional director of
DOS, deputy regional director of DOS, and FDIC regional office which
the FDIC designates as follows:
(1) When an institution that is the subject of a notice or
application is not part of a group of related institutions, the
appropriate region for the institution and any individual associated
with the institution is the FDIC region in which the institution or
proposed institution is or will be located; or
(2) When an institution that is the subject of a notice or
application is part of a group of related institutions, the appropriate
region for the institution and any individual associated with the
institution is the FDIC region in which the group's major policy and
decision makers are located, or any other region the FDIC designates on
a case-by-case basis.
(b) Associate director means any associate director of DOS, or in
the event such title becomes obsolete, any official of equivalent
authority within the division.
(c) Deputy Director means the Deputy Director of DOS, or in the
event such title becomes obsolete, any official of equivalent or higher
authority within the division.
(d) Deputy regional director means any deputy regional director of
DOS, or in the event such title becomes obsolete, any official of
equivalent authority within the same FDIC region of DOS.
(e) DOS means the Division of Supervision, or in the event the
Division of Supervision is reorganized, any successor division.
(f) Director means the Director of DOS, or in the event such title
becomes obsolete, any official of equivalent or higher authority within
the division.
(g) Regional director means any regional director in DOS, or in the
event such title becomes obsolete, any official of equivalent authority
within the division.
Sec. 362.17 Filing procedures.
(a) Where to file. All applications and notices required by subpart
A or subpart B of this part are to be in writing and filed with the
appropriate regional director .
(b) Contents of filing--(1) Filings generally. All applications or
notices required by subpart A or subpart B may be in letter form and
shall contain the following information:
(i) A brief description of the activity and the manner in which it
will be conducted;
(ii) The amount of the bank's existing or proposed direct or
indirect investment in the activity as well as calculations sufficient
to indicate compliance with any specific capital ratio or investment
percentage limitation detailed in subpart A;
(iii) A copy of the bank's business plan regarding the conduct of
the activity;
(iv) A citation to the state statutory or regulatory authority for
the conduct of the activity;
(v) A copy of the order or other document from the appropriate
regulatory authority granting approval for the bank to conduct the
activity if such approval is necessary and has already been granted;
(vi) A brief description of the bank's policy and practice with
regard to any anticipated involvement in the activity by a director,
executive office or principal shareholder of the bank or any related
interest of such a person; and
(vii) A description of the bank's expertise in the activity.
(2) Copy of application or notice filed with another agency. If an
insured state bank has filed an application or notice with another
federal or state regulatory authority which contains all of the
information required by paragraph (b)(1) or (b)(2) of this section, the
insured state bank may submit a copy to the FDIC in lieu of a separate
filing.
(3) Additional information. The appropriate regional director may
request additional information.
Sec. 362.18 Processing.
(a) Expedited processing--(1) Notices. Where subparts A and B
permit an insured state bank or its subsidiary to commence or continue
an activity after notice to the FDIC, and the appropriate regional
director does not require any additional information with respect to
the notice, the appropriate regional director will provide written
acknowledgment that the FDIC has received the notice. The
acknowledgment will indicate the date after which the bank or its
subsidiary may commence the activity or continue
[[Page 48024]]
the activity as proposed if the FDIC has not withdrawn the notice from
expedited processing in the interim in accordance with paragraph
(a)(2). This period will normally be 30 days, subject to extension for
an additional 15 days upon written notice to the bank. If the
appropriate regional director requests additional information, the
written acknowledgment will be provided to the bank once complete
information has been received.
(2) Removal from expedited processing. Upon prompt written notice
to the insured state bank, the appropriate regional director may remove
the notice from expedited processing because:
(i) The notice presents a significant supervisory concern, policy
issue, or legal issue; or
(ii) Other good cause exists for removal.
(b) Standard processing for applications and notices that have been
removed from expedited processing. Where subparts A and B permit an
insured state bank or its subsidiary to commence or continue an
activity after application to the FDIC, or for notices which are not
processed pursuant to the expedited processing procedures, the FDIC
will provide the insured state bank with written notification of the
final action taken. The FDIC will normally review and act on such
applications within 60 days after receipt of a completed application,
subject to extension for an additional 30 days upon written notice to
the bank. Failure of the FDIC to act on an application prior to the
expiration of these periods does not constitute approval of the
application.
Sec. 362.19 Delegations of authority.
The authority to review and act upon applications and notices filed
pursuant to this subpart E and to take any other action authorized by
this subpart E or subparts A and B is delegated to the Director, the
Deputy Director, and, where confirmed in writing by the Director, to an
associate director, and to the appropriate regional director and deputy
regional director.
Subpart F--Applications and Notices; Activities of Insured Savings
Associations
Sec. 362.20 Scope.
This subpart sets out the procedures for complying with the notice
and application requirements for activities and investments of insured
state savings associations and their service corporations under subpart
C. This subpart also sets out the procedures for complying with the
notice requirements for establishing or engaging in new activities
through a subsidiary of an insured savings association under subpart D.
Sec. 362.21 Definitions.
For the purposes of this subpart, the following definitions shall
apply:
(a) Appropriate regional director, appropriate deputy regional
director, and appropriate regional office, respectively, mean the
regional director of DOS, deputy regional director of DOS, and FDIC
regional office which the FDIC designates as follows:
(1) When an institution that is the subject of a notice or
application is not part of a group of related institutions, the
appropriate region for the institution and any individual associated
with the institution is the FDIC region in which the institution or
proposed institution is or will be located; or
(2) When an institution that is the subject of a notice or
application is part of a group of related institutions, the appropriate
region for the institution and any individual associated with the
institution is the FDIC region in which the group's major policy and
decision makers are located, or any other region the FDIC designates on
a case-by-case basis.
(b) Associate director means any associate director of DOS, or in
the event such title becomes obsolete, any official of equivalent
authority within the division.
(c) Deputy Director means the Deputy Director of DOS, or in the
event such title becomes obsolete, any official of equivalent or higher
authority within the division.
(d) Deputy regional director means any deputy regional director of
DOS, or in the event such title becomes obsolete, any official of
equivalent authority within the same FDIC region of DOS.
(e) DOS means the Division of Supervision, or in the event the
Division of Supervision is reorganized, such successor division.
(f) Director means the Director of DOS, or in the event such title
becomes obsolete, any official of equivalent or higher authority within
the division.
(g) Regional director means any regional director in DOS, or in the
event such title becomes obsolete, any official of equivalent authority
within the division.
Sec. 362.22 Filing procedures.
(a) Where to file. All applications and notices required by subpart
C or subpart D of this part are to be in writing and filed with the
appropriate regional director .
(b) Contents of filing--(1) Filings generally. All applications or
notices required by subpart C or subpart D of this part may be in
letter form and shall contain the following information:
(i) A brief description of the activity, the manner in which it
will be conducted, and the expected volume or level of the activity;
(ii) The amount of the savings assocation's existing or proposed
direct or indirect investment in the activity as well as calculations
sufficient to indicate compliance with any specific capital ratio or
investment percentage limitation detailed in subparts C or D;
(iii) A copy of the savings association's business plan regarding
the conduct of the activity;
(iv) A citation to the state statutory or regulatory authority for
the conduct of the activity;
(v) A copy of the order or other document from the appropriate
regulatory authority granting approval for the bank to conduct the
activity if such approval is necessary and has already been granted;
(vi) A brief description of the savings association's policy and
practice with regard to any anticipated involvement in the activity by
a director, executive office or principal shareholder of the savings
association or any related interest of such a person; and
(vii) A description of the savings association's expertise in the
activity.
(2) Copy of application or notice filed with another agency. If an
insured savings association has filed an application or notice with
another federal or state regulatory authority which contains all of the
information required by paragraph (b)(1) or (b)(2) of this section, the
insured savings association may submit a copy to the FDIC in lieu of a
separate filing.
(3) Additional information. The appropriate regional director may
request additional information.
Sec. 362.23 Processing.
(a) Expedited processing.--(1) Notices. Where subparts C and D
permit an insured savings association, service corporation, or
subsidiary to commence or continue an activity after notice to the
FDIC, and the appropriate regional director does not require any
additional information with respect to the notice, the appropriate
regional director will provide written acknowledgment that the FDIC has
received the notice. The acknowledgment will indicate the date after
which the savings association, service corporation, or subsidiary may
commence the activity or continue the activity as proposed if the FDIC
has not withdrawn the notice from expedited
[[Page 48025]]
processing in the interim in accordance with paragraph (d)(2). This
period will normally be 30 days, subject to extension for an additional
15 days upon written notice to the bank. If the appropriate regional
director requests additional information, the written acknowledgment
will be provided to the savings association once complete information
has been received.
(2) Removal from expedited processing. Upon prompt written notice
to the insured savings association, the appropriate regional director
may remove the notice from expedited processing because:
(i) The notice presents a significant supervisory concern, policy
issue, or legal issue; or
(ii) Other good cause exists for removal.
(b) Standard processing for applications, and notices removed from
expedited processing. Where subpart C and D permit an insured savings
association, service corporation, or subsidiary to commence or continue
an activity after application to the FDIC, or for notices which are not
processed pursuant to the expedited processing procedures, the FDIC
will provide the insured savings association with written notification
of the final action taken. The FDIC will normally review and act on
such applications within 60 days after receipt of a completed
application, subject to extension for an additional 30 days upon
written notice to the bank. Failure of the FDIC to act on an
application prior to the expiration of these periods does not
constitute approval of the application.
(c) Notices of activities in excess of an amount permissible for a
federal savings association; subsidiary notices. For notices required
by Sec. 362.10(b)(3) or Sec. 362.14, the appropriate regional director
will provide written acknowledgement that the FDIC has received the
notice. The notice will be reviewed at the appropriate regional office,
which will take such action as it deems necessary and appropriate.
Sec. 362.24 Delegations of authority.
The authority to review and act upon applications and notices filed
pursuant to this subpart F and to take any other action authorized by
this subpart F or subparts C and D is delegated to the Director, the
Deputy Director, and, where confirmed in writing by the Director, to an
associate director, and to the appropriate regional director and deputy
regional director.
Dated at Washington, D.C. this 26th day of August, 1997.
By order of the Board of Directors.
Federal Deposit Insurance Corporation
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 97-23881 Filed 9-11-97; 8:45 am]
BILLING CODE 6714-01-p
