[Federal Register Volume 61, Number 174 (Friday, September 6, 1996)]
[Proposed Rules]
[Pages 47242-47282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-22402]
[[Page 47241]]
_______________________________________________________________________
Part II
Federal Reserve System
_______________________________________________________________________
12 CFR Part 225
Bank Holding Companies and Change in Bank Control (Regulation Y);
Proposed Rule
Federal Register / Vol. 61, No. 174 / Friday, September 6, 1996 /
Proposed Rules
[[Page 47242]]
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0935]
Bank Holding Companies and Change in Bank Control (Regulation Y)
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking; request for comments.
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SUMMARY: The Board is proposing a comprehensive amendment of Regulation
Y that is intended to improve the competitiveness of bank holding
companies by eliminating unnecessary regulatory burden and operating
restrictions, and by streamlining the application/notice process. Among
other proposed revisions, the Board proposes to establish a streamlined
and expedited review process for bank and nonbanking proposals by well-
run bank holding companies. The Board also proposes to reorganize and
expand the regulatory list of nonbanking activities and to remove a
number of restrictions on those activities that are outmoded, have been
superseded by Board order or do not apply to insured banks that conduct
the same activity. In addition, the Board proposes several amendments
to the tying restrictions, including removal of the regulatory
extension of those restrictions to bank holding companies and their
nonbank subsidiaries. A number of other changes have also been proposed
to eliminate unnecessary regulatory burden and to streamline and
modernize Regulation Y, including changes to the provisions
implementing the Change in Bank Control Act and section 914 of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
DATES: Comments must be received by October 31, 1996.
ADDRESSES: Comments should refer to Docket No. R-0935, and may be
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551. Comments may also be delivered to Room B-2222 of
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, and to
the guard station in the Eccles Building courtyard on 20th Street, NW.
(between Constitution Avenue and C Street) at any time. Comments
received will be available for inspection in room MP-500 of the Martin
Building between 9 a.m. and 5 p.m. weekdays, except as provided in
section 261.8(a) of the Board's Rules Regarding Availability of
Information.
FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General
Counsel (202/452-3583), Gregory A. Baer, Managing Senior Counsel (202/
452-3236), Diane A. Koonjy, Senior Attorney (202/452-3274), Lisa R.
Chavarria, Attorney (202/452-3904), Satish M. Kini, Attorney (202/452-
3818), Legal Division; Molly Wassom, Assistant Director (202/452-2305),
Sid Sussan, Assistant Director (202/452-2638), Division of Banking
Supervision and Regulation, Board of Governors of the Federal Reserve
System. For the hearing impaired only, Telecommunication Device for the
Deaf (TDD), Dorothea Thompson (202/452-3544), Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC.
SUPPLEMENTARY INFORMATION:
Outline: The discussion of proposed revisions to Regulation Y is
divided into the following sections:
A. Summary of principles applied in reviewing and revising
Regulation Y.
B. Summary of proposed revisions.
C. Explanation of proposed changes to the procedures governing bank
acquisitions.
D. Explanation of proposed changes to the nonbanking provisions.
E. Explanation of restrictions removed from permissible nonbanking
activities.
F. Explanation of changes to tying rules.
G. Explanation of other changes.
Discussion
A. Summary of the Principles Applied in Reviewing and Revising
Regulation Y
Regulation Y is the regulation the Board has adopted to implement
the requirements of the Bank Holding Company Act (the BHC Act), the
Change in Bank Control Act and provisions of the Federal Deposit
Insurance Act. As required by section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994, the Board has
conducted a comprehensive review of Regulation Y to improve efficiency,
reduce unnecessary costs, and eliminate unwarranted constraints on
credit availability while faithfully implementing statutory
requirements. This review included discussions with staff of the other
federal banking agencies regarding the implementation of common
statutory provisions.
Based on this review, the Board proposes a comprehensive revision
to Regulation Y that is intended to improve the competitiveness of bank
holding companies by eliminating unnecessary regulatory burden and
operating restrictions, and by streamlining and expediting the
application/notice process. The revisions proposed by the Board to
Regulation Y are summarized in the following sections and explained
more fully in sections C through G.
The Board invites comment on all aspects of its proposed revisions.
In addition, the Board invites other suggestions on revisions to
Regulation Y that would eliminate unnecessary burden while adhering to
applicable statutory requirements and maintaining safety and soundness.
Approval Process
Much of Regulation Y is comprised of procedures for evaluating
applications and notices. A number of revisions are proposed to these
procedures with the goal of eliminating, to the fullest extent
permitted under current law, any unnecessary burden and paperwork.
Two important principles underlie the revisions that are proposed
to the approval process for bank holding companies. First, the new
regulation would establish objective and verifiable measures for each
of the criteria set forth in the BHC Act and an expedited and nearly
red-tape free approval process for those bank holding companies that
meet these measures. Under this new procedure, a bank holding company
that meets these objective measures should be able to expect little
burden or delay from the approval process unless special circumstances
demonstrate that a closer review is warranted. Second, the application/
notice process should focus on an analysis of the effects of the
specific proposal and should not normally become a vehicle for
comprehensively evaluating and addressing supervisory and compliance
issues at the applicant organization that can more effectively be
addressed in the supervisory process.
Importantly, these principles reflect a change in approach to the
application/notice process, both procedural and substantive. They
recognize that the approval process is most effective as a gateway for
identifying (and rejecting) organizations that do not have the
resources or expertise to make an acquisition or conduct a particular
activity; and that the on-site inspection and supervisory process is
the most effective way to determine if a particular organization is in
fact managing its subsidiaries or conducting an approved activity in a
safe and sound manner and operating within its authority.
Based on these principles, a new streamlined approval procedure is
proposed that would permit well-rated and well-run bank holding
companies to acquire banks and nonbanking
[[Page 47243]]
companies and to engage in permissible nonbanking activities de novo
with the filing of a simple, short letter and only 15 days advance
notice. A qualifying bank holding company would be required to provide
only minimal information in connection with a notice (basically a brief
description of the proposal and certification that the financial and
other criteria are met). Staff analysis of these proposals would be
focused on verifying that the qualifying criteria are in fact met. As
explained in more detail below, a qualifying bank holding company could
make bank and nonbanking acquisitions using this streamlined procedure
totaling up to 35 percent of the risk-weighted assets of the acquiring
bank holding company during any 12 month period. This limitation on the
size of acquisitions would not apply to the acquisition of banks by
small qualifying bank holding companies so long as the pro forma
consolidated assets of the holding company do not exceed $300 million.
All bank acquisition proposals that exceed 35 percent of assets (or
cause a small bank holding company to exceed $300 million in assets) or
that involve bank holding companies that otherwise do not meet the
qualifying criteria would be reviewed under the Board's current 30/60-
day procedure.
Approximately 85 percent of the bank holding companies with
consolidated assets in excess of $100 million would qualify generally
for this expedited procedure and more than 50 percent of the
applications/notices reviewed by the System during 1995 would have
qualified for this new streamlined procedure. Adoption of this
procedure would substantially reduce the paperwork that must be filed
by a qualifying bank holding company, the staff analysis of proposals
by these well-run organizations, and the time required to secure System
action on these proposals. In addition to reducing burden on qualifying
applicants, adoption of this new procedure should free up System
resources to focus on cases raising more complex and difficult issues,
thereby improving the processing time associated with these cases.
The new proposed procedure follows the approach taken in the
regulatory relief bills currently pending before Congress but cannot
reach the level of efficiency in the regulatory relief bills without a
change in the terms of the BHC Act. For example, the BHC Act currently
requires that a bank holding company obtain Board approval prior to
acquiring an additional bank or commencing a nonbanking activity. Thus,
the Board may not eliminate the prior approval process for bank or
nonbanking proposals and may not adopt a post-consummation notification
process in place of a pre-consummation approval process. However, the
abbreviated prior notice procedure that is proposed here would satisfy
the BHC Act by permitting consummation of a bank or nonbanking proposal
at the expiration of a brief notice period. The proposed regulatory
relief bill would eliminate the prior approval requirement altogether
for certain classes of nonbanking proposals and permit post-
consummation notice.1
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\1\ The regulatory relief bills in both the House and the Senate
would allow well-capitalized and well-managed banks, without any
prior notice, to engage de novo in nonbanking activities that have
been approved by the Board by regulation. These companies would also
be permitted, after providing the Board with 12 to 15 business days'
prior notice, to acquire any bank or any nonbanking company engaged
in a permissible activity so long as the bank or nonbanking company
represents less than 10 percent of the assets of the acquiring bank
holding company.
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As part of the review of the procedures governing bank acquisition
proposals, the Board's policies governing public comment have been
reviewed to assure that a meaningful opportunity for public comment is
provided while at the same time providing for the efficient and timely
processing of applications and notices. As discussed more fully below,
the proposed revisions would retain the Board's self-imposed 30-day
public comment period for bank acquisition proposals, with publication
of these proposals required in the Federal Register and local
newspapers. The proposal recommends, however, that the System limit the
exercise of its discretion to consider untimely comments and adhere
strictly to the Board's existing rule that only comments received
during the public comment period be considered, absent a showing of
extraordinary circumstances.
Other revisions have been proposed to the various procedures in
Regulation Y to eliminate unnecessary burden and to make the
application/notice procedure more focused and efficient. For example,
the proposal would streamline the procedure for a bank holding company
to obtain a waiver for transactions that are in substance a bank-to-
bank merger subject to review by another federal banking agency, and
would extend this waiver procedure to internal corporate
reorganizations. In addition, the proposal would eliminate the 4-week
pre-acceptance review period for bank acquisition proposals, thereby
allowing prompt acceptance and review of bank acquisition proposals.
These suggestions are outlined below and explained in detail in later
sections of this document.
Nonbanking Activities
Regulation Y also addresses the permissible nonbanking activities
of bank holding companies. As noted above, a streamlined procedure is
suggested for proposals by bank holding companies to acquire nonbanking
companies and to engage de novo in permissible nonbanking activities.
In addition, the ``laundry list'' of nonbanking activities that the
Board has defined by regulation as ``closely related to banking,'' and
hence permissible, has been revised and reorganized, and a number of
other changes suggested to improve the ability of bank holding
companies to engage in nonbanking activities.
Several principles guided the suggested reforms in the nonbanking
area. Most important is the premise that bank holding companies should
be permitted to conduct nonbanking activities to the fullest extent
permissible under the BHC Act and that the regulation should be
sufficiently flexible to allow for industry changes in permissible
activities without creating unnecessary additional filing burdens.
Thus, definitions of permissible activities have been broadened and
updated, and new procedures are proposed to make it easier for any
interested person to obtain a Board decision regarding whether a new
activity is permissible. The proposed revisions anticipate that the
Board would be pro-active in authorizing new activities, especially as
new activities are permitted for banks or as new financial activities
develop, and recognize that, under the BHC Act, bank holding companies
are authorized to conduct activities beyond the scope of activities
that insured banks may conduct.
A comprehensive revision of the restrictions that govern the
nonbanking activities of bank holding companies has also been
conducted. This review drew on the experience that the System has
developed over the past two decades in authorizing and supervising
nonbanking activities and reflects removal of a significant number of
restrictions that the System's experience has found are not necessary
or are outdated. A basic tenet of the revisions proposed in this area
is that a bank holding company should not be subject to supervisory
restrictions on the conduct of a specific activity that would not apply
to an insured depository institution conducting the same activity.
Another precept guiding this review is that supervisory principles
governing
[[Page 47244]]
the conduct of an activity should be clearly explained, adjusted to
take account of market developments and the System's experience in
supervising the activity, and, wherever appropriate, uniformly applied
to insured depository institutions and their affiliates on an
interagency basis.
Accordingly, the proposed revisions eliminate restrictions on the
conduct of specific activities that would not apply to insured
depository institutions that conduct the same activity. Also eliminated
were any restrictions that are outmoded or that the Board has already
superseded by order. It is anticipated that, unless the Board
determines otherwise with regard to a specific activity or company,
these restrictions would be removed at the time of final adoption of
the proposed regulation for all bank holding companies with authority
to conduct the relevant activity, without requiring that individual
bank holding companies obtain specific relief or additional consent.
In addition, the revisions contemplate that the Board, in
conjunction with the other banking agencies wherever appropriate, will
develop supervisory policy statements that govern the conduct of
certain activities. A supervisory policy statement has the advantage of
being more easily adjusted to reflect market developments and provides
a vehicle for more comprehensive guidance on the conduct of a specific
activity than individual regulatory restrictions.
The Board and the other agencies have made effective use of
supervisory policy statements in other areas, most notably in providing
guidance on the sale of securities and other nondeposit investment
products on bank premises. System experience has been that bank holding
companies have taken these statements seriously. Accordingly, the
revisions anticipate that several restrictions that currently are
contained in Regulation Y would be moved to supervisory policy
statements that would be developed at a later date.
The proposed regulation continues to anticipate that the
marketplace for already approved activities will develop and evolve.
Bank holding companies may continue to participate in these market
developments in permissible activities without seeking additional Board
approval. In the past, there has on occasion been uncertainty regarding
whether a particular development or variation in an activity represents
a fundamental change that redefines the activity into a new activity
for which an additional approval would be required under the BHC Act.
To address this, a new procedure has been proposed outside of the
application/notice process through which a bank holding company may, on
an expedited basis, obtain Board confirmation that a given development
or variation in an activity is permissible. These interpretations of
the scope of permissible activities would be published and would allow
all bank holding companies to participate in the development or
variation without additional approval. This procedure would eliminate a
number of notices filed by bank holding companies that are uncertain of
the scope of permissible nonbanking activities.
Tying Restrictions
A final principle underlying the proposal is that each restriction
in Regulation Y should be reevaluated in light of developments in the
marketplace in which nonbanking subsidiaries of bank holding companies
operate. Application of this principle warrants significant changes to
the Board's anti-tying regulation, which the Board already has revised
substantially over the past two years. Section 106 of the Bank Holding
Company Act Amendments of 1970 restricts tying arrangements by banks on
the grounds that the unique role of banks in the economy, in particular
their power to extend credit, would allow them to gain a competitive
advantage in other markets. In 1971, the Board by regulation extended
the coverage of these anti-tying rules to bank holding companies and
their nonbank subsidiaries. However, the Board's experience has shown
that these nonbanking companies generally operate in markets that are
notable for their competitive vitality. Accordingly, the proposed
revisions eliminate the Board's regulatory extension of the anti-tying
statute, leaving restriction of anti-competitive behavior by bank
holding companies and their nonbank subsidiaries to the same general
antitrust laws that govern their competitors.
Other Changes
As explained in more detail below, these various principles have
also led to a number of other suggested reforms to Regulation Y. In
addition to proposing the suggestions discussed below, the Board
invites suggestions on other revisions to Regulation Y that would
further eliminate unnecessary regulatory burden and paperwork.
B. Summary of Proposed Revisions
The Board seeks public comment on proposals to amend Regulation Y
to:
Bank Acquisition Proposals
Establish a streamlined 15-day notice procedure for
proposals by well-capitalized and well-managed bank holding
companies with ``satisfactory'' or better CRA performance records to
acquire banks, within limits (this procedure would currently be
available to approximately 85 percent of the bank holding companies
with assets over $100 million and would have applied to
approximately 50 percent of the applications/notices submitted to
the System last year);
Eliminate the pre-acceptance period for all filings to
acquire a bank (thereby expediting processing of bank acquisition
proposals by as much as 28 days);
Provide for publication of newspaper and Federal
Register notices regarding bank acquisition proposals up to 30 days
before a filing for approval of the transaction is made;
Adhere strictly to the Board's policies governing
acceptance of public comments to require all comments on bank
acquisitions to be submitted during the public comment period;
2
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\2\ As part of its review of Regulation Y, the Board has
delegated additional authority to the Reserve Banks to act on
certain classes of protested bank acquisition proposals.
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Streamline the current waiver procedure for
transactions that are in substance bank-to-bank mergers and expand
the procedure to apply to internal corporate reorganizations by
registered bank holding companies;
Proposals Involving Nonbanking Activities and Acquisitions
Establish a streamlined 15-day notice procedure for
proposals by well-capitalized and well-managed bank holding
companies to engage de novo in permissible nonbanking activities and
to acquire, within limits, nonbanking companies engaged in any
activity permitted by regulation or permitted for that bank holding
company by order;
Revise and reorganize the laundry list of permissible
nonbanking activities into fourteen categories of functionally
related activities and permit bank holding companies to obtain
approval at one time to engage in all activities on the list or
within the same functional category;
Broaden the scope and description of activities,
including in particular, derivatives trading and investment
activities, investment advisory activities, and management
consulting activities;
Expand data processing and management consulting
activities to include, as an incidental activity, deriving up to 30
percent of total revenue from nonfinancial data processing and
management consulting activities;
Add to the regulatory laundry list of permissible
nonbanking activities several nonbanking activities previously
approved by the Board by order, including private placement of
securities, acting as riskless principal in the sale of securities,
acting as a futures commission merchant in the sale of nonfinancial
futures and options on futures, providing career counseling services
to employees in the financial industry, and providing asset
management services;
Remove from the regulation restrictions on the conduct
of permissible nonbanking
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activities that have been superseded by Board order, are unnecessary
or would not apply to the conduct by an insured bank of the same
activity, including restrictions on the conduct of leasing
activities, private placement and riskless principal activities,
derivatives investment and advisory activities, futures clearing and
execution activities, foreign exchange activities, the sale of
payment instruments, tax planning and preparation activities, and
consumer counseling activities;
Eliminate the one year time limit on System approvals
to engage de novo in permissible nonbanking activities for bank
holding companies that maintain adequate capital and satisfactory
examination ratings (this would allow a bank holding company to seek
a single approval to engage in all permissible nonbanking
activities);
Establish a streamlined procedure outside the
application process for bank holding companies and others to obtain
an advisory opinion from the Board about the scope of permissible
activities;
Revise the Board's policy statement governing the
investment advisory activities of bank holding companies to remove
several restrictions that currently apply to bank holding companies
that advise mutual funds;
Provide for publication of Federal Register notices
regarding nonbanking proposals up to 30 days before a filing for
Board approval is made;
Allow bank holding companies with approval to engage in
any lending activity broader authority to acquire, in the ordinary
course of business and without special Board approval, assets from
third parties engaged in the same activity;
Revision of Tying Rules
Remove Board-imposed tying restrictions that limit the
ability of non-bank affiliates of a holding company to package their
products, create exceptions from the statutory restriction on bank
tying arrangements to allow banks greater flexibility to package
products with their affiliates, and clarify that the tying
restrictions do not apply abroad;
Bank Holding Company Formations
Reduce the threshold qualifications and information
requirements for the existing abbreviated procedure for bank holding
company formations by current shareholders of a bank;
Change in Bank Control Act Filings
Eliminate the current requirement that a person that
has already received Board approval under the Change in Bank Control
Act obtain additional approvals to acquire additional shares of the
same bank or bank holding company;
Add a definition of the term acting in concert and
establish presumptions to resolve questions about when a group is
acting in concert;
Allow after-the-fact filings when a CIBC Act filing
requirement is triggered by the action of an unrelated third party;
Permit public notice of CIBC Act filings to be
published 30 days in advance of filing notice with the System;
Other Changes
Modify requirements for filing prior notice of changes
in directors and senior executive officers of state member banks and
bank holding companies and clarify the appeals process for rejected
notices;
Establish a regulatory presumption that exempts
testamentary trusts from the definition of company in the BHC Act;
Reduce from 30 to 15 the number of days notice required
before a large stock redemption by a bank holding company, permit
bank holding companies to take account of intervening new issues of
stock in computing when a stock redemption notice must be filed, and
allow small bank holding companies to make stock redemptions without
notice if the holding company meets certain leverage and capital
requirements applicable to small bank holding companies;
Update and revise the Board's existing policy statement
on small one-bank holding companies to reduce burden in the approval
process for proposals to form small bank holding companies and by
small bank holding companies to acquire additional banks; and
Implement current Board decisions defining the terms
class of voting securities and immediate family.
C. Explanation of Proposed Changes to the Procedures Governing Bank
Acquisitions
1. Streamlined Procedure for Well-Run Bank Holding Companies
The proposed revision would establish a 15-day notice procedure for
acting on bank acquisition proposals by well-run bank holding companies
if the following criteria are met:
Well-capitalized. Both before and immediately following
the transaction, the bank holding company, its lead insured
depository institution and insured depository institutions
controlling at least 80 percent of the total depository institution
assets of the bank holding company are well-capitalized;3
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\3\ A small bank holding company--defined as any bank holding
company with assets under $150 million--would be required to meet
certain debt-to-equity levels to qualify for this streamlined
procedure.
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Well-managed. At the time of the transaction, the bank
holding company, its lead insured depository institution and insured
depository institutions controlling at least 80 percent of the total
depository institution assets of the bank holding company are well-
managed (i.e., have received one of the two highest composite
ratings at the most recent examination, a ``satisfactory''
management rating and at least a ``satisfactory'' compliance
rating);
Satisfactory CRA rating. At the time of the
transaction, the lead insured depository institution and insured
depository institutions controlling at least 80 percent of the total
insured depository institution assets of the acquiring bank holding
company have a ``satisfactory'' or better performance rating at the
most recent CRA examination;
Competition. In every relevant banking market as
defined by the Board, the market share for deposits controlled by
the acquiring bank holding company following the transaction is
below 35 percent and the proposal conforms with the Department of
Justice Horizontal Merger Guidelines as applied to banking
organizations, in both cases relying on thrift weighting at 50
percent and without reliance on divestitures;
Size of acquisition. During any 12 month period, the
book value of the aggregate assets acquired by the bank holding
company, combining all acquisitions under the expedited procedure
for bank acquisitions with acquisitions under the expedited
procedure for nonbanking proposals, does not exceed 35 percent of
the consolidated total risk-weighted assets of the acquiring bank
holding company as measured at the beginning of the 12 month period.
This limitation would not apply to bank acquisitions by qualifying
bank holding companies that have assets of less than $300 million on
a pro forma basis;
Interstate. Approval of the proposal is not barred
under the provisions governing interstate acquisitions (e.g., meets
relevant deposit concentration limits, State age requirements, and
other applicable requirements);
Consolidated Home Country Supervision. The acquiring
bank holding company meets the requirement for consolidated home
country supervision contained in the BHC Act; and
No Supervisory Actions. At the time of the transaction,
no significant supervisory action is pending against the acquiring
bank holding company.
As of March 31, 1996, approximately 85 percent of the bank holding
companies with assets greater than $100 million would qualify for these
procedures. More than 50 percent of the applications/notices submitted
by bank holding companies during 1995 would have qualified for this
streamlined procedure and reduced filing requirement.
A bank holding company that meets these qualifications would be
able to acquire a bank or bank holding company by providing the
appropriate Reserve Bank with 15-day prior written notice of the
transaction. Under this procedure, a bank holding company would be
required to provide only limited information. The information
requirements are specified in the proposed regulation and have been
reduced to providing certification that the bank holding company and
the transaction meet the requirements for the procedure, a description
of the transaction and the parties, and certain pro forma information
regarding the financial and competitive effects of the transaction. The
bank holding company must also provide evidence that public notice of
the transaction has been given sufficiently in advance to permit
interested members of the public 30
[[Page 47246]]
days to submit their views regarding the proposal to the Board.
An identical expedited procedure is proposed for nonbanking
proposals by well-capitalized and well-managed bank holding companies
where the bank holding company proposes to engage de novo or to acquire
a company engaged in a nonbanking activity that the Board has approved
by regulation or, with limited exceptions designated by the Board, by
order. The aggregate size limitation discussed above (i.e., an
aggregate limit of 35 percent of assets during any 12 month period for
all acquisitions under the bank and nonbanking expedited procedures)
would limit the total amount of banking and nonbanking acquisitions
that a bank holding company could make during any 12 month period under
the streamlined notice procedures. Finally, because the CRA, interstate
banking, and home country supervision requirements do not apply to
transactions under section 4 of the BHC Act, no criteria would be
established in these areas for nonbanking proposals under the expedited
procedure.4
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\4\ Consistent with Board precedent, the CRA criterion would
apply to proposals by bank holding companies to acquire savings
associations under section 4.
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The proposed procedure would permit the Board or the Reserve Bank
to notify a bank holding company for any reason that this streamlined
notice procedure is not available and that a full application--subject
to the current application procedure--would be required. This provision
provides a mechanism to address situations in which information
obtained either in an examination or outside the examination process
indicates that a more thorough review of the organization's ability to
meet the statutory factors is warranted. For example, the Board could
follow the normal 30/60-day procedure in cases that are subject to a
substantive protest, that raise issues regarding the funding of a
transaction or that raise concerns about the ability of the applicant
adequately to manage the risks associated with a particular activity.
It is anticipated that this mechanism would be used only sparingly and
in extraordinary situations.
A company or proposal that does not qualify for the proposed
streamlined procedure would follow the current application process,
which provides for Reserve Bank action within 30 days of filing and
Board action on more complex cases within 60 days of filing. As
explained below, a number of steps are proposed to reduce the burden of
the current application process. In the event that, during the review
of a transaction under the expedited proposal, the Board determines
that a bank holding company must follow the current approval procedure
rather than the expedited procedure, the proposed regulation
contemplates that the notice filed by the holding company under the
expedited procedure would be accepted under the normal procedure and
that the normal procedure will be deemed to have begun at the time that
the expedited notice was filed.
In the case of the acquisition of a bank, the BHC Act requires that
the primary supervisor for the bank to be acquired be given 30 calendar
days in which to submit comments on the transaction. In practice, the
primary supervisor generally allows the notice period to expire without
filing comments. Moreover, financial, managerial, legal and safety and
soundness concerns that are known to the primary bank supervisor are
generally also known by the Board because of ongoing sharing of
supervisory information. Accordingly, it usually serves no regulatory
purpose to allow this 30-day notice period to serve as a constraint on
the Board's action on a proposal.
Under the proposed procedure, the Reserve Bank would provide notice
of a proposal to the primary supervisor. The proposed procedure
contemplates that the System will act on any proposal within 15 days of
receiving a filing regarding the proposal even though the period for
obtaining comments from the primary supervisor has not expired. The new
procedure provides, however, that the System's action is subject to
revocation if the primary supervisor objects to a transaction within
the relevant notice period. Because bank acquisition proposals may not
be consummated for 15 days after System action--which is the post-
approval waiting period established by statute to allow the Department
of Justice to review a transaction--it is expected that the notice
period for the primary supervisor will expire prior to consummation of
a bank acquisition proposal.
The Board seeks comment on all aspects of this proposed procedure,
including comment on whether the procedure is workable and likely to
reduce burden and whether the proposed regulatory criteria are
appropriate. The Board intends that the proposed expedited procedure
apply to ``well-run'' bank holding companies, whether domestic or
foreign, large or small. The Board seeks comment on whether the
criteria proposed are appropriately defined to achieve this result. In
this regard, the Board has already proposed an adjustment to the
qualifying criteria for small bank holding companies (defined as bank
holding companies with total assets under $300 million).
2. Elimination of the Pre-Acceptance Period for Bank Acquisition
Proposals
Currently, Regulation Y provides a period prior to acceptance of a
filing involving a bank acquisition proposal during which the
appropriate Reserve Bank reviews the informational sufficiency of the
filing and may ask for additional information. An application is
accepted for processing once the information requested during this pre-
acceptance period is provided. A similar pre-acceptance period for
nonbanking proposals was eliminated by the Board in 1993 and the
experience with nonbanking proposals since that time indicates that the
pre-acceptance period is not necessary.
Accordingly, the proposed revision to Regulation Y would eliminate
the pre-acceptance period for all bank acquisition proposals. This
change would shorten by as much as 28 days the period that a proposal
is within the System, and would begin the processing of all
applications involving a bank acquisition--both under the streamlined
and standard procedure--on the date of submission of the required
filing. The proposed revision to Regulation Y would provide that,
within 7 calendar days of receipt of a notice or application to acquire
a bank, the appropriate Reserve Bank must either accept the filing as
of the date of receipt or return the filing as informationally
incomplete. It is expected that a filing that contains the information
specified in the regulation or in the appropriate Federal Reserve form
will, except in extraordinary circumstances, be accepted for action.
The draft regulation would allow the Board or the Reserve Bank to
request any additional information at any time during the period for
review of the proposal, although one of the premises underlying the
expedited procedure is that an analysis of transactions that qualify
for expedited processing will be limited and information beyond the
information stated in the regulation will only be requested for those
proposals in special circumstances.
3. Timing of Publication
In the case of a bank expansion proposal, the Board's rules require
that notice be published by the applicant in local newspapers and by
the Board in the Federal Register. The Board initiated the newspaper
publication
[[Page 47247]]
requirement for bank acquisition proposals in order to solicit
information from the local community regarding the effect of a proposal
on the convenience and needs of the local community, and retained the
requirement after the enactment of the Community Reinvestment Act.
Public notice of nonbanking proposals is published only in the Federal
Register.
Currently, the Board's rules require that newspaper notice of a
proposed bank acquisition be published in a newspaper of general
circulation no more than 7 days before or 7 days after the appropriate
filing is made with the Reserve Bank. The Board publishes notice in the
Federal Register of both bank acquisition proposals and nonbanking
proposals upon receipt of a filing. In over 90 percent of the bank
acquisition proposals filed with the System, no public comments are
submitted. Consequently, the current publication schedule often results
in substantial delay in action on a proposal in which no comments are
submitted. For example, because the public comment period is typically
30 days, this publication schedule delays action on some proposals
until up to 37 days after the proposal has been filed to allow for
Federal Register publication.
Moreover, public announcement of a proposed bank acquisition
usually well pre-dates the newspaper and Federal Register publication.
This has led to confusion on the part of commenters about when a timely
comment may be filed with the System.
To avoid this delay and confusion, the regulation would provide for
newspaper publication of bank acquisition proposals up to 30 days prior
to submission of a filing for System approval, which is closer to the
time of the actual public announcement of the proposal. In addition,
the applicant would be permitted to request that the Board publish
notice of a proposal in the Federal Register up to 30 days before a
filing is made with the System. This change would apply to all bank and
nonbanking proposals, including cases that qualify for the new
streamlined procedures outlined above, and would allow more efficient
processing of applications/notices while permitting the public a full
comment period. In the case of proposals that qualify for the new
streamlined procedure, advance publication of notice is essential to
permit System action within 15 days following the filing.
4. Revision of Public Comment Procedures for Bank Acquisitions
As just noted, since 1960, the Board has provided by regulation for
the publication of bank acquisition proposals. The Board's rules
currently provide that all comments from the public regarding a
proposed transaction must be received prior to the close of the public
comment period. However, the rules also provide that the Board may, in
its discretion, consider any untimely comment.
Since adoption of its publication rule, the Board has liberally
used its discretion to consider all comments, in particular,
supplemental comments filed by a commenter that has filed an initial
timely comment, to the fullest extent practicable without delaying
action on a proposal beyond the self-imposed 60-day processing
schedule. There has been growing concern that this practice of
accepting and considering public comments submitted after the close of
the public comment period has encouraged some commenters to file
comments after the close of the comment period, and other commenters to
file cursory comments during the public comment period while submitting
numerous and voluminous comments after the close of the comment period,
sometimes as late as the day of the Board's consideration of the case.
The Board proposes to retain its current practice of requiring
public notice of bank acquisition proposals and of providing commenters
at least 30 days in which to develop and submit comments on bank
acquisitions under the BHC Act. Similarly, public notice would continue
to be given of all nonbanking proposals, with the public provided at
least 14 days to comment on nonbanking transactions.
The Board also proposes, however, to adhere more strictly to its
current rules, and--for both bank and nonbanking proposals--no longer
to consider any comments submitted after the close of the comment
period, including supplemental comments filed after the close of the
comment period by a commenter that had filed initial comments on a
timely basis, except in extraordinary circumstances in which the
commenter provides compelling evidence that it could not have submitted
all of its comments in a timely fashion.5
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\5\ As part of its review of its policies and procedures
governing applications/notices, the Board has delegated additional
authority to the Reserve Banks to act on cases involving protests
that raise individual consumer complaints (such as denial of an
individual loan), allegations for which the commenter provides no
substantiation, and cases involving an assertion of violation of a
law where a court of the agency responsible for enforcing the
specific law has not made a determination that the law was violated
and the Board has determined the law is not within the Board's
jurisdiction to interpret and enforce (such as State laws preserving
the rights of minority shareholders and federal equal employment
laws). In each of these areas, the Reserve Bank would be required to
review the performance record of the applicant and could act only if
the CRA, managerial and other statutory factors supported approval.
The Board's Inspector General endorsed this change in procedure
based on a review of the Board's application process.
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5. Streamlined Waiver Process for Proposals Involving Bank Mergers
The Board's current regulation permits bank holding companies to
seek a waiver of the application filing requirement under the BHC Act
for transactions that involve the acquisition of stock of a bank for an
instant in time as part of a bank-to-bank merger. All of these
transactions are subject to review by a federal banking agency under
the Bank Merger Act, which requires review of the financial,
managerial, competitive, convenience and needs and CRA effects of the
bank merger. The Board established this waiver process to eliminate
redundant review of these transactions by multiple federal banking
agencies. The Board retained jurisdiction over these transactions and a
modest review process because some transactions have an effect on the
financial and other resources of the parent bank holding company, which
is not subject to an analysis under the Bank Merger Act.
Under the Board's current waiver process, a bank holding company
must provide 30 days advance notice to the System and file supporting
information. A waiver is automatically granted at the end of that
period unless the Board notifies the bank holding company that a full
application is required. The Board received approximately 110 waiver
requests in 1995.
The Board proposes to streamline the waiver procedure in three
ways. First, the length of the review process for waivers would be
reduced to 10 days from 30 days. Thus, a bank holding company would
receive a waiver for a qualifying transaction if the System does not
notify the bank holding company prior to expiration of a 10-day waiver
review process that a full application is required. Second, the
regulation would be amended to specify the information that must be
provided with a waiver request. That information would be limited to a
copy of the Bank Merger Act filing made with the appropriate federal
banking agency for the banks involved in the merger, and
[[Page 47248]]
a description of the transaction at the bank holding company level,
including the purchase price and the source of funding for the purchase
price.
Third, the proposed regulation would make the waiver process
available to internal reorganizations of bank holding companies, such
as the transfer of banks within a registered bank holding company, the
formation of new intermediate-tier bank holding companies, and the
merger of intermediate-tier bank holding companies. Some of these
transactions are not subject to a review under the Bank Merger Act.
However, all of these transactions involve corporate reorganizations by
registered bank holding companies that have received Board approval to
control and operate the banks involved in the transaction. The Board
has granted waivers for internal reorganizations in previous cases, on
a case-by-case basis.
In all cases in which a waiver is available, the Board would retain
the right to require a full application in individual cases if the
Board determines that circumstances warrant a full Board review and the
Board notifies the bank holding company that a filing is required.
The Board seeks comment on these revisions to the waiver procedure,
including whether the criteria identified in the proposal are adequate
to assure Board review of transactions that involve significant issues
under the standards set forth in the BHC Act.
6. Small Bank Holding Company Policy Statement
In 1984, the Board adopted a policy statement governing the
formation of small one bank holding companies that recognized that
there are public benefits to permitting small bank holding companies
with well capitalized and well managed subsidiary banks to operate with
levels of debt that are somewhat higher than ordinarily permitted for
bank holding companies. The Board proposes to revise and update this
policy statement to reduce the burden on small bank holding companies
of the applications process, especially for less highly leveraged
organizations, and to otherwise remove obsolete language. The revised
language reflects that the policy statement has, for some time, been
applied to small bank holding companies (regardless of the number of
subsidiary banks) otherwise meeting the statement's criteria, and not
just to small one bank holding companies. The statement would also be
revised to clarify that it applies to expansion proposals by small bank
holding companies as well as to small bank holding company formations.
In addition, the statement would be updated to replace outdated
language defining applicable capital levels with the requirement that
all subsidiary banks be well-capitalized. Notifications to form small
bank holding companies over banks that are well managed and in
satisfactory condition, and that present no other issues, will be
eligible for the expedited applications processing procedures if the
pro-forma debt to equity ratio is 1.0:1 or less. The criteria under
which these organizations could pay reasonable corporate dividends have
also been simplified.
Other proposals to form bank holding companies will be subject to a
focused review of the parent-level debt servicing ability or any other
issue presented. It is not expected that these organizations will pay
dividends until their leverage has been reduced to a 1.0:1 level.
The Board requests comment on these proposed revisions and, in
particular, the effect of these revisions on proposals to form small
bank holding companies and by small bank holding companies to acquire
additional banks.
D. Explanation of Proposed Changes to the Nonbanking Provisions
1. General Review and Updating of Nonbanking Activities
The principal authority for bank holding companies to engage in
nonbanking activities is set forth in section 4(c)(8) of the BHC Act.
That section generally provides that a bank holding company may seek
Board approval to engage in, or acquire shares of a company engaged in,
activities that the Board has determined, after notice and opportunity
for hearing, ``to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.'' The statute
provides that the Board may make this determination by order or by
regulation. The Board has to date determined by regulation that 24
activities are ``closely related to banking'' and has determined by
individual order that a number of additional activities are also
``closely related to banking.''
Once the Board has determined--either by regulation or by order--
that an activity is ``closely related to banking,'' the Board need not
make that determination again in subsequent cases. Review of subsequent
cases is limited to determining whether the conduct of the nonbanking
activity by the applying bank holding company would result in public
benefits that outweigh the potential adverse effects (the ``proper
incident'' test).
The list of nonbanking activities contained in Regulation Y (the
``laundry list'') is intended to serve the purpose of providing a
convenient and detailed list of most of the activities that the Board
has found to be closely related to banking and therefore permissible
for bank holding companies. The Regulation Y laundry list also
designates the activities that may be approved by the Reserve Banks
under delegated authority, although the Board has delegated authority
for Reserve Banks to act on proposals involving a number of activities
approved by order during intervals between modifications of Regulation
Y.
As explained above, the Board proposes to establish an expedited
procedure for ``well-rated'' and ``well-run'' bank holding companies to
obtain System approval to make nonbanking acquisitions that fall within
the size limit noted above and to engage de novo in permissible
nonbanking activities. The Board also proposes to reorganize the list
of permissible nonbanking activities into fourteen categories of
functionally related activities. This reorganization should make the
list easier to understand and make it easier for bank holding companies
to obtain approval to engage in related activities. For example, the
proposed revisions would permit a bank holding company to obtain
approval at one time to engage in all of the activities on the laundry
list or all activities listed in a functional category, or, at the
holding company's choosing, to obtain approval to engage in any
specific activity within a category.
As part of the reorganization of the laundry list, the proposal
amends the list to include nonbanking activities that previously have
been determined by order to be closely related to banking. Among the
activities that would be included are: (1) Riskless principal
transactions; (2) private placement services; (3) foreign exchange
trading for a bank holding company's own account; (4) dealing and
related activities in gold, silver, platinum and palladium; (5)
employee benefits consulting; (6) career counseling services; (7) asset
management, servicing and collection activities; (8) acquiring and
resolving debt-in-default; (9) printing and selling checks; and (10)
providing real-estate settlement services.
The Board also proposes to broaden the scope of permissible
derivatives and foreign exchange activities to assure that bank holding
companies may conduct these activities to the same degree as banks, and
to remove several restrictions on these activities that apply to bank
holding companies but do not
[[Page 47249]]
apply to banks that conduct these activities. In addition, the proposal
eliminates restrictions on a number of activities that no longer appear
to be warranted or that have been superseded.6 In particular, the
proposal revises and updates the description of derivatives activities
and foreign exchange activities to reflect recent Board decisions, and
eliminates any requirement that the Board specifically review and
approve new derivatives instruments or trading on new exchanges.
---------------------------------------------------------------------------
\6\ For example, many of the current restrictions that treat
private placement activities as impermissible underwriting
activities would be eliminated. The Board recently eliminated these
restrictions as they applied to riskless principal transactions.
Restrictions designed to distinguish riskless principal and private
placement activities from securities underwriting activities would
be retained.
---------------------------------------------------------------------------
2. Mechanism for Authorizing New Activities
The proposal would add two provisions to Regulation Y to ease the
burden associated with the authorization of new activities. First, the
proposed regulation would specifically reflect the fact that the Board
may, on its own initiative, begin a proceeding to find that an activity
is permissible for bank holding companies, as the Board did in the case
of many of the earlier nonbanking activities and as it is proposing in
the management consulting, data processing and other areas as part of
this proposal. The Board could amend the laundry list, for example, as
new activities are authorized for banks, as experience with a narrowly
defined activity indicates that bank holding companies should be
permitted to engage in a more broadly defined activity, or as
developments occur in technology or the marketplace for financial
products and services. As part of this proposal, the System would
actively track market developments as well as decisions that authorize
banks to conduct new activities and evaluate adding these activities to
the laundry list even if an individual request has not yet been made to
engage in these activities.
Second, the Board proposes to amend the regulation to establish a
streamlined procedure outside the application process through which a
bank holding company may request an advisory opinion from the Board
that a particular variation on an activity is permissible under an
existing authorization and is not deemed to be a new activity. This
procedure would be particularly helpful in areas such as data
processing, investment advisory, derivatives and foreign exchange
activities where some bank holding companies have questioned whether
the general authorization granted by the Board to conduct these
activities permits the bank holding company to conduct variations that
develop in response to market changes after the original authorization
granted by the Board.
These two procedures, when combined with the proposals to broaden
several of the definitions of permissible nonbanking activities, should
make it easier for bank holding companies to participate in marketplace
developments in permissible nonbanking activities and in new
activities. For example, because most permissible nonbanking activities
have been broadly defined, a bank holding company would not be required
to seek additional Board approval to participate in market developments
in permissible activities. As noted above, if a bank holding company is
uncertain about the permissibility of a development, an expedited
procedure outside the approval process is available to obtain Board
guidance on the scope of the authorized activity. All bank holding
companies would then be able to act on the basis of that guidance
without additional approval. This procedure will eliminate a number of
applications that are currently filed by bank holding companies that
are uncertain about the scope of permissible activities.
As previously noted, the draft proposal would also establish a
procedure that would allow bank holding companies and others to seek a
Board determination, outside of the applications process, that a given
new activity is permissible. The Board could then add this activity to
the new functional categories or establish a new category, as
appropriate. At the time the Board reviews this new activity, the Board
would determine whether it is appropriate to permit bank holding
companies to engage in this activity without additional approval (as,
for example, a variation of one or more previously authorized
activities) or to require bank holding companies to obtain approval
prior to conducting the activity (because, for example, the activity
does not fall within a previously approved activity or category). The
Board has in the past followed these approaches at various times.
3. Nonbanking Activities That Are Incidental to a Permissible Activity
The Board proposes to expand its interpretation governing the scope
of activities that are incidental to a permissible nonbanking activity.
For example, the Board has permitted bank holding companies that
conduct permissible data processing activities to use excess hardware
capacity to conduct data processing involving nonfinancial data where
the hardware has not been purchased solely to create excess capacity
and the holding company does not provide software to process the
nonfinancial data (other than making system software available). The
Board also permits bank holding companies to sell general purpose data
processing hardware where the hardware represents less than 30 percent
of the total cost of the data processing services provided by the bank
holding company. In addition, the Board permits companies engaged in
securities underwriting activities to provide certain incidental
services so long as the revenue from those services is counted as
ineligible revenue for purposes of applying the Board's section 20
revenue test.
Over the past year, several industry members have recommended that
the Board broaden this interpretation to permit bank holding companies
greater flexibility in conducting data processing and management
consulting activities. In particular, these members have recommended
that the Board permit a bank holding company, as an incidental activity
to the holding company's permissible financial data processing and
management consulting activities, to receive a modest amount of revenue
from providing nonfinancial data processing services and from providing
management consulting services to nonbanking companies.
Bank holding companies argue that they are at a competitive
disadvantage in providing data processing and management consulting
services because of the strict limitations tying these services to
financial data and financial consulting. Bank holding companies also
claim that these limitations disadvantage bank holding companies in
hiring the most competent employees, who often have interests and
skills beyond financial areas.
The Board proposes to amend Regulation Y to permit bank holding
companies engaged in data processing and management consulting
activities, as an incidental activity, to derive up to 30 percent of
their annual revenue from nonfinancial data processing or consulting
services. This 30-percent level is based on the amount of general
purpose hardware that a bank holding company is already permitted to
provide in connection with permissible data processing activities.
[[Page 47250]]
4. Removal of Restrictions Governing Permissible Activities
As noted above, the proposal would remove restrictions currently
contained in the regulation that are outmoded, have been superseded by
Board order or do not apply to insured depository institutions that
conduct the same activity. A detailed discussion of the restrictions
that are proposed to be removed is contained in section E below.
In summary, restrictions in the current regulation on the conduct
of individual activities, such as restrictions governing disclosures to
customers, requiring compliance with anti-tying rules, limiting
disclosure of customer information, and requiring divestiture of
property within specific periods of time, have been deleted from the
regulation with the expectation that existing and future Board policies
and guidance would more fully address the manner in which individual
activities should be conducted. This approach permits greater
flexibility in developing and changing the guidance for individual
activities in order to adapt to changes and developments in the
marketplace. Supervisory statements also permit the opportunity for
uniform interagency guidance, where such an approach is appropriate.
5. Elimination of Time Limit on System Approvals for Nonbanking
Acquisitions
The proposed draft takes several other steps to ease the burden on
bank holding companies that seek approval to engage in permissible
activities. Currently, a bank holding company that seeks approval to
engage in a nonbanking activity must commence the activity within one
year of receiving System approval or the approval lapses. This
requirement is not legally required and elimination of this requirement
would allow a bank holding company to seek a single approval to engage
de novo in all permissible nonbanking activities, thereby greatly
reducing the filing burden on bank holding companies.
This change would significantly reduce burden by eliminating the
filing of multiple applications to engage in permissible nonbanking
activities and by permitting bank holding companies quickly to respond
to a decision to compete in a permissible nonbanking activity.
Moreover, this change would focus the filing requirement on
acquisitions of nonbanking companies, which are the types of proposals
that have the most significant effects on most organizations.
The Board originally imposed the time limit on its approvals in
order to address concern that the financial and other resources of a
bank holding company could change between the time that the System
approved a proposal and commencement of the activity by the holding
company. This concern would appear to be minimal in the case of
proposals by a bank holding company to engage de novo in a permissible
activity. To address this concern, the proposed revision would provide
that an approval to engage de novo in an activity would not expire so
long as the bank holding company continues to have adequate capital and
at least satisfactory composite and management examination ratings.
6. Revision of Policy Statement Governing Investment Advisory
Activities
In 1972, the Board permitted bank holding companies to provide
investment advice to mutual funds and other investment companies. In
connection with that determination, the Board adopted a policy
statement outlining a number of restrictions that the Board believed
were necessary to address the potential that the investment advisory
activities of bank holding companies may result in the ``subtle
hazards'' that the Glass-Steagall Act was designed to prevent. In 1992,
the Board substantially revised the policy statement to remove many of
the restrictions on investment advisory activities to conform with
various court decisions and developments in the market that had
occurred since the policy statement was adopted. On August 23, 1996,
the Board also amended this policy statement to allow a bank holding
company to purchase, as fiduciary, shares of a mutual fund advised by
the holding company where the purchase of shares is permitted by the
fiduciary agreement, relevant state law or court order. In addition,
the Board rescinded a letter issued in 1986 (the ``Sovran letter'')
that governs the manner in which a bank holding company may act as
broker in the sale of mutual fund shares to bank customers.
The Board proposes to remove four restrictions that remain in the
policy statement. These restrictions are:
A prohibition on a bank holding company owning any
shares of a mutual fund advised by the bank holding company;
A prohibition on a bank holding company lending to a
mutual fund advised by the bank holding company;
A prohibition on a bank holding company accepting
shares of a mutual fund that it advises as collateral for any loan
to a customer that is for the purpose of purchasing such mutual fund
shares; and
A prohibition on a bank holding company serving as an
investment adviser to an investment company or mutual fund that has
a name that is similar to, or a variation of, the name of the bank
holding company or any of its subsidiary banks.
None of these four restrictions is specifically required by the
Glass-Steagall Act. The first restriction was intended to assure that a
bank holding company does not, in violation of the Glass-Steagall Act,
control a mutual fund that it advises. Removal of this prohibition
would allow a bank holding company to acquire up to 5 percent of the
shares of a mutual fund, which is the limit contained in the BHC Act
for investments by bank holding companies in the voting shares of any
company. This modest investment amount would not appear to enhance
significantly the ability of a bank holding company to control a mutual
fund it advises. The federal securities laws require, for example, that
the board of directors of a mutual fund maintain at least a majority of
directors that are independent of the investment adviser, and it is
these directors that must review and approve the continued service of
the investment adviser.
The second limitation governs loans by a bank holding company to an
investment company advised by the bank holding company. In 1982,
section 23A of the Federal Reserve Act, which establishes quantitative
and qualitative limitations on the lending activities of banks, was
amended to cover these types of lending transactions by banks. Section
23A would permit a bank to lend to a mutual fund advised by the bank or
an affiliate within the overall limits that apply to loans by banks to
affiliates. In light of section 23A, a complete prohibition on these
lending activities by a bank holding company--which does not lend
insured funds--does not appear necessary and the Board proposes to
remove this restriction.
The third limitation prohibits a bank holding company from
accepting as collateral for a loan shares of an investment company that
the holding company advises where the purpose of the loan is to
purchase the investment company shares. Section 23A limits the ability
of banks to accept these shares as collateral for a loan from the bank.
This restriction in section 23A was intended to address potential
safety and soundness concerns that could result from allowing an
insured institution to accept shares of a related mutual fund as
collateral for a loan. A bank holding company, on the other hand, does
not lend insured funds. Moreover, the collateral and other requirements
in
[[Page 47251]]
section 23A do not apply to loans by bank holding companies.
Accordingly, the Board seeks public comment on permitting bank holding
companies and their nonbanking affiliates to extend credit that is
collateralized by shares of investment companies that the bank holding
company advises.
The fourth restriction raises an issue regarding the potential for
customer confusion about whether shares of investment companies are
federally insured. The Board's rule prohibits bank holding company from
having a name that is ``similar to, or a variation of'' a mutual fund
or investment company advised by the holding company or any of its
subsidiary banks. This rule is stricter than the rule adopted by the
Comptroller of the Currency for national banks, which permits a
national bank to advise an investment company with a name that is
similar to the name of the bank provided that the name is not identical
to the bank's name. The Board's rule is also stricter than the position
of the SEC, which permits an investment company to have a name similar
to that of an insured depository institution provided that the
investment company makes a number of disclosures that advise customers
that the investment company is not federally insured or guaranteed by
the insured depository institution.7
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\7\ Letter of May 13, 1993, (1993 Transfer Binder) Fed. Sec. L.
Rep. (CCH) Paragraph 76,683.
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The Board seeks comment on amending its rule to permit similar
names so long as: (1) The investment company name is not identical to
that of the holding company or an affiliated insured depository
institution, (2) the investment company name does not include the term
bank, and (3) the holding company or investment company discloses to
customers in writing that shares of the investment company are not
federally insured and are not obligations of or guaranteed by any
insured depository institution, and the role of the bank holding
company as an adviser to the investment company. The Board seeks
comment on whether these limitations would adequately address the
potential for customer confusion that shares of an investment company
advised by a bank holding company are not federally insured.
7. Revision to Exception for Acquisitions of Lending Assets in the
Ordinary Course of Business
The Board also proposes to update the regulatory language
permitting a bank holding company, without additional approval, to
acquire lending assets from a third party in the ordinary course of
business. The Board currently permits a bank holding company, without
additional approval, to acquire assets of an office of another company
related to making, acquiring or servicing loans so long as the bank
holding company and the transaction meet certain qualifications. Among
the qualifications are that the assets relate to consumer or mortgage
lending, and that the acquired assets represent the lesser of $25
million or 25 percent of the consumer lending, mortgage banking or
industrial banking assets of the acquiring bank holding company. The
office must also be located in the geographic area served by the bank
holding company.
The Board proposes to revise this provision in three ways. First,
since the Board no longer limits the geographic scope of its approval
to engage in nonbanking activities, this restriction would be removed.
Second, the scope of the exception would be broadened from consumer and
mortgage banking assets to permit the acquisition of assets related to
any lending activity. Third, the threshold limits would be raised to
permit the acquisition of assets representing up to the lesser of $100
million or 50 percent of the lending assets of the bank holding
company.
The Board invites public comment on these revisions.
E. Explanation of the Restrictions Removed From Permissible Nonbanking
Activities
As noted above, the Board proposes to remove restrictions contained
in the current regulation that are outmoded, have been superseded by
Board order or would not apply to an insured depository institution
conducting the same activity. The limitations that remain are necessary
to establish a definition of the permitted activity or to prevent
circumvention of another statute, such as the Glass-Steagall Act. The
following discussion explains, by functional group of activities, the
restrictions that the Board proposes to eliminate as well as, the
limitations that the Board proposes to retain.
The Board seeks comment on all aspects of its proposed changes to
the Regulation Y laundry list. In particular, comment is invited on
whether the activities are properly defined and whether, as defined,
each activity is closely related to banking for purposes of section
4(c)(8) of the BHC Act. Comment is also invited on new activities that
the Board should consider including on the regulatory laundry list.
Comments regarding new activities should explain the basis for finding
that the activity is closely related to banking for purposes of the BHC
Act.
The Board invites comment on whether the restrictions on nonbanking
activities that are proposed to be retained are adequate to address
potential adverse effects from the conduct of the relevant activity,
including potential conflicts of interests and customer confusion. In
addition, the Board seeks comment on whether supervisory policy
statements are adequate for addressing potential adverse effects that
may be associated with certain activities, and the type of guidance
that should be provided in such a policy statement.
1. Extending Credit and Servicing Loans
Lending activities are already broadly defined and contain no
restrictions.
2. Activities Related to Extending Credit
A new category has been added authorizing activities that the Board
determines to be usual in connection with making, acquiring, brokering
or servicing loans or other extensions of credit. Without limiting the
scope of this activity, the category lists a number of activities that
the Board has previously determined are related to credit extending
activities, including, by way of example, credit bureau, collection
agency, appraisal, asset management, check guarantee, and real-estate
settlement activities. Restrictions governing disclosures, tying,
preferential treatment of customers of affiliates, disclosure of
confidential customer information without customer consent and similar
restrictions have been removed from these activities. These
restrictions do not apply to banks that conduct these activities and,
to the extent these restrictions are appropriate, supervisory guidance
on the conduct of the activity would be developed.
3. Leasing Personal or Real Property
The leasing provision of the regulation was streamlined by
combining the two types of leasing activities permissible for bank
holding companies: Full-payout leasing and high residual value
leasing.8 The
[[Page 47252]]
following restrictions have been removed--
\8\ A full-payout lease is the functional equivalent of an
extension of credit and relies primarily on rental payments and tax
benefits to recover the cost of the leased property and related
financing costs. High residual value leasing may involve significant
reliance on the expected residual value of the leased property--on
average, under 50 percent, but in some cases, up to the full
original cost of leased property--to recoup the cost of the leased
property and related financing costs. Under the Board's regulation,
bank holding companies may provide full-payout leases for any type
of personal property or real property, and may make high residual
value leases only for personal property. Bank holding companies have
not been permitted to engage in high residual value leasing for real
property because of concern that such leasing would be
indistinguishable from real estate development and investment
activities.
---------------------------------------------------------------------------
The lease must serve as the functional equivalent of an
extension of credit (permissible high residual value leasing may not
be the functional equivalent of an extension of credit);
The property must be acquired only for a specific
leasing transaction;
Leased property must be re-leased or sold within 2
years of the end of each lease;
The maximum lease term may not exceed 40 years; and
No leased property may be held for more than 50 years.
These restrictions were removed from the regulation primarily to
permit bank holding companies greater flexibility to acquire property
in quantity in the expectation of leasing activities and to grant more
flexibility in selling or releasing property at the expiration of a
lease. It is expected that supervisory guidance would be developed to
aid examiners in supervising the acquisition and retention of property
for leasing.
The draft also removes the provision limiting to 100 percent of the
initial acquisition cost the amount of reliance that may be placed on
the residual value of leased personal property. No such limit applies
to national bank leasing activities. The estimated residual value of
real property continues to be limited to 25 percent of the value of the
property at the time of the initial lease. This restriction is intended
to distinguish real property leasing from real estate development and
investment activities.
Two other requirements were retained: (1) That the lease be non-
operating, and (2) that the initial lease term be at least 90 days.
These requirements were developed in the course of litigation regarding
the leasing activities of national banks, and were relied on by the
courts in distinguishing bank leasing activities from general property
rental and real estate development businesses. The requirement that a
lease be non-operating is also a statutory requirement limiting the
high residual value leasing activities of national banks.9 In
particular, the definition of nonoperating leases in the automobile
rental context, which was developed in litigation and prevents a bank
holding company from directly providing repair and similar services,
has been retained. The draft would permit a bank holding company to
arrange for a third party to provide repair and other services in
connection with a lease.
---------------------------------------------------------------------------
\9\ As a general matter, the requirement that a lease be non-
operating means that the bank holding company does not itself
operate the equipment or property being leased or repair or service
the property. This limitation was intended to help distinguish bank
leasing activities from general commercial activities.
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4. Operating Nonbank Depository Institutions
This category permits ownership of a savings association and an
industrial loan company. The proposed regulation retains the
restrictions in the BHC Act that the institution not be operated as a
``bank'' for purposes of the BHC Act 10 and that the activities of
the institution conform to the relevant statutory provisions of the BHC
Act.
---------------------------------------------------------------------------
\10\ The BHC Act contains an exception from the definition of
``bank'' for industrial loan companies and savings associations that
meet requirements listed in the BHC Act.
---------------------------------------------------------------------------
5. Trust Company Functions
The current regulation limits the deposit-taking and lending
activities of trust companies. These limitations are already
encompassed in the requirement in the BHC Act that the trust company
not be a ``bank'' for purposes of the BHC Act, and have, therefore,
been deleted from the regulation.
6. Financial and Investment Advisory Activities
The regulation has been reorganized to group together all
investment and financial advisory activities. The proposed rule broadly
authorizes acting as investment or financial adviser to any person,
without restriction. The proposed definition of investment and
financial advisory activities is very broad and would permit some types
of advisory activities beyond the scope of advisory activities
currently permitted by regulation. The Board invites comment on whether
this activity has been properly defined and whether all investment and
financial advisory activities are closely related to banking.
Without limiting the breadth of the advisory authority, the rule
also lists as specific examples of permissible advisory activities
certain types of investment or financial advice, counseling and related
services that previously had been separately authorized. These examples
are--
Advising an investment company and sponsoring,
organizing and managing a closed-end investment company;
Furnishing general economic information and forecasts;
Providing financial advice regarding mergers and
similar corporate transactions;
Providing consumer educational courses and providing
tax-planning and tax-preparation; and
Providing advice regarding derivatives transactions.
The few restrictions imposed by the Board on these activities would
be removed. Specifically, the Board proposes to remove the current
restriction that discretionary investment advice be provided only to
institutional customers, thereby allowing bank holding companies to
manage retail customer accounts outside of the trust department of an
affiliated bank. This activity would continue to be governed by the
fiduciary principles in relevant state law. Similarly, the requirement
that investment advice regarding derivatives transactions be provided
only to institutional investors would be removed, thereby allowing this
advice to be provided to retail customers. These restrictions do not
apply to banks that provide investment advisory services.
Restrictions also have been deleted in the areas of tax-planning
and preparation services and consumer counseling services that
prohibited bank holding companies from promoting specific products and
services and from obtaining or disclosing confidential customer
information without the customer's consent. These restrictions do not
apply to banks that engage in these activities.
7. Agency Transactional Services for Customer Investments
The various transactional services that a bank holding company may
provide as agent have been reorganized into a single functional
category. This category includes securities brokerage activities,
private placement activities, riskless principal activities, execution
and clearance of derivatives contracts, foreign exchange execution
services and other transactional services.
i. Securities brokerage activities.
The current regulation differentiates between securities brokerage
services provided alone (i.e., discount brokerage services) and
securities brokerage services provided in combination with investment
advisory services (i.e., full-service brokerage activities). The
proposed rule would authorize securities brokerage without
distinguishing between discount and full-service brokerage activities.
Under the current regulation, bank holding companies providing
full-service brokerage services must make certain disclosures to
customers regarding the uninsured nature of securities and may not
disclose confidential customer information without the customer's
consent. These requirements have been deleted. The disclosure
requirements--along with a number of other requirements that
specifically address the potential for
[[Page 47253]]
customer confusion, training requirements, suitability requirements and
other matters--are already contained in an interagency policy statement
that governs the sale of securities and other non-deposit investment
products on bank premises as well as in rules adopted by the SEC. In
addition, similar disclosure requirements are required by the Board's
policy statement governing the sale by bank holding companies of shares
of mutual funds and other investment companies that the bank holding
company advises. To the extent that disclosures to customers are
appropriate in areas not covered by these policy statements, it is
expected that the Board would develop supervisory guidance, on an
interagency basis where appropriate.
The Board seeks comment on whether elimination of these
restrictions from the regulation would lead to adverse effects,
including customer confusion about the uninsured nature of non-deposit
investment products sold through bank holding companies.
ii. Riskless principal activities.
The Board recently reduced the restrictions that govern riskless
principal activities. The restrictions that were retained were designed
to ensure that bank holding companies does not avoid the Glass-Steagall
Act provisions by classifying underwriting and dealing activities as
riskless principal activities. The provisions that are proposed to be
retained prohibit:
Selling bank-ineligible securities at the order of a
customer who is the issuer or in a transaction in which the bank
holding company has an agreement to place the securities of the
issuer;
Acting as riskless principal in any transaction
involving a bank-ineligible security for which the bank holding
company or an affiliate makes a market;
Acting as riskless principal for any bank-ineligible
security carried in the inventory of the bank holding company or any
affiliate; and
Acting as riskless principal on behalf of any U.S.
affiliate that engages in bank-ineligible securities underwriting or
dealing activities or any foreign affiliate that engages in
securities underwriting or dealing activities outside the U.S.
The proposed regulation retains these four restrictions. The Board
requests comment on whether these restrictions, and in particular the
second and third restrictions, are necessary to assure compliance with
the Glass-Steagall Act.
iii. Private placement activities.
In adding private placement activities to the laundry list, the
regulation adopts the definition of private placement activities used
by the SEC and the federal securities laws. All but one restriction
that had been imposed by Board order on the conduct of this activity
would be removed. That restriction prohibits a bank holding company
from purchasing for its own account securities that it is placing and
from holding in inventory unsold portions of securities it is
attempting to place. This restriction prevents a bank holding company
from classifying its securities underwriting activities, which are
governed by the Glass-Steagall Act and the Board's section 20
decisions, as private placement activities.
Among the restrictions that would be removed from the conduct of
private placement activities are prohibitions on:
Extending credit that enhances the marketability of a
security being placed;
Lending to an issuer for the purpose of covering the
funding lost through the unsold portion of securities being placed;
Lending to the issuer for the purpose of repurchasing
securities being placed;
Acquiring securities through an account for which the
bank holding company has fiduciary authority;
Providing advice to any purchaser regarding a security
the bank holding company is placing; and
Placing securities with any non-institutional investors
(the SEC rules allow sales to institutional investors and up to 35
non-institutional investors).
None of these restrictions have been applied to national banks that
conduct private placement activities. The Board seeks comment on
whether any of these restrictions must be retained to address potential
adverse effects, including potential conflicts of interest or customer
confusion, or to assure fulfillment of fiduciary duties.
iv. Futures commission merchant activities.
a. In general. The current regulation authorizes bank holding
companies to execute and clear derivatives on certain financial
instruments on major exchanges, subject to a number of restrictions.
The Board has, by order, broadened this authority in two key
respects. First, the Board has by order permitted bank holding
companies to execute and clear derivative contracts on a broad range of
nonfinancial commodities. Second, the Board has permitted bank holding
companies to clear derivative contracts without simultaneously
providing execution services. The proposed regulation has been amended
to incorporate these actions.
The proposal also deletes the restriction that a bank holding
company not act as a futures commission merchant (FCM) on any exchange
unless the rules of the exchange have been reviewed by the Board. All
U.S. commodities exchanges are supervised by the CFTC. A review by the
Federal Reserve System of the rules of an exchange, whether domestic or
foreign, does not provide a reliable guide regarding the risk
management systems of the exchange or the safety of conducting FCM
activities on the exchange. A more effective method for addressing the
risks of FCM activities--whether on domestic or foreign exchanges--is
through the on-site inspection and supervision of the risk management
systems of the bank holding company.
The proposed rule removes several other requirements, including
that the FCM subsidiary--
Time stamp all orders and execute them in chronological
order;
Not trade for its own account;
Not extend margin credit to customers; and
Maintain adequate capital.
As noted above, the Board is proposing to remove restrictions on
subsidiary FCM trading for its own account, and conduct in the other
areas listed above is addressed in rules of the CFTC or the relevant
self-regulatory organization.
The proposed rule retains the requirements of the current
regulation that a bank holding company conduct its FCM activities
through a separately incorporated subsidiary (i.e., not through the
parent bank holding company) and that the subsidiary not become a
member of an exchange that requires the parent bank holding company
also to become a member of the exchange. The purpose of this
restriction is to limit the bank holding company's exposure to
contingent obligations under the loss sharing rules of exchange
clearing houses in order to preserve the holding company's ability to
serve as a source of strength to its subsidiary insured depository
institutions.
The Board invites comment on all aspects of its proposed revision
to FCM activities. In particular, the Board invites comment on whether
the requirement limiting the parent bank holding company from becoming
a member of an exchange is appropriate and on whether the Board's
concern could be addressed more effectively by an alternative
restriction, such as a requirement that the parent bank holding company
not provide a guarantee of non-proprietary trades conducted by an FCM
subsidiary. A restriction on the holding company providing such a
guarantee has been imposed on bank holding companies through
examination guidance and various Board orders to assure that the
capital of the holding company is
[[Page 47254]]
available to support the insured depository institution subsidiaries of
the holding company.
b. Proposed change in Board precedent regarding clearing-only
activities. The Board has by order permitted bank holding companies to
clear trades that the FCM has not executed itself. The proposed rule
incorporates this activity in the laundry list, retaining two
restrictions currently imposed by Board order. The first restriction
prohibits the clearing subsidiary from serving as the primary or
qualifying clearing firm for a customer. The second restriction is that
the clearing subsidiary have a contractual right to decline to clear
any trade that the subsidiary believes poses unacceptable risks.
These requirements were adopted to ensure that the clearing
subsidiary of a bank holding company could limit its exposure to
traders that execute trades themselves or through third parties. In
particular, these requirements prevent a bank holding company from
clearing trades executed by exchange locals or market makers. In 1991,
the Board rejected a proposal by a bank holding company to engage in
clearing trades for exchange locals and market makers because of
concerns about the inability of the bank holding company to monitor and
control its credit exposures during the trading day.\11\ The Board
found that the activity was closely related to banking, but believed
that the potential adverse effects of conducting the activity
outweighed the potential public benefits.
---------------------------------------------------------------------------
\11\ Stichting Prioriteit ABN AMRO Holding, 77 Federal Reserve
Bulletin 189 (January 9, 1991).
---------------------------------------------------------------------------
The Board seeks comment on whether these two restrictions on the
conduct of clearing-only activities by bank holding companies should be
retained or whether bank holding companies, as part of permissible FCM
activities, should be permitted to engage in clearing without executing
trades, including clearing trades for professional traders. In
particular, the Board invites comment on whether and how bank holding
companies are able to monitor and limit adequately the potential
exposure from conducting this activity.
v. Other transactional services.
In addition to the transactional services described above, the
proposed rule adds a provision allowing a bank holding company to
provide transactional services for customers involving any derivative
or foreign exchange transaction that a bank holding company is
permitted to conduct for its own account.
The proposed rule also removes the restriction in the current
regulation prohibiting a bank holding company from providing foreign
exchange transactional services in the same subsidiary that provides
advice regarding foreign exchange. Banks are not subject to this
restriction. With this change, a bank holding company would be
permitted to provide any transactional service to any customer in
combination with a related advisory service, and may provide any
advisory and transactional services as agent to both retail and
institutional customers.
8. Investment Transactions as Principal
The proposal incorporates decisions by the Board that permit bank
holding companies broadly to invest for the holding company's own
account as principal in derivatives on financial and nonfinancial
commodities. The proposal would allow a bank holding company to trade
as principal for its own account any derivative contract on a financial
or nonfinancial commodity or index of commodities, so long as any one
of three conditions is met:
The underlying asset is a permissible investment for
State member banks;
The derivative contract requires cash settlement; or
The derivative contract allows for assignment,
termination or offset prior to expiration and the bank holding
company makes every reasonable effort to avoid delivery.
The proposal also includes authority that the Board has previously
granted by order permitting bank holding companies to buy, sell and
store gold, silver, platinum and palladium bullion, coins, bars and
rounds. The regulation retains the current authority to trade in
foreign exchange and bank-eligible securities. The proposal does not
expand the current authority of bank holding companies to acquire as
principal securities or physical commodities that a bank is not
currently permitted to own for its own account.
In several areas, such as foreign exchange trading and certain
derivatives trading, the Board has prohibited bank holding companies
from engaging in the same subsidiary in trading activities as principal
and providing advice to customers. This restriction does not apply to
banks that conduct the same activities and has been removed. It is
expected that supervisory guidance would be developed to address
potential conflicts of interest that may arise in this area.
9. Management Consulting and Counseling Activities
The current regulation authorizes bank holding companies to provide
management consulting services on any matter to any depository
institution or affiliate of a depository institution. The rule has been
expanded in two respects.
First, bank holding companies would be authorized to provide
management consulting services regarding financial, economic,
accounting or audit matters to any company. These activities are
directly related to the activities and expertise of bank holding
companies. The Board invites comment on whether this activity is
closely related to banking for purposes of section 4(c)(8) of the BHC
Act.
Second, a bank holding company would be permitted to derive up to
30 percent of its management consulting revenue from management
consulting services provided to any customer on any matter.
Two restrictions have been retained--governing interlocks with and
investments in client companies--to ensure that a bank holding company
does not exercise control over a client company through a management
consulting contract.
10. Support Services
This category includes courier services (other than armored car
services) and printing checks and related documents. Both services are
included in the laundry list as they were authorized by the Board,
without change.
11. Insurance Agency and Underwriting Activities
The insurance provisions reflect the detailed restrictions on
insurance activities of bank holding companies specified in the BHC
Act. The current regulation has not been changed.
Community Development Activities
The current regulation permits bank holding companies to make
equity and debt investments in corporations and projects designed
primarily to promote community welfare. The proposal amends the
description of this activity to clarify that this activity includes
providing advisory and related services to community development
programs. The Board has permitted these advisory services by order.
13. Money Orders, Savings Bonds and Traveler's Checks
The current regulation limits the sale and issuance of money orders
and similar consumer payment instruments to instruments with a face
value of less
[[Page 47255]]
than $1,000. The Board has by order authorized this activity for
payment instruments of any face amount. Accordingly, the limitation on
the face amount of these instruments has been removed.
14. Data Processing Activities
The current regulation broadly authorizes bank holding companies to
provide data processing and data transmission services by any
technological means so long as the data processed or furnished are
financial, banking or economic. The proposed rule clarifies that a bank
holding company may render advice to anyone on processing and
transmitting banking, financial and economic data.
The following two restrictions on permissible data processing
activities have been deleted:
All data processing services must be provided pursuant
to a written agreement with the third party that describes and
limits the services; and
Data processing facilities must be designed, marketed
and operated for processing and transmitting financial, banking or
economic data.
The data processing activity has also been revised to permit bank
holding companies to derive up to 30 percent of their data processing
revenues from processing and transmitting data that are not financial,
banking or economic.
F. Explanation of Changes to Tying Rules
The Board is proposing amendments to its rules regarding tying
arrangements. The amendments would allow bank holding companies
significantly greater flexibility to package their products, and
thereby provide more efficient and lower cost service to their
consumers.
Tying arrangements, where a customer's ability to purchase or
receive a discount on one product is tied to the customer's purchase of
another product, are prohibited by section 106 of the Bank Holding
Company Act Amendments of 1970. Although section 106 applies only when
a bank offers the tying product, the Board in 1971 extended its special
restrictions to bank holding companies and their nonbank subsidiaries.
36 FR 10,777 (June 3, 1971).
The Board has authority to grant exceptions to section 106 and, in
the past few years, has used its exemptive authority to allow banks to
offer products to their customers more efficiently and at lower cost,
without risk of anti competitive effects. For example, the Board has
allowed arrangements that included discounts on brokerage services and
other products based on a customer's relationship with the bank or bank
holding company. The proposed amendments set forth below would build on
this recent history in attempting to identify broader categories of
packaging arrangements that do not raise the concerns that section 106
was intended to address and should therefore be permitted.
Section 106 contains five restrictions intended to prohibit anti-
competitive behavior by banks: two prohibit tying arrangements; Two
prohibit reciprocity arrangements; and one prohibits exclusive dealing
arrangements. The tying restrictions, which have the greatest effect on
industry practices, prohibit a bank from restricting the availability
or varying the consideration for one product or service (the ``tying''
product) on the condition that a customer purchase another product or
service offered by the bank or by any of its affiliates (the ``tied''
product).\12\
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\12\ Violations of section 106 may be redressed through: (1) An
enforcement action for civil money penalties brought by the
appropriate Federal banking agency, (2) an action for injunctive
relief brought by the Justice Department or any person who can show
``danger of irreparable loss or damage,'' or (3) a civil suit
brought by ``any person who is injured in his business or property''
by the prohibited arrangement, with the court directed to award
treble damages and attorneys fees if the plaintiff prevails. See 12
U.S.C. 1972(2)(F), 1973, 1975.
---------------------------------------------------------------------------
Section 106 is a broader prohibition than those contained in the
antitrust laws because, unlike the antitrust laws, a plaintiff in
action under section 106 need not show that: (1) the seller has market
power in the market for the tying product; (2) the tying arrangement
has had an anti-competitive effect in the market for the tied product;
or (3) the tying arrangement has had a substantial effect on interstate
commerce. The broader reach of section 106 is most evident in that it
prohibits a bank from varying the consideration for one of its
products--that is, offering a discount on one of its products--for
customers who purchase a second product from the bank or its
affiliates. Such an arrangement generally would not be prohibited by
the antitrust laws.
Section 106 was adopted in 1970 when Congress expanded the
authority of the Board to approve bank holding companies to engage in
nonbanking activities. Section 106 was based on Congressional concern
that banks' unique role in the economy, in particular their power to
extend credit, would allow them to gain a competitive advantage in the
new, nonbanking markets that their affiliates were being allowed to
enter. See S. Rep. No. 1084, 91st Cong., 2d Sess. (1970). Congress
therefore imposed special limitations on tying by banks--restrictions
beyond those imposed by the antitrust laws.
1. Rescind the Board's Regulatory Extension of the Statute
As noted above, the Board has by regulation extended the
restrictions of section 106 to bank holding companies and their nonbank
subsidiaries as if they were banks. This extension was adopted at the
same time that the Board approved by regulation the first ``laundry
list'' of nonbanking activities under section 4(c)(8) of the BHC Act,
apparently as a prophylactic measure addressed at potential anti-
competitive practices by companies engaging in nonbanking activities.
In the past 25 years, the Board has gained extensive experience
with nonbank affiliates of bank holding companies and the markets in
which they operate. Based on this experience, the Board does not
believe that these nonbank companies possess the market power over
credit or other unique competitive advantages that Congress was
concerned that banks enjoyed in 1970. Bank holding companies may never
have possessed such market power but, even if they once did, financial
services markets have generally become much more competitive over time.
Accordingly, the Board believes that applying the special bank anti-
tying rules to such companies is no longer justified. Any competitive
problems that might arise would be isolated cases, better addressed not
through a special blanket prohibition but rather through the same
general antitrust laws that bind their nonbank competitors.
In recognition of these facts, the Board has over the past several
years relaxed the anti-tying restrictions on nonbanks within bank
holding companies. In addition to adopting various exceptions that
applied both to banks and nonbanks, the Board in 1994 permitted a bank
holding company or its nonbank subsidiary to offer a discount on any of
its products or services on the condition that a customer obtain any
other product or service from that company or from any of its nonbank
affiliates--that is, permitted discount arrangements that did not
involve a bank. 12 CFR 225.7(b)(3). However, even with this exception,
tying between a bank holding company or its nonbank subsidiary and an
affiliated bank is still restricted, as is any inter-affiliate tying
arrangement that does not involve the offering of a discount.
The Board proposes to rescind its regulatory extension of the anti-
tying
[[Page 47256]]
rules to nonbanks. The Board notes that in doing so it would not be
granting an ``exception'' to section 106--as section 106 never
envisioned that non-banks would be covered in the first place. Rather,
the Board would be lifting a restriction that it itself imposed, and
one which it believes should be maintained only if there is clear
evidence of its necessity.
Removal of these special restrictions on bank holding companies and
their nonbank subsidiaries would eliminate a competitive disadvantage
by allowing them the same freedom to package products that their
competitors currently enjoy. The Sherman Act would continue to prohibit
bank holding companies and their subsidiaries from engaging in any
tying arrangement that had an anti-competitive effect. 15 U.S.C. 1.
Furthermore, section 106 would continue to prohibit a bank from tying
one of its products to a product offered by one of its affiliates, bank
or nonbank.
The Board is seeking comment, however, on whether it should retain
its regulatory extension of the statute for purposes of one type of
tying arrangement. Section 825(a)(3) of the Personal Responsibility and
Work Opportunity Reconciliation Act of 1996, signed into law on August
22, 1996, amended the Food Stamp Act of 1997 to prohibit tying the
availability of electronic benefit transfer services to other point-of-
sale services. Enforcement of the Act is assigned to the Secretary of
Agriculture. 104 Pub. L. 193, 110 Stat. 2105; 7 U.S.C. 2016(i)(11).
Banks, bank holding companies, and nonbank subsidiaries of bank holding
companies were exempted from the statute, apparently because they were
already restricted by section 106 (in the case of banks) and the
Board's regulation (in the case of bank holding companies and their
nonbank subsidiaries). Thus, unless the Board were to retain a
restriction on bank holding companies and their nonbank subsidiaries,
they would be the only companies not subject to a special restriction
on tying of electronic benefit transfer services.
2. Treat Inter-Affiliate Tying Arrangements the Same as Intra-Bank
Arrangements
The Board is also proposing to broaden a statutory exception
designed to preserve traditional banking relationships. The statutory
exception is limited to traditional banking relationships within one
bank, and the proposed regulatory exception would extend the statutory
exception to apply to relationships that involve more than one bank or
other affiliate.
Section 106 contains an explicit exception (the ``statutory
traditional bank product exception'') that permits a bank to tie any
product or service to a loan, discount, deposit, or trust service
offered by that bank. 12 U.S.C. Sec. 1972(1)(A). For example, a bank
could condition the use of its messenger service on a customer's
maintaining a deposit account at the bank. Although the statutory
traditional bank product exception appears to have been effective in
preserving traditional relationships between customer and bank, the
exception is limited in an important way: it does not extend to
transactions involving products offered by affiliates. Thus, a bank
could not condition the use of its messenger service on a customer's
maintaining a deposit at an affiliated bank. As another example, the
Board recently granted an exemption to allow a secured credit card
program where a bank required that a customer maintain a deposit at an
affiliated bank. Although a bank could have offered a secured credit
card program conditioned on a customer's maintaining a deposit at that
same bank, the inter-affiliate arrangement was otherwise prohibited by
section 106 but for the exemption.
The Board has already adopted a ``regulatory traditional bank
product exception'' that generally extends the statutory traditional
bank product exception between affiliates--for example, allowing one
bank to offer a discount on a loan based on a customer's deposit
relationship with an affiliated bank. However, taking an incremental
approach, the Board placed two restrictions on the regulatory
exception. First, the Board required that both products involved in the
tying arrangement be traditional bank products (thereby disqualifying
the messenger service example above). Second, the Board required that
the arrangement consist of discounting the tying product rather than
restricting its availability (thereby disqualifying the secured credit
card example above).
The Board believes that there remains a rationale for the latter
restrictions--for example, secured credit cards aside, there are few
examples where restricting the availability of one product on the
purchase of another serves a valid economic purpose.13
Nonetheless, Congress has already decided not to apply these
restrictions to the statutory traditional bank product exception for
intra-bank transactions, and it is difficult to argue that inter-
affiliate transactions pose any greater risk of anti-competitive
behavior than intra-bank transactions. Moreover, Congress has already
extended the statutory traditional bank product exception between
affiliates, without restriction, for savings associations and their
affiliates. 12 U.S.C. 1464(q)(1)(A).
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\13\ The Board has recently been presented with another case
where restricting the availability of a product may be justifiable.
A petitioner has sought an exemption from section 106 to allow a
brokerage subsidiary of a bank holding company to require a customer
to maintain a deposit at an affiliated bank in order to facilitate
compliance with the time-for-payment requirements of Regulation T.
Even if the Board were to rescind its regulatory extension of
section 106 to bank holding companies and their nonbank
subsidiaries, a brokerage department of a bank would still be
prohibited from imposing this requirement, absent the proposed
amendment to the traditional bank product exception.
---------------------------------------------------------------------------
3. Extend the Expanded Regulatory Traditional Bank Product Exception to
Reciprocity Arrangements
As noted above, section 106 prohibits not only tying arrangements
(conditioning the availability of one product on the purchase of
another) but also reciprocity arrangements (conditioning the
availability of one product on the providing of another by the
customer). 12 U.S.C. 1972(1) (C) and (D). Like the tying prohibition,
the prohibition on reciprocity arrangements contains an exception
intended to preserve traditional banking relationships. The exception
provides that a bank may condition the availability of a loan,
discount, deposit or trust service on the customer's providing some
product or service ``related to, and usually provided in connection
with'' such a loan, discount, deposit or trust service. 12 U.S.C.
1972(1)(C).
Also like the statutory traditional bank product exception to the
tying prohibition, this exception to the reciprocity prohibition does
not apply to inter-affiliate transactions. Although the Board has
received only one request to extend the exception--probably because
this exception is confusing and rarely invoked in the case law--the
Board is proposing such an extension for comment, for the same reasons
noted above.
4. Coverage of Foreign Banks Under Section 106
A petitioner has sought an interpretation or exemption from the
statute to clarify that section 106 does not restrict ``foreign
transactions.'' Petitioner argues that statutes are generally presumed
not to have an extra-territorial reach unless specified by Congress,
and that no specification was made in section 106. Petitioner
[[Page 47257]]
notes that if section 106 did apply, U.S. firms would be at a
competitive disadvantage, as there is no equivalent to section 106 in
other nations.
The Board seeks comment on whether it should establish a ``safe
harbor'' to provide certainty with respect to foreign transactions. In
particular, the Board seeks comment on whether any safe harbor should
define ``foreign transactions'' according to the location of the
customer (as suggested by petitioner), the location of the market where
any potential anti-competitive effects would occur (as appears to be
the practice under the Sherman Act), or some other factor or factors.
G. Explanation of Other Proposed Changes
1. Bank Holding Company Formations
Regulation Y currently implements the provisions enacted in the
Riegle Community Development Act that establish a streamlined 30-day
notice procedure for proposals by existing shareholders of a bank to
establish a bank holding company. To qualify for this procedure under
current rules, the shareholders of the bank must acquire at least 80
percent of the shares of the new bank holding company in substantially
the same proportion as the shareholders' bank ownership, must certify
that the shareholders are not subject to any supervisory or
administrative action, and must identify the shareholders of the new
bank holding company.
The Board proposes several changes to these requirements. First,
the Board proposes to reduce the percentage of the bank holding company
that must be owned by shareholders of the bank from 80 to 67 percent.
This level assures that the transaction is in fact a reorganization in
which the bank shareholders continue to control the new bank holding
company and minimizes the likelihood that a new controlling shareholder
will be introduced without adequate review.
Next, the proposal would require that only the principal
shareholders (i.e., shareholders owning in excess of 10 percent of the
bank holding company) certify that they are not subject to any
supervisory or administrative action, rather than requiring that all
shareholders make this certification. Finally, the proposal would
eliminate any publication requirement for this category of bank holding
company formations. The Riegle Act does not require publication of
these proceedings and, because these transactions represent a corporate
reorganization, little purpose is served by requiring public notice.
The System would continue to consider all of the same statutory factors
in reviewing these proposals, including considering the competitive
effects, financial and managerial resources of the organization, effect
on the convenience and needs of the community and the CRA performance
record of the bank.
The Board invites comment on whether these changes are appropriate,
would reduce unnecessary burden on the formation of new bank holding
companies--particularly small bank holding companies--and are
consistent with the provisions of the BHC Act permitting this expedited
procedure.
2. Change in Bank Control Act Filings
The Board proposes to reorganize, clarify and simplify the portion
of Regulation Y that implements the Change in Bank Control Act (CIBC
Act). The proposal attempts to harmonize the scope and procedural
requirements of the Board's regulation implementing the CIBC Act with
those of the other federal banking agencies and to reduce any
unnecessary regulatory burden. The proposal also incorporates various
interpretations of this subpart made by the Board since the last
revision of Regulation Y. These changes have been developed in
consultation with the other federal banking agencies in an effort to
develop a uniform regulatory approach to implementing the CIBC Act at
all of the banking agencies.
Currently, the Board's rules generally require any person (other
than a bank holding company) seeking to acquire shares of a state
member bank or bank holding company to file a notice under the CIBC Act
at two thresholds: when the person's ownership level exceeds 10 percent
of the voting shares of the bank or bank holding company, and again
when the ownership level exceeds 25 percent. This two-tiered approach
allowed a review of the financial resources of an acquiror at two
stages, with a lesser showing of financial resources required for
transactions below the 25 percent threshold.
The Board proposes to reduce regulatory burden by eliminating the
25 percent threshold. This eliminates the requirement that persons who
have received authorization to own in excess of 10 percent, but less
than 25 percent, of the voting shares of a member bank or bank holding
company file a second notice before owning 25 percent or more of the
voting shares of the institution. Persons who initially acquire in
excess of 25 percent of the shares of a bank or bank holding company
would continue to be subject to only one review under the CIBC Act. The
other federal banking agencies have already adopted this approach.
Under the proposal, persons who currently own 10 percent (but less
than 25 percent) of the shares of a state member bank or bank holding
company with Board approval under the CIBC Act would be exempt from
further filing requirements under the CIBC Act, unless otherwise
notified in writing by the System. In future cases in which a person
appears to have sufficient financial resources to acquire more than 10
percent, but less than 100 percent of the shares of a bank, the System
may limit the approval granted on a case-by-case basis to require
further review of the financial resources of the person as appropriate.
The proposal also adds definitions of key terms to clarify the
scope of the regulation. In particular, the Board proposes to add a
definition of the term acting in concert and includes specific
presumptions of concerted action to provide guidance to acquirors. In
addition, the proposal incorporates current Board practice that the
acquisition of a loan in default that is secured by voting securities
of a state member bank or bank holding company is presumed to be an
acquisition of the underlying securities.
The proposal also would reduce regulatory burden on persons whose
ownership percentage increases as the result of a redemption of voting
securities by the issuing bank or the action of a third party not
within the acquiring person's control. In these situations, the
proposal would permit the person affected by the bank or third party
action to file a notice within 90 calendar days after the transaction
occurs, provided that the acquiring person does not reasonably have
advance knowledge of the triggering transaction. Currently, these
persons must file notice under the CIBC Act prior to the action that
increases the person's percentage ownership, and, because these persons
cannot control the third party action that causes the increased
percentage ownership, are often put in violation of the CIBC Act and
the Board's Regulation Y.
The Board also proposes to provide more flexible timing for
newspaper announcements of filings under the CIBC Act by permitting
notificants to publish the announcement up to 30 calendar days before
submitting the filing. In addition, the newspaper notice requirement
would be modified to eliminate the requirement that the notice include
a statement of the percentage of shares proposed to be acquired.
Finally, the proposal would add a new section reflecting the stock
[[Page 47258]]
loan reporting requirements in section 205 of the Federal Deposit
Insurance Corporation Improvement Act.
The Board invites comment on all of its proposed revisions to the
CIBC Act implementing regulation. In particular, the Board requests
comment on whether the revisions identifying when persons will be
presumed to be acting in concert identify all relevant situations in
which a bank may undergo a change in control. The Board also requests
comment on other ways that its implementing rules under the CIBC Act
may be modified to eliminate unnecessary burden and paperwork,
consistent with the requirements of the CIBC Act.
3. Notice of Change of Directors and Senior Executive Officers
In addition to the BHC Act and CIBC Act, Regulation Y implements
section 914 of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (section 914). Section 914 requires a state
member bank and a bank holding company (together, ``regulated
institutions'') to give prior notice to the System before changing
directors or senior executive officers if the regulated institution is
in financially troubled condition, has undergone a change in control
within two years, or has been chartered for less than two years.
The proposed rule retains a number of the current regulation's
substantive provisions. For example, the financial condition of
regulated institutions remains the focus for defining when an
institution's troubled condition would trigger the prior notice
requirements of section 914. The proposed rule also continues to
interpret a change in control for purposes of section 914 to mean a
transaction that requires a filing under the CIBC Act. Accordingly,
section 914 filings are not triggered by the acquisition of a state
member bank by a bank holding company under section 3 of the BHC Act.
The current rule would be modified in several ways. The proposed
rule would eliminate any filing requirement under section 914 for
charter conversions and ``phantom'' bank mergers (chartering an insured
depository institution to facilitate the acquisition of an existing
insured depository institution) if the converting or acquired
depository institution has been in operation for at least two years.
The proposed rule also would adopt the System's current practice of
granting individuals who seek election to the board of directors of
regulated institutions without the support of management an automatic
waiver that allows these individuals to commence service immediately
after election to the board and to make a post-election filing under
section 914. In addition, the proposed rule would provide more guidance
on appealing a disapproved notice. Other changes have been proposed in
cooperation with the staffs of the other banking agencies in an attempt
to develop uniform definitions, notice procedures and appeals
procedures.
The Board invites public comment on these changes, as well as on
other ways that the procedures for reviewing changes in officers and
directors may be revised to reduce unnecessary burden consistent with
the requirements of section 914.
4. Other Changes
The Board has also proposed several other modifications to the
regulation to incorporate previous Board decisions and policies
regarding the definitions of ``class of voting securities'' and
``immediate family'' and has modified references and several time
periods for Reserve Bank action to accommodate the changes explained
above. Public comment is welcome on these proposed revisions.
In addition, the Board invites public comment on other suggestions
for revising Regulation Y to eliminate unnecessary burden and paperwork
consistent with the Board's statutory mandates and safety and
soundness.
Attached is a draft of Regulation Y that incorporates the proposed
revisions. These revisions affect subparts A, B, C and E, appendix C
and the Board's interpretation at 12 CFR 225.125. Changes to the
Board's Rules of Procedure will be made as necessary to conform to
changes to Regulation Y that are finally adopted. No changes are being
proposed at this time to subparts D, F or G, which address,
respectively, Control and Divestiture Proceedings, Limitations on
Nonbank Banks and Appraisal Standards for Federally Related
Transactions.
Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act, the Board is required
to conduct an analysis of the effect, on small institutions, of the
proposed revision to Regulation Y. As of December 31, 1995, the number
of bank holding companies totalled 5,274.14 The following chart
provides a distribution, based on asset size, for those companies.
---------------------------------------------------------------------------
\14\ Financial top-tier domestic bank holding companies.
Excludes middle-tier bank holding companies, and foreign bank
holding companies that are not required to file a Y-9 report with
the Federal Reserve System.
------------------------------------------------------------------------
Percent
Number of of bank
Asset size category (M=million) bank holding
holding company
companies assets
------------------------------------------------------------------------
Less than $150M.................................... 3,954 \15\ 5.5
$150M-$300M........................................ 655 3.2
Greater than $300M................................. 665 91.3
------------------------------------------------------------------------
\15\ Bank holding companies with consolidated assets of less than $150
million are not required to file financial regulatory reports on a
consolidated basis. Assets for this group are estimated based on
reports filed by the parent companies and subsidiaries.
The proposed comprehensive revision to Regulation Y is intended to
eliminate unnecessary burden for all bank holding companies, including
smaller banking organizations. Included in the proposed revision are an
expedited 15-day notice procedure with minimal information requirements
for well-rated and well-run bank holding companies, a reorganization
and streamlining of the regulatory laundry list of permissible
nonbanking activities, the removal of unnecessary and outmoded
regulatory restrictions, and an automatic waiver of filing requirements
for bank acquisitions that are in-substance bank-to-bank mergers. These
changes apply to all bank holding companies and will be particularly
helpful to small bank holding companies.
The proposed revisions include a number of other changes applicable
to smaller organizations in particular. These changes include a special
exception for small bank holding companies with assets of less than
$300 million from the aggregate size limit applying to the use of the
expedited application procedures, an update of the small bank holding
company policy statement that applies to bank holding companies with
assets of less than $150 million and reduction of burden for qualifying
small bank holding companies, reduction of the thresholds for
qualification for streamlined formation of new bank holding companies,
reduction in the filing requirements under the Change in Bank Control
Act, and addition of a new exception for small bank holding companies
from the prior approval requirements regarding stock redemption
proposals. These and the other changes described above are explained in
more detail in the Supplementary Information portion of this document.
The Board expects that the numerous changes proposed will result in
a significant reduction in regulatory filings, in the paperwork burden
and processing time associated with regulatory filings, and in the
costs
[[Page 47259]]
associated with complying with regulation, thereby improving the
ability of all bank holding companies, including small organizations,
to conduct business on a more cost-efficient basis. The Board invites
public comment on this subject.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
Ch. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by the Office
of Management and Budget. Comments on the collections of information
should be sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-00171, 7100-0121, 7100-0134, 7100-0131, 7100-
0119, as applicable; see below), Washington, DC 20503, with copies of
such comments to be sent to Mary M. McLaughlin, Federal Reserve Board
Clearance Officer, Division of Research and Statistics, Mail Stop 97,
Board of Governors of the Federal Reserve System, Washington, DC 20551.
The collection of information requirements in this proposed
regulation are found in 12 CFR 225.11, 12 CFR 225.12, 12 CFR 225.14, 12
CFR 225.17, 12 CFR 225.23, 12 CFR 225.24, 12 USC 1817(j) and 1831(i),
12 CFR 225.73, 12 CFR 225.4, and 12 CFR 225.3(a). This information is
required to evidence compliance with the requirements of the Bank
Holding Company Act, the Change in Bank Control Act and provisions of
the Federal Deposit Insurance Act. The respondents are for-profit
financial institutions and other corporations, including small
businesses, and individuals.
The Federal Reserve may not conduct or sponsor, and an organization
is not required to respond to, these information collections unless it
displays a currently valid OMB control number. The OMB control numbers
are indicated below.
The proposed streamlining of applications to acquire banks and
nonbanking companies by institutions that meet the qualifying criteria
should result in a significant reduction in burden for respondents that
file the Application for Prior Approval To Become a Bank Holding
Company, or for a Bank Holding Company To Acquire an Additional Bank or
Bank Holding Company (FR Y-3; OMB No. 7100-0171). Approximately 196
respondents file the FR Y-3 annually pursuant to section 3(a)(1) of the
Bank Holding Company Act (Act) and 303 respondents file annually the FR
Y-3 pursuant to section 3(a)(3) and 3(a)(5) of the Act. The current
burden per response is 48.5 hours and 59.0 hours, respectively, for a
total estimated annual burden of 27,383 hours. Under the proposed rule,
it is estimated that 50 percent of these respondents, or a total of 249
respondents for both types of applications, would meet the criteria to
qualify for the filing of a streamlined application. The average number
of hours per response for proposed applications of each type is
estimated to decrease to 2.5 hours. Therefore the total amount of
annual burden is estimated to be 14,343.5 hours. Based on an hourly
cost of $50, the annual cost to the public under the proposed revision
is estimated to be $717,175, which represents an estimated cost
reduction of $651,975 from the estimated annual cost to the public of
$1,369,150 under the current rule.
The proposed streamlining of applications to engage de novo in
permissible nonbanking activities and to acquire nonbanking companies
and the proposal to permit bank holding companies to obtain approval at
one time to engage in a preauthorized list of such activities should
result in a significant reduction in burden for respondents that file
the Application for Prior Approval To Engage Directly or Indirectly in
Certain Nonbanking Activities (FR Y-4; OMB No. 7100-0121).
Approximately 362 respondents file the FR Y-4 annually to meet
application requirements, and 114 respondents file to meet notification
requirements. The current burden per response is 59.0 hours and 1.5
hours, respectively, for a total estimated annual burden of 21,529
hours. Under the proposed rule it is estimated that 50 percent of these
respondents would meet the criteria to qualify for the filing of a
streamlined application, representing an estimated 181 applications and
57 notifications. The average number of hours per response for proposed
applications of this type is estimated to decrease to 1.5 hours. The
estimated burden per response to meet the notification requirement
remains unchanged at 1.5 hours. Therefore the total amount of annual
burden is estimated to be 11,121.5 hours. Based on an hourly cost of
$50, the annual cost to the public under the proposed revision is
estimated to be $556,075, which represents an estimated cost reduction
of $520,375 from the current estimated annual cost to the public of
$1,076,450 under the current rule.
The proposed elimination of the requirement that a person who has
already received Board approval under the Change in Bank Control Act
obtain additional approvals to acquire additional shares of the same
bank or bank holding company should result in a significant reduction
in burden for respondents that file the Notice of Change in Bank
Control (FR 2081; OMB No. 7100-0134). Approximately 300 respondents
file the FR 2081 annually to meet the notification requirements of
change in control, 280 respondents file to meet the requirements for
notice of a change in director or senior executive officer, and 1000
respondents file to meet requirements to report certain biographical
and financial information. The current burden per response for each
requirement is 30.0 hours, 2.0 hours, and 4.0 hours, respectively, for
a total estimated annual burden of 13,560 hours. Under the proposed
rule it is estimated that 50 percent fewer notifications of change in
control will be filed for an annual total of 150 responses. The
estimated number of filings to meet the other two requirements and the
estimated average hours per response for each requirement remains
unchanged. Therefore the total amount of annual burden is estimated to
be 9,060 hours. Based on an hourly cost of $20, the total annual cost
to the public under the proposed revision is estimated to be $181,200,
which represents an estimated cost reduction of $90,000 from the
current estimated annual cost to the public of $271,200 under the
current rule.
The proposed allowance for bank holding companies to take account
of intervening new issues of stock in computing when a stock redemption
notice must be filed and the exemption provided to small bank holding
companies that meet certain leverage and capital requirements should
result in a significant reduction in burden for respondents that file
the Notice of Proposed Stock Redemption (FR 4008; OMB No. 7100-0131).
Approximately 50 respondents file the FR 4008 annually. The current
burden per response is 15.5 hours, for a total estimated annual burden
of 775 hours. Under the proposed rule it is estimated that 50 percent
fewer notifications will be filed for an annual total of 25 responses
and the estimated average hours per response remains unchanged.
Therefore the total amount of annual burden is estimated to be 387.5
hours. Based on an hourly cost of $30, the total annual cost to the
public under the proposed revision is estimated to be $11,625, which
represents a cost reduction of $11,625 from the current estimated cost
to the public of $23,250 under the current rule.
The proposed streamlining of application requirements are not
expected to change the ongoing annual
[[Page 47260]]
burden associated with the Application for a Foreign Organization to
Become a Bank Holding Company (FR Y-1f; OMB No. 7100-0119).
Approximately 2 respondents file the FR Y-1f annually. The current
burden per response is 77 hours for a total estimated annual burden of
144 hours. Based on an hourly cost of $20, the annual cost to the
public is estimated to be $3,080.
All information contained in these collections of information are
available to the public unless the respondent can substantiate that
disclosure of certain information would result in substantial
competitive harm or an unwarranted invasion of personal privacy or
would otherwise qualify for an exemption under the Freedom of
Information Act.
Comments are invited on: (a) Whether the proposed collections of
information are necessary for the proper performance of the Federal
Reserve's functions; including whether the information has practical
utility; (b) the accuracy of the Federal Reserve's estimate of the
burden of the proposed information collections, including the cost of
compliance; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; and (d) ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology.
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the preamble, the Board proposes to
amend 12 CFR part 225 as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for Part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. Subpart A is revised to read as follows:
Subpart A--General Provisions
Sec.
225.1 Authority, purpose, and scope.
225.2 Definitions.
225.3 Administration.
225.4 Corporate practices.
225.5 Registration, reports, and inspections.
225.6 Penalties for violations.
225.7 Exceptions to tying restrictions.
Subpart A--General Provisions
Sec. 225.1 Authority, purpose, and scope.
(a) Authority. This part 1 (Regulation Y) is issued by the
Board of Governors of the Federal Reserve System (Board) under section
5(b) of the Bank Holding Company Act of 1956, as amended (12 U.S.C.
1844(b)) (BHC Act); sections 8 and 13(a) of the International Banking
Act of 1978 (12 U.S.C. 3106 and 3108); section 7(j)(13) of the Federal
Deposit Insurance Act, as amended by the Change in Bank Control Act of
1978 (12 U.S.C. 1817(j)(13)) (Bank Control Act); section 8(b) of the
Federal Deposit Insurance Act (12 U.S.C. 1818(b)); section 914 of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (12
U.S.C. 1831i); and the International Lending Supervision Act of 1983
(Pub. L. 98-181, title IX). The BHC Act is codified at 12 U.S.C. 1841,
et seq.
---------------------------------------------------------------------------
\1\ Code of Federal Regulations, title 12, chapter II, part 225.
---------------------------------------------------------------------------
(b) Purpose. The principal purposes of this part are to regulate
the acquisition of control of banks by companies and individuals, to
define and regulate the nonbanking activities in which bank holding
companies and foreign banking organizations with United States
operations may engage, and to set forth the procedures for securing
approval for such transactions and activities.
(c) Scope. (1) Subpart A contains general provisions and
definitions of terms used in this regulation.
(2) Subpart B governs acquisitions of bank or bank holding company
securities and assets by bank holding companies or by any company that
will become a bank holding company as a result of the acquisition.
(3) Subpart C defines and regulates the nonbanking activities in
which bank holding companies and foreign banking organizations may
engage directly or through a subsidiary. In addition, certain
nonbanking activities conducted by foreign banking organizations and
certain foreign activities conducted by bank holding companies are
governed by the Board's Regulation K (12 CFR part 211, International
Banking Operations).
(4) Subpart D specifies situations in which a company is presumed
to control voting securities or to have the power to exercise a
controlling influence over the management or policies of a bank or
other company, sets forth the procedures for making a control
determination, and provides rules governing the effectiveness of
divestitures by bank holding companies.
(5) Subpart E governs changes in bank control resulting from the
acquisition by individuals or companies (other than bank holding
companies) of voting securities of a bank holding company or state
member bank of the Federal Reserve System.
(6) Subpart F specifies the limitations that govern companies that
control so-called nonbank banks and the activities of nonbank banks.
(7) Subpart G prescribes minimum standards that apply to the
performance of real estate appraisals and identifies transactions that
require state certified appraisers.
(8) Subpart H identifies the circumstances when written notice must
be provided to the Board prior to the appointment of a director or
senior officer of a bank holding company and establishes procedures for
obtaining the required Board approval.
(9) Appendix A to the regulation contains the Board's Risk-Based
Capital Adequacy Guidelines for bank holding companies and for state
member banks.
(10) Appendix B to the regulation contains the Board's Capital
Adequacy Guidelines for measuring leverage for bank holding companies
and state member banks.
(11) Appendix C to the regulation contains the Board's policy
statement governing small bank holding companies.
(12) Appendix D to the regulation contains the Board's capital
adequacy guidelines for measuring tier 1 leverage for bank holding
companies.
Sec. 225.2 Definitions.
Except as modified in this regulation or unless the context
otherwise requires, the terms used in this regulation have the same
meanings as set forth in the relevant statutes.
(a) Affiliate. Affiliate means any company that controls, is
controlled by, or is under common control with, a bank or nonbank bank.
(b) Bank. (1) Bank means:
(i) An insured bank as defined in section 3(h) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(h)); or
(ii) An institution organized under the laws of the United States
which both:
(A) Accepts demand deposits or deposits that the depositor may
withdraw by check or similar means for payment to third parties or
others; and
(B) Is engaged in the business of making commercial loans.
(2) The term bank does not include those institutions qualifying
under the exceptions listed in section 2(c)(2) of the BHC Act (12
U.S.C. 1841(c)(2)).
(c) Bank holding company--(1) Bank holding company means any
company
[[Page 47261]]
(including a bank) that has direct or indirect control of a bank, other
than control that results from the ownership or control of:
(i) Voting securities held in good faith in a fiduciary capacity
(other than as provided in paragraphs (e)(2) (ii) and (iii) of this
section) without sole discretionary voting authority, or as otherwise
exempted under section 2(a)(5)(A) of the BHC Act;
(ii) Voting securities acquired and held only for a reasonable
period of time in connection with the underwriting of securities, as
provided in section 2(a)(5)(B) of the BHC Act;
(iii) Voting rights to voting securities acquired for the sole
purpose and in the course of participating in a proxy solicitation, as
provided in section 2(a)(5)(C) of the BHC Act;
(iv) Voting securities acquired in satisfaction of debts previously
contracted in good faith, as provided in section 2(a)(5)(D) of the BHC
Act, if the securities are divested within two years of acquisition (or
such later period as the Board may permit by order); or
(v) Voting securities of certain institutions owned by a thrift
institution or a trust company, as provided in sections 2(a)(5) (E) and
(F) of the BHC Act.
(2) Except for the purposes of section 225.4(b) of this subpart and
subpart E of this part or as otherwise provided in this regulation, the
term bank holding company includes a foreign banking organization. For
the purposes of subpart B of this part, the term bank holding company
includes a foreign banking organization only if it owns or controls a
bank in the United States.
(d) Company--(1) Company includes any bank, corporation, general or
limited partnership, association or similar organization, business
trust, or any other trust unless by its terms it must terminate either
within 25 years, or within 21 years and 10 months after the death of
individuals living on the effective date of the trust.
(2) Company does not include any organization, the majority of the
voting securities of which are owned by the United States or any state.
(3) Testamentary Trusts Exempt. Unless the Board finds that the
trust is being operated as a business trust, a trust is presumed not to
be a company if the trust:
(i) Terminates within 21 years and 10 months after the death of
grantors or beneficiaries of the trust living on the effective date of
the trust;
(ii) Is a testamentary trust established by an individual or
individuals for the benefit of natural persons (or trusts for the
benefit of natural persons) who are related by blood, marriage or
adoption;
(iii) Contains only assets previously owned by the individual or
individuals who established the trust;
(iv) Is not a Massachusetts business trust; and
(v) Does not issue shares, certificates or any other evidence of
ownership.
(e) Control--(1) Control of a bank or other company means (except
for the purposes of subpart E of this part):
(i) Ownership, control, or power to vote 25 percent or more of the
outstanding shares of any class of voting securities of the bank or
other company, directly or indirectly or acting through one or more
other persons;
(ii) Control in any manner over the election of a majority of the
directors, trustees, or general partners (or individuals exercising
similar functions) of the bank or other company;
(iii) The power to exercise, directly or indirectly, a controlling
influence over the management or policies of the bank or other company,
as determined by the Board after notice and opportunity for hearing in
accordance with Sec. 225.31 of subpart D of this part; or
(iv) Conditioning in any manner the transfer of 25 percent or more
of the outstanding shares of any class of voting securities of a bank
or other company upon the transfer of 25 percent or more of the
outstanding shares of any class of voting securities of another bank or
other company.
(2) A bank or other company is deemed to control voting securities
or assets owned, controlled, or held, directly or indirectly:
(i) By any subsidiary of the bank or other company;
(ii) In a fiduciary capacity (including by pension and profit-
sharing trusts) for the benefit of the shareholders, members, or
employees (or individuals serving in similar capacities) of the bank or
other company or of any of its subsidiaries; or
(iii) In a fiduciary capacity for the benefit of the bank or other
company or any of its subsidiaries.
(f) Foreign banking organization. Foreign banking organization and
qualifying foreign banking organization shall have the same meanings as
provided in Sec. 211.23 of the Board's Regulation K (12 CFR 211.23).
(g) Management official. Management official means any officer,
director (including honorary or advisory directors), partner, or
trustee of a bank or other company, or any employee of the bank or
other company with policy-making functions.
(h) Nonbank bank. Nonbank bank means any institution that:
(1) Became a bank as a result of enactment of the Competitive
Equality Amendments of 1987 (Pub. L. 100-86), on the date of such
enactment (August 10, 1987); and
(2) Was not controlled by a bank holding company on the day before
the enactment of the Competitive Equality Amendments of 1987 (August 9,
1987).
(i) Outstanding shares. Outstanding shares means any voting
securities, but does not include securities owned by the United States
or by a company wholly owned by the United States.
(j) Person. Person includes an individual, bank, corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization, or any other form of
entity.
(k) Savings association. Savings association means:
(1) Any federal savings association or federal savings bank;
(2) Any building and loan association, savings and loan
association, homestead association, or cooperative bank if such
association or cooperative bank is a member of the Savings Association
Insurance Fund; and
(3) Any savings bank or cooperative which is deemed by the director
of the Office of Thrift Supervision to be a savings association under
section 10(l) of the Home Owners Loan Act.
(l) Shareholder--(1) Controlling shareholder means a person that
owns or controls, directly or indirectly, 25 percent or more of any
class of voting securities of a bank or other company.
(2) Principal shareholder means a person that owns or controls,
directly or indirectly, 10 percent or more of any class of voting
securities of a bank or other company, or any person that the Board
determines has the power, directly or indirectly, to exercise a
controlling influence over the management or policies of a bank or
other company.
(m) Subsidiary. Subsidiary means a bank or other company that is
controlled by another company, and refers to a direct or indirect
subsidiary of a bank holding company. An indirect subsidiary is a bank
or other company that is controlled by a subsidiary of the bank holding
company.
(n) United States. United States means the United States and
includes any state of the United States, the District of Columbia, any
territory of the United States, Puerto Rico, Guam, American Samoa, and
the Virgin Islands.
(o) Voting securities--(1) In general. Voting securities means
shares of common or preferred stock, general or limited partnership
shares or interests,
[[Page 47262]]
or similar interests if the shares or interest, by statute, charter, or
in any manner, entitle the holder:
(i) To vote for or to select directors, trustees, or partners (or
persons exercising similar functions of the issuing company); or
(ii) To vote on or to direct the conduct of the operations or other
significant policies of the issuing company.
(2) Nonvoting shares. Preferred shares, limited partnership shares
or interests, or similar interests are not voting securities if:
(i) Any voting rights associated with the shares or interest are
limited solely to the type customarily provided by statute with regard
to matters that would significantly and adversely affect the rights or
preference of the security or other interest, such as the issuance of
additional amounts or classes of senior securities, the modification of
the terms of the security or interest, the dissolution of the issuing
company, or the payment of dividends by the issuing company when
preferred dividends are in arrears;
(ii) The shares or interest represent an essentially passive
investment or financing device and do not otherwise provide the holder
with control over the issuing company; and
(iii) The shares or interest do not entitle the holder, by statute,
charter, or in any manner, to select or to vote for the selection of
directors, trustees, or partners (or persons exercising similar
functions) of the issuing company.
(3) Class of voting shares. Shares of stock issued by a single
issuer are deemed to be the same class of voting shares, regardless of
differences in dividend rights or liquidation preference, if the shares
are voted together as a single class on all matters for which the
shares have voting rights other than matters described in paragraph
(o)(2)(i) of this section that affect solely the rights or preferences
of the shares.
Sec. 225.3 Administration.
(a) Delegation of authority. Designated Board members and officers
and the Federal Reserve Banks are authorized by the Board to exercise
various functions prescribed in this regulation and in the Board's
Rules Regarding Delegation of Authority (12 CFR part 265) and the
Board's Rules of Procedure (12 CFR part 262).
(b) Appropriate Federal Reserve Bank. In administering this
regulation, unless a different Federal Reserve Bank is designated by
the Board, the appropriate Federal Reserve Bank is as follows:
(1) For a bank holding company (or a company applying to become a
bank holding company): The Reserve Bank of the Federal Reserve district
in which the company's banking operations are principally conducted, as
measured by total domestic deposits in its subsidiary banks on the date
it became (or will become) a bank holding company;
(2) For a foreign banking organization that has no subsidiary bank
and is not subject to paragraph (b)(1) of this section: The Reserve
Bank of the Federal Reserve district in which the total assets of the
organization's United States branches, agencies, and commercial lending
companies are the largest as of the later of January 1, 1980, or the
date it becomes a foreign banking organization;
(3) For an individual or company submitting a notice under subpart
E of this part: the Reserve Bank of the Federal Reserve district in
which the banking operations of the bank holding company or state
member bank to be acquired are principally conducted, as measured by
total domestic deposits on the date the notice is filed.
Sec. 225.4 Corporate practices.
(a) Bank holding company policy and operations. (1) A bank holding
company shall serve as a source of financial and managerial strength to
its subsidiary banks and shall not conduct its operations in an unsafe
or unsound manner.
(2) Whenever the Board believes an activity of a bank holding
company or control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) constitutes a serious risk to the financial
safety, soundness, or stability of a subsidiary bank of the bank
holding company and is inconsistent with sound banking principles or
the purposes of the BHC Act or the Financial Institutions Supervisory
Act of 1966, as amended (12 U.S.C. 1818(b) et seq.), the Board may
require the bank holding company to terminate the activity or to
terminate control of the subsidiary, as provided in section 5(e) of the
BHC Act.
(b) Purchase or redemption by a bank holding company of its own
securities. (1) Filing notice. Except as provided in paragraph (b)(6)
or paragraph (b)(7) of this section, a bank holding company shall give
the Board prior written notice before purchasing or redeeming its
equity securities if the gross consideration for the purchase or
redemption, when aggregated with the net consideration paid by the
company for all such purchases or redemptions during the preceding 12
months, is equal to 10 percent or more of the company's consolidated
net worth. For the purposes of this section, ``net consideration'' is
the gross consideration paid by the company for all of its equity
securities purchased or redeemed during the period minus the gross
consideration received for all of its equity securities sold during the
period.
(2) Content of notice. Any notice under this section shall be filed
with the appropriate Reserve Bank and shall contain the following
information:
(i) The purpose of the transaction, a description of the securities
to be purchased or redeemed, the total number of each class
outstanding, the gross consideration to be paid, and the terms of any
debt incurred in connection with the transaction;
(ii) A description of all equity securities redeemed within the
preceding 12 months, the net consideration paid, and the terms of any
debt incurred in connection with those transactions; and
(iii) A current and pro forma consolidated balance sheet if the
bank holding company has total assets of over $150 million, or a
current and pro forma parent-company-only balance sheet if the bank
holding company has total assets of $150 million or less.
(3) Acting on notice. Within 15 calendar days of receipt of a
notice under this section, the appropriate Reserve Bank shall either
approve the transaction proposed in the notice or refer the notice to
the Board for decision. If the notice is referred to the Board for
decision, the Board shall act on the notice within 30 calendar days
after the Reserve Bank receives the notice.
(4) Factors considered in acting on notice. The Board may
disapprove a proposed purchase or redemption if it finds that the
proposal would constitute an unsafe or unsound practice, or would
violate any law, regulation, Board order, directive, or any condition
imposed by, or written agreement with, the Board. In determining
whether a proposal constitutes an unsafe or unsound practice, the Board
will consider whether the bank holding company's financial condition,
after giving effect to the proposed purchase or redemption, meets the
financial standards applied by the Board under section 3 of the BHC
Act, including the Board's Capital Adequacy Guidelines (appendix A) and
the Board's Policy Statement for Small Bank Holding Companies (appendix
C).
(5) Disapproval and hearing. The Board shall notify the bank
holding company in writing of the reasons for a decision to disapprove
any proposed purchase or redemption. Within 10 calendar days of receipt
of a notice of disapproval by the Board, the bank holding company may
submit a written request for a hearing. The Board will
[[Page 47263]]
order a hearing within 10 calendar days of receipt of that request if
it finds that material facts are in dispute or if it otherwise appears
appropriate. Any hearing conducted under this paragraph shall be held
in accordance with the Board's Rules of Practice for Formal Hearings
(12 CFR part 263). At the conclusion of the hearing, the Board shall by
order approve or disapprove the proposed purchase or redemption on the
basis of the record of the hearing.
(6) Exception for well-capitalized bank holding companies. A bank
holding company is not required to obtain prior Board approval for the
redemption or purchase of its equity securities under this section
provided:
(i) The total and tier 1 risk-based capital ratios and the leverage
capital ratio for the bank holding company, both before and following
the redemption, exceed the thresholds established for well-capitalized
state member banks under 12 CFR 208.33(b)(1) as if the bank holding
company (on a consolidated basis) were deemed to be a state member
bank;
(ii) The bank holding company received a BOPEC composite 1-S or 2-S
rating at its most recent inspection; and
(iii) The bank holding company is not the subject of any unresolved
supervisory issues.
(7) Exception for small bank holding companies. A bank holding
company that has less than $150 million in total assets and no public
debt outstanding, and does not engage in any leveraged nonbanking
activities, is not required to obtain prior Board approval for the
redemption or purchase of its equity securities under this section
provided:
(i) The bank holding company received a BOPEC composite 1-S or 2-S
rating at its most recent inspection;
(ii) The bank holding company has a debt to equity ratio of not
more than 1.0:1 on a pro forma basis;
(iii) Each bank controlled by the bank holding company is rated
composite 1 or 2 as of its most recent examination;
(iv) The total and tier 1 risk-based capital ratios and the
leverage capital ratio for each bank controlled by the bank holding
company, both before and following the redemption, exceed the
thresholds established for ``well-capitalized'' state member banks
under 12 CFR 208.33(b)(1); and
(v) The bank holding company is not the subject of any unresolved
supervisory issues.
(c) Deposit insurance. Every bank that is a bank holding company or
a subsidiary of a bank holding company shall obtain Federal Deposit
Insurance and shall remain an insured bank as defined in section 3(h)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).
(d) Acting as transfer agent, municipal securities dealer, or
clearing agent. A bank holding company or any nonbanking subsidiary
that is a ``bank'', as defined in section 3(a)(6) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(6)), and that is a transfer
agent of securities, a municipal securities dealer, a clearing agency,
or a participant in a clearing agency (as those terms are defined in
section 3(a) of the Securities Exchange Act (12 U.S.C. 78c(a)), shall
be subject to Secs. 208.8 (f)-(j) of the Board's Regulation H (12 CFR
208.8 (f)-(j)) as if it were a state member bank.
(e) Reporting requirement for credit secured by certain bank
holding company stock. Each executive officer or director of a bank
holding company the shares of which are not publicly traded shall
report annually to the board of directors of the bank holding company
the outstanding amount of any credit that was extended to the executive
officer or director and that is secured by shares of the bank holding
company. For purposes of this paragraph, the terms ``executive
officer'' and ``director'' shall have the meaning given in Sec. 215.2
of Regulation O, 12 CFR 215.2.
(f) Criminal referral report. A bank holding company or any nonbank
subsidiary thereof, or a foreign bank that is subject to the BHC Act or
any nonbank subsidiary of such foreign bank operating in the United
States, shall file a criminal referral form in accordance with the
provisions of Sec. 208.20 of the Board's Regulation H, 12 CFR 208.20.
Sec. 225.5 Registration, reports, and inspections.
(a) Registration of bank holding companies. Each company shall
register within 180 days after becoming a bank holding company by
furnishing information in the manner and form prescribed by the Board.
A company that receives the Board's prior approval under subpart B of
this part to become a bank holding company may complete this
registration requirement through submission of its first annual report
to the Board as required by paragraph (b) of this section.
(b) Reports of bank holding companies. Each bank holding company
shall furnish, in the manner and form prescribed by the Board, an
annual report of the company's operations for the fiscal year in which
it becomes a bank holding company, and for each fiscal year during
which it remains a bank holding company. Additional information and
reports shall be furnished as the Board may require.
(c) Examinations and inspections. The Board may examine or inspect
any bank holding company and each of its subsidiaries and prepare a
report of their operations and activities. With respect to a foreign
banking organization, the Board may also examine any branch or agency
of a foreign bank in any state of the United States and may examine or
inspect each of the organization's subsidiaries in the United States
and prepare reports of their operations and activities. The Board will
rely as far as possible on the reports of examination made by the
primary federal or state supervisor of the subsidiary bank of a bank
holding company or of the branch or agency of the foreign bank.
Sec. 225.6 Penalties for violations.
(a) Criminal and civil penalties. Section 8 of the BHC Act provides
criminal penalties for willful violation, and civil penalties for
violation, by any company or individual of the BHC Act or any
regulation or order issued under it, or for making a false entry in any
book, report, or statement of a bank holding company. Civil money
penalty assessments for violations of the BHC Act shall be made in
accordance with subpart C of the Board's Rules of Practice for Hearings
(12 CFR part 263, subpart C). For any willful violation of the Bank
Control Act or any regulation or order issued under it, the Board may
assess a civil penalty as provided in 12 U.S.C. 1817(j)(15).
(b) Cease-and-desist proceedings. For any violation of the BHC Act,
the Bank Control Act, this regulation, or any order or notice issued
thereunder, the Board may institute a cease-and-desist proceeding in
accordance with the Financial Institutions Supervisory Act of 1966, as
amended (12 U.S.C. 1818(b) et seq.).
Sec. 225.7 Exceptions to tying restrictions.
(a) Purpose. This section establishes exceptions to the anti-tying
restrictions of section 106 of the Bank Holding Company Act Amendments
of 1970 (12 U.S.C. 1971, 1972(1)). These exceptions are in addition to
statutory exceptions in section 106. The section also restricts tying
of electronic benefit transfer services by bank holding companies and
their nonbank subsidiaries.
(b) Exceptions to statute. Subject to the limitations of paragraph
(c) of this section, a bank may:
(1) Traditional bank products. Extend credit, lease or sell
property of any kind, or furnish any service, or fix or vary the
consideration for any of the foregoing,
[[Page 47264]]
on the condition or requirement that a customer:
(i) Obtain a traditional bank product from an affiliate of the
bank; or
(ii) Provide some additional credit, property, or service to an
affiliate of the bank that is related to and usually provided in
connection with a traditional bank product.
(2) Safe harbor for combined-balance discounts. Vary the
consideration for any product or package of products based on a
customer's maintaining a combined minimum balance in certain products
specified by the bank (eligible products), if:
(i) The bank offers deposits, and all such deposits are eligible
products; and
(ii) Balances in deposits count at least as much as nondeposit
products toward the minimum balance.
(c) Limitations on exceptions. Any exception granted pursuant to
this section shall terminate upon a finding by the Board that the
arrangement is resulting in anticompetitive practices. The eligibility
of a bank to operate under any exception granted pursuant to this
section shall terminate upon a finding by the Board that its exercise
of this authority is resulting in anticompetitive practices.
(d) Electronic benefit transfer services. A bank holding company or
nonbank subsidiary of a bank holding company that provides electronic
benefit transfer services shall be subject to the anti-tying
restrictions applicable to such services set forth in section 7(i)(11)
of the Food Stamp Act of 1977 (7 U.S.C. 2016(i)(11).
(e) Definitions. For purposes of this section:
(1) Traditional bank product means a loan, discount, deposit, or
trust service.
(2) Affiliate has the meaning given such term in section 2(k) of
the Bank Holding Company Act (12 U.S.C. 1841(k)).
3. Subpart B is revised to read as follows:
Subpart B--Acquisition of Bank Securities or Assets
Sec.
225.11 Transactions requiring Board approval.
225.12 Transactions not requiring Board approval.
225.13 Factors considered in acting on bank acquisition proposals.
225.14 Expedited action for certain bank acquisitions by well-run
bank holding companies.
225.15 Procedures for other bank acquisition proposals.
225.16 Public notice, hearings and other provisions governing
applications and notices.
225.17 Notice procedure for one-bank holding company formations.
Subpart B--Acquisition of Bank Securities or Assets
Sec. 225.11 Transactions requiring Board approval.
The following transactions require the Board's prior approval under
section 3 of the Bank Holding Company Act except as exempted under
Sec. 225.12 or as otherwise covered by Sec. 225.17 of this part:
(a) Formation of bank holding company. Any action that causes a
bank or other company to become a bank holding company.
(b) Acquisition of subsidiary bank. Any action that causes a bank
to become a subsidiary of a bank holding company.
(c) Acquisition of control of bank or bank holding company
securities. The acquisition by a bank holding company of direct or
indirect ownership or control of any voting securities of a bank or
bank holding company, if the acquisition results in the company's
control of more than 5 percent of the outstanding shares of any class
of voting securities of the bank or bank holding company. An
acquisition includes the purchase of additional securities through the
exercise of preemptive rights, but does not include securities received
in a stock dividend or stock split that does not alter the bank holding
company's proportional share of any class of voting securities.
(d) Acquisition of bank assets. The acquisition by a bank holding
company or by a subsidiary thereof (other than a bank) of all or
substantially all of the assets of a bank.
(e) Merger of bank holding companies. The merger or consolidation
of bank holding companies, including a merger through the purchase of
assets and assumption of liabilities.
(f) Transactions by foreign banking organization. Any transaction
described in paragraphs (a) through (e) of this section by a foreign
banking organization (as defined in 12 CFR 211.21(n)) that involves the
acquisition of an interest in a U.S. bank or in a bank holding company
for which application would be required if the foreign banking
organization were a bank holding company.
Sec. 225.12 Transactions not requiring Board approval.
The following transactions do not require the Board's approval
under Sec. 225.11 of this subpart:
(a) Acquisition of securities in fiduciary capacity. The
acquisition by a bank or other company (other than a trust that is a
company) of control of voting securities of a bank or bank holding
company in good faith in a fiduciary capacity, unless:
(1) The acquiring bank or other company has sole discretionary
authority to vote the securities and retains the authority for more
than two years; or
(2) The acquisition is for the benefit of the acquiring bank or
other company, or its shareholders, employees, or subsidiaries.
(b) Acquisition of securities in satisfaction of debts previously
contracted. The acquisition by a bank or other company of control of
voting securities of a bank or bank holding company in the regular
course of securing or collecting a debt previously contracted in good
faith, if the acquiring bank or other company divests the securities
within two years of acquisition. The Board or Reserve Bank may grant
requests for up to three one-year extensions.
(c) Acquisition of securities by a bank holding company with
majority control. The acquisition by a bank holding company of
additional voting securities of a bank or bank holding company if more
than 50 percent of the outstanding voting securities of the bank or
bank holding company is lawfully controlled by the acquiring bank
holding company prior to the acquisition.
(d) Acquisitions involving bank mergers--(1) Transactions subject
to Bank Merger Act. The merger or consolidation of a subsidiary bank of
a bank holding company with another bank, or the purchase of assets by
such a subsidiary bank, or a similar transaction involving subsidiary
banks of a bank holding company, if the transaction requires the prior
approval of a federal supervisory agency under the Bank Merger Act (12
U.S.C. 1828(c)) and does not involve the acquisition of shares of a
bank. This exception does not include:
(i) The merger of a nonsubsidiary bank and a nonoperating
subsidiary bank formed by a company for the purpose of acquiring the
nonsubsidiary bank; or
(ii) Any transaction requiring the Board's prior approval under
Sec. 225.11(e) of this subpart. The Board may require an application
under this subpart if it determines that the merger or consolidation
would have a significant adverse impact on the financial condition of
the bank holding company or otherwise requires approval under section 3
of the BHC Act.
(2) Certain acquisitions subject to the Bank Merger Act. The
acquisition by a bank holding company of shares of a bank or company
controlling a bank, or the merger of a company controlling a bank with
the bank holding company, as part of the merger or consolidation of
[[Page 47265]]
the bank with a subsidiary bank (other than a nonoperating subsidiary
bank) of the acquiring bank holding company or as part of the purchase
of substantially all of the assets of the bank by a subsidiary bank
(other than a nonoperating subsidiary bank) of the acquiring bank
holding company, if:
(i) The bank merger, consolidation, or asset purchase occurs
simultaneously with the acquisition of the shares of the bank or bank
holding company or the merger of holding companies, and the bank is not
operated by the acquiring bank holding company as a separate entity
other than as the survivor of the merger, consolidation or asset
purchase;
(ii) The transaction requires the prior approval of a federal
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));
(iii) The transaction does not involve the acquisition of any
nonbank company that would require prior approval under section 4 of
the BHC Act (12 U.S.C. 1843);
(iv) Both before and after the transaction, the acquiring bank
holding company meets the Board's Capital Adequacy Guidelines
(appendixes A, B and C of this part);
(v) At least 10 days prior to the transaction, the acquiring bank
holding company has provided to the Reserve Bank written notice of the
transaction that contains:
(A) A copy of the filing made to the appropriate federal banking
agency under the Bank Merger Act, and
(B) A description of the holding company's involvement in the
transaction, the purchase price and the source of funding for the
purchase price; and
(vi) Prior to expiration of the period provided in paragraph
(d)(2)(v) of this section, the Reserve Bank has not informed the bank
holding company that an application under Sec. 225.11 is required.
(3) Internal corporate reorganizations. (i) Subject to paragraph
(d)(3)(ii) of this section, any of the following transactions performed
by a bank holding company:
(A) The merger of subsidiary holding companies;
(B) The formation of a subsidiary holding company;
(C) The transfer of control or ownership of a subsidiary bank from
one subsidiary holding company to another subsidiary holding company or
to the parent holding company.
(ii) A transaction described in paragraph (d)(3)(i) of this section
qualifies for this exception if:
(A) The transaction represents solely a corporate reorganization
involving companies and insured depository institutions that, both
preceding and following the transaction, are controlled and operated by
the bank holding company;
(B) The transaction does not involve the acquisition of additional
voting shares of an insured depository institution that, prior to the
transaction, was less than majority owned by the bank holding company;
(C) Both before and after the transaction, the bank holding company
meets the Board's capital adequacy guidelines (appendixes A, B and C of
this part); and
(D) At least 10 days prior to the transaction, the bank holding
company has provided to the Reserve Bank written notice of the
transaction and the Reserve Bank has not informed the bank holding
company that an application under Sec. 225.11 is required.1
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\1\ In the case of transactions that result in the formation or
designation of a new bank holding company, the new bank holding
company must also complete the registration requirements described
in Sec. 225.5.
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(e) Holding securities in escrow. The holding of any voting
securities of a bank or bank holding company in an escrow arrangement
for the benefit of an applicant pending the Board's action on an
application for approval of the proposed acquisition, if title to the
securities and the voting rights remain with the seller and payment for
the securities has not been made to the seller.
(f) Acquisition of foreign banking organization. The acquisition of
a foreign banking organization (as defined in 12 CFR 211.21(n)) where
the foreign banking organization does not directly or indirectly own or
control a bank in the United States, unless the acquisition is also by
a foreign banking organization and otherwise subject to Sec. 225.11(f)
of this subpart.
Sec. 225.13 Factors considered in acting on bank acquisition
proposals.
(a) Factors requiring denial. As specified in section 3(c) of the
BHC Act, the Board may not approve any application under this subpart
if:
(1) The transaction would result in a monopoly or would further any
combination or conspiracy to monopolize, or to attempt to monopolize,
the business of banking in any part of the United States;
(2) The effect of the transaction may be substantially to lessen
competition in any section of the country, tend to create a monopoly,
or in any other manner be in restraint of trade, unless the Board finds
that the transaction's anticompetitive effects are clearly outweighed
by its probable effect in meeting the convenience and needs of the
community;
(3) The applicant has failed to provide the Board with adequate
assurances that it will make available such information on its
operations or activities, and the operations or activities of any
affiliate of the applicant, that the Board deems appropriate to
determine and enforce compliance with the BHC Act and other applicable
federal banking statutes, and any regulations thereunder; or
(4) In the case of an application involving a foreign bank, the
foreign bank is not subject to comprehensive supervision or regulation
on a consolidated basis by the appropriate authorities in its home
country, as provided in Sec. 211.24(c)(1)(ii) of the Board's Regulation
K (12 CFR 211.24(c)(1)(ii)).
(b) Other factors. In deciding applications under this subpart, the
Board also considers the following factors with respect to the
applicant, its subsidiaries, any banks related to the applicant through
common ownership or management, and the bank or banks to be acquired:
(1) Financial condition. Their financial condition and future
prospects, including whether current and projected capital positions
and levels of indebtedness conform to standards and policies
established by the Board.
(2) Managerial resources. The competence, experience, and integrity
of the officers, directors, and principal shareholders of the
applicant, its subsidiaries and the banks and bank holding companies
concerned; their record of compliance with laws and regulations; and
the record of the applicant and its affiliates of fulfilling any
commitments to, and any conditions imposed by, the Board in connection
with prior applications.
(3) Convenience and needs of the community. The convenience and
needs of the communities to be served, including the record of
performance under the Community Reinvestment Act of 1977 (12 U.S.C.
2901 et seq.) and regulations issued thereunder, including the Board's
Regulation BB (12 CFR part 228).
(c) Interstate transactions. The Board may approve any application
or notice under this subpart by a bank holding company to acquire
control of or all or substantially all of the assets of a bank located
in a state other than the home state of the bank holding company,
without regard to whether the transaction is prohibited under the law
of any state, if the transaction complies
[[Page 47266]]
with the requirements of section 3(d) of the BHC Act (12 U.S.C.
1842(d)).
Sec. 225.14 Expedited action for certain bank acquisitions by well-run
bank holding companies.
(a) Filing of notice--(1) Information required and public notice.
As an alternative to the procedure provided in Sec. 225.15, a bank
holding company that meets the requirements of paragraph (b) of this
section may satisfy the prior approval requirements of Sec. 225.11 in
connection with the acquisition of shares or control of a bank, or a
merger or consolidation between registered bank holding companies, by
providing the appropriate Reserve Bank with a written notice containing
the following:
(i) A certification that all of the criteria in paragraph (b) of
this section are met;
(ii) A description of the transaction that includes identification
of the companies and insured depository institutions involved in the
transaction, identification of each banking market affected by the
transaction, and a description of the funding for the transaction;
(iii) Evidence that notice of the proposal has been published in
accordance with Sec. 225.16(b); and
(iv) A balance sheet and capital ratios for the acquiring bank
holding company and the market indexes for each relevant banking market
reflecting the pro forma effect of the transaction.
(2) Action on proposals under this section. The Board or the
appropriate Reserve Bank shall act on a proposal submitted under this
section or notify the bank holding company that the transaction is
subject to the procedure in Sec. 225.15 before the later of:
(i) 15 calendar days following the filing of all of the information
required in paragraph (a)(1)of this section; or
(ii) 3 business days following the close of the public comment
period;
(3) Acceptance of notice in event expedited procedure not
available. In the event that the Board or the Reserve Bank determines
after the filing of a notice under this section that a bank holding
company may not use the procedure in this section and must file a
notice under Sec. 225.15, the notice shall be deemed accepted for
purposes of Sec. 225.15 as of the date that the notice was filed under
this section.
(b) Criteria for use of expedited procedure. The procedure in this
section is available only if:
(1) Well capitalized organization.
(i) Bank holding company. Both at the time of and immediately after
the proposed transaction, the acquiring bank holding company is well
capitalized; 2
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\2\ For purposes of this paragraph, a bank holding company with
assets under $150 million will be deemed to have met the
requirements of this paragraph if the parent bank holding company's
ratio of pro forma debt to equity is 1.0:1 or less and the proposal
in all other respects meets the requirements of appendix C of this
part.
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(ii) Insured depository institutions. Both at the time of and
immediately after the proposed transaction,
(A) The lead insured depository institution of the acquiring bank
holding company is well capitalized;
(B) Well capitalized insured depository institutions control at
least 80 percent of the total assets of insured depository institutions
controlled by the acquiring bank holding company; and
(C) No insured depository institution controlled by the acquiring
bank holding company is undercapitalized;
(2) Well managed organization. At the time of the transaction, the
acquiring bank holding company, its lead insured depository
institution, and insured depository institutions that control at least
80 percent of the total assets of insured depository institutions
controlled by such holding company are well managed;
(3) Established CRA performance record. At the time of the
transaction, the lead insured depository institution of the acquiring
bank holding company, and insured depository institutions that control
at least 80 percent of the total assets of insured depository
institutions controlled by such holding company have received a
'satisfactory' or better composite rating and at least a satisfactory
rating for consumer compliance at the most recent examination under the
Community Reinvestment Act;
(4) Competitive criteria--(i) Competitive screen. Without regard to
any divestitures proposed by the acquiring bank holding company, the
acquisition does not cause:
(A) Insured depository institutions controlled by the acquiring
bank holding company to control in excess of 35 percent of market
deposits in any relevant banking market, or
(B) The Herfindahl-Hirschman index to increase by more than 200
points in any relevant banking market with a post-acquisition index of
at least 1800;
(ii) Department of Justice. The Department of Justice has not
indicated to the Board that consummation of the transaction is likely
to have a significantly adverse effect on competition in any relevant
banking market;
(5) Size of acquisition. Either:
(i) In general. The book value of the aggregate risk-weighted
assets acquired by the acquiring bank holding company in all
transactions approved during the previous 12 months under this section
and Sec. 225.23 does not exceed 35 percent of the consolidated risk-
weighted assets of the acquiring bank holding company; or
(ii) Small bank holding companies. Immediately following
consummation of the proposed transaction, the consolidated total assets
of the acquiring bank holding company are less than $300 million;
(6) Interstate acquisitions. Board approval of the transaction is
not prohibited under section 3(d) of the BHC Act;
(7) Other supervisory considerations. Board approval of the
transaction is not prohibited under the informational sufficiency and
comprehensive home country supervision standards set forth in section
3(c)(3) of the BHC Act; and
(8) Notification. The acquiring bank holding company has not been
notified by the Board or Reserve Bank prior to the expiration of the
period in paragraph (a)(2) of this section that an application under
Sec. 225.15 is required.
(c) Comment by primary banking supervisor--(1) Notice. Upon receipt
of a notice under this section, the appropriate Reserve Bank shall
promptly furnish notice of the proposal and a copy of the information
filed pursuant to paragraph (a) of this section to the primary banking
supervisor of the banks to be acquired.
(2) Comment period. The primary banking supervisor shall have 30
calendar days (or such shorter time as agreed to by the primary banking
supervisor) from the date of the letter giving notice in which to
submit its views and recommendations to the Board.
(3) Action subject to supervisor's comment. Action by the Board or
the Reserve Bank on a proposal under this section is subject to the
condition that the primary banking supervisor not object to the
proposal prior to the expiration of the comment period described in
paragraph (c)(2) of this section. In the event that the primary banking
supervisor provides written notice to the Board during the 30-day
period described in paragraph (c)(2) of this section objecting to the
proposal, any approval given under this section shall be revoked and
the Board shall order a hearing on the proposal in accordance with
section 3(b) of the Bank Holding Company Act;
(4) Emergencies. Notwithstanding paragraphs (c) (2) and (3) of this
section, the Board may provide the primary banking supervisor with 10
calendar days notice of a proposal under this
[[Page 47267]]
section if the Board finds that an emergency exists requiring
expeditious action, and may act during the notice period or without
providing notice to the primary banking supervisor if the Board finds
that it must act immediately to prevent probable failure.
(d) Definitions. For purposes of this section--
(1) Primary banking supervisor. The primary banking supervisor for
an institution is:
(i) The Office of the Comptroller of the Currency in the case of a
national banking association or District bank; and
(ii) The appropriate supervisory authority for the State in which
the bank is chartered in the case of a State bank.
(2) Well managed. A company or depository institution is well
managed if, at its most recent inspection or examination or subsequent
review, the company or institution received:
(i) One of the highest two composite ratings; and
(ii) At least a satisfactory rating for management, if such a
rating is given.
Sec. 225.15 Procedures for other bank acquisition proposals.
(a) Filing application. Except as provided in Sec. 225.14, an
application for the Board's prior approval under this subpart shall be
governed by the provisions of this section and shall be filed with the
appropriate Reserve Bank on the designated form.
(b) Notice to primary banking supervisor. Upon receipt of an
application under this subpart, the Reserve Bank shall promptly furnish
notice and a copy of the application to the primary banking supervisor
of each bank to be acquired. The primary supervisor shall have 30
calendar days from the date of the letter giving notice in which to
submit its views and recommendations to the Board.
(c) Accepting application for processing. Within 7 calendar days
after the Reserve Bank receives an application under this section, the
Reserve Bank shall accept it for processing or return the application
if it is substantially incomplete. Upon accepting an application, the
Reserve Bank shall immediately send copies to the Board. The Reserve
Bank or the Board may request additional information necessary to
complete the record of an application at any time after accepting the
application for processing.
(d) Action on applications--(1) Action under delegated authority.
The Reserve Bank shall approve an application under this section within
30 calendar days after it has accepted the application, unless the
Reserve Bank, upon notice to the applicant, refers the application to
the Board for decision because action under delegated authority is not
appropriate.
(2) Board action. The Board shall act on an application under this
subpart that is referred to it for decision within 60 calendar days
after the Reserve Bank has accepted the application, unless the Board
notifies the applicant that the 60-day period is being extended for a
specified period and states the reasons for the extension. In no event
may the extension exceed the 91-day period provided in Sec. 225.16(e).
The Board may at any time request additional information that it
believes is necessary for its decision.
Sec. 225.16 Public notice, hearings and other provisions governing
applications and notices.
(a) In general. The provisions of this section shall apply to all
notices and applications filed under Secs. 225.14 and 225.15.
(b) Public notice--(1) Newspaper publication--(i) Location of
publication. In the case of each notice or application submitted under
Secs. 225.14 or 225.15, the applicant shall cause a newspaper notice to
be published in a newspaper of general circulation in the form and at
the locations specified in Sec. 262.3 of the Rules of Procedure (12 CFR
262.3);
(ii) Content of notice. A newspaper notice under this paragraph
shall provide an opportunity for interested persons to comment on the
proposal for a period of at least 30 calendar days; and
(iii) Timing of publication. Each newspaper notice published in
connection with a proposal under this paragraph must be published no
more than 30 calendar days before and no later than 7 calendar days
following the date that a notice or application is filed with the
appropriate Reserve Bank.
(2) Federal Register notice--(i) Publication by Board. Upon receipt
of a notice or application under Sec. 225.14 or Sec. 225.15, the Board
shall promptly publish notice of the proposal in the Federal Register
and shall provide an opportunity for interested persons to comment on
the proposal for a period of at least 15 calendar days;
(ii) Request for advance publication. At any time during the 30-day
period prior to filing a notice or application under Sec. 225.14 or
Sec. 225.15, a bank holding company may request that the Board publish
notice of a proposal in the Federal Register. A request for advance
Federal Register publication must be made in writing to the appropriate
Reserve Bank and must contain the identifying information prescribed by
the Board for Federal Register publication;
(3) Waiver or shortening of notice. The Board may waive or shorten
the required notice periods under this section if the Board determines
that an emergency exists requiring expeditious action on the proposal
or the Board finds that immediate action is necessary to prevent the
probable failure of an insured depository institution.
(c) Notice to Attorney General. The Board or Reserve Bank shall
immediately notify the Attorney General of approval of any notice or
application under Sec. 225.14 or Sec. 225.15.
(d) Hearings. As provided in section 3(b) of the BHC Act, the Board
shall order a hearing on any application or notice under Secs. 225.14
or 225.15 if the Board receives from the primary supervisor of the bank
to be acquired, within the 30-day period specified in Sec. 225.14(c) or
Sec. 225.15(b), a written recommendation of disapproval of an
application. The Board may order a formal or informal hearing or other
proceeding on the application or notice, as provided in
Sec. 262.3(i)(2) of the Board's Rules of Procedure. Any request for a
hearing (other than from the primary supervisor) shall comply with
section 262.3(e) of the Rules of Procedure (12 CFR 262.3(e)).
(e) Approval through failure to act--(1) Ninety-one day rule. An
application or notice under Sec. 225.14 or Sec. 225.15 shall be deemed
approved if the Board fails to act on the application or notice within
91 calendar days after the date of submission to the Board of the
complete record on the application. For this purpose, the Board acts
when it issues an order stating that the Board has approved or denied
the application or notice, reflecting the votes of the members of the
Board, and indicating that a statement of the reasons for the decision
will follow promptly.
(2) Complete record. For the purpose of computing the commencement
of the 91-day period, the record is complete on the latest of:
(i) The date of receipt by the Board of an application or notice
that has been accepted by the Reserve Bank;
(ii) The last day provided in any notice for receipt of comments
and hearing requests on the application or notice;
(iii) The date of receipt by the Board of the last relevant
material regarding the application or notice that is needed for the
Board's decision, if the material is received from a source outside of
the Federal Reserve System; or
(iv) The date of completion of any hearing or other proceeding.
[[Page 47268]]
(f) Exceptions to notice and hearing requirements--(1) Probable
bank failure. If the Board finds it must act immediately on an
application or notice in order to prevent the probable failure of a
bank or bank holding company, the Board may modify or dispense with the
notice and hearing requirements provided in this section.
(2) Emergency. If the Board finds that, although immediate action
on an application or notice is not necessary, an emergency exists
requiring expeditious action, the Board shall provide the primary
supervisor 10 days to submit its recommendation. The Board may act on
such an application or notice without a hearing and may modify or
dispense with the other notice and hearing requirements provided in
this section.
(g) Waiting period. A transaction approved under Sec. 225.14 or
Sec. 225.15 shall not be consummated until 30 days after the date of
approval of the application, except that a transaction may be
consummated:
(1) Immediately upon approval, in the event that the Board has
determined under paragraph (f) of this section that the application or
notice involves a probable bank failure;
(2) On or after the 5th calendar day following the date of
approval, in the event that the Board has determined under paragraph
(f) of this section that an emergency exists requiring expeditious
action; or
(3) On or after the 15th calendar day following the date of
approval, in the event that the Board has not received any adverse
comments from the United States attorney general relating to the
competitive factors and the attorney general has consented to such
shorter waiting period.
Sec. 225.17 Notice procedure for one-bank holding company formations.
(a) Transactions which qualify under this section. An acquisition
by a company of control of a bank may be consummated 30 days after
providing notice to the appropriate Reserve Bank in accordance with
paragraph (b) of this section, provided that all of the following
conditions are met:
(1) The shareholder or shareholders who control at least 67 percent
of the shares of the bank would control, immediately after the
reorganization, at least 67 percent of the shares of the holding
company in substantially the same proportion, except for changes in
shareholders' interests resulting from the exercise of dissenting
shareholders' rights under state or federal law; 3
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\3\ A shareholder of a bank in reorganization will be considered
to have the same proportional interest in the holding company if the
shareholder interest increases, on a pro rata basis, as a result of
either the redemption of shares from dissenting shareholders by the
bank or bank holding company or the acquisition of shares of
dissenting shareholders by the remaining shareholders.
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(2) No shareholder or group of shareholders acting in concert
would, following the reorganization, own or control 10 percent or more
of any class of voting shares of the bank holding company unless that
shareholder or group of shareholders was authorized, after review under
the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)) by the
appropriate federal banking agency for the bank, to own or control 10
percent or more of any class of voting shares of the bank; 4
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\4\ This procedure is not available in cases in which the
exercise of dissenting shareholders' rights would cause a company
that is not a bank holding company (other than the company in
formation) to be required to register as a bank holding company.
This procedure also is not available for the formation of a bank
holding company organized in mutual form.
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(3) The bank is adequately capitalized (as defined in section 38 of
the Federal Deposit Insurance Act (12 U.S.C. 1831o));
(4) The bank has received at least a composite ``satisfactory''
rating at its most recent examination, in the event that the bank has
been subject to an examination;
(5) At the time of the reorganization, neither the bank nor any of
its officers, directors, or principal shareholders is involved in any
unresolved supervisory or enforcement matters with any appropriate
federal banking agency;
(6) The company demonstrates that any debt that it would incur at
the time of the reorganization, and the proposed means of retiring this
debt, would not place undue burden on the holding company or its
subsidiary on a pro forma basis; 5
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\5\ For a banking organization with consolidated assets, on a
pro forma basis, of less than $150 million (other than a banking
organization that would control a de novo bank), this requirement
would be satisfied if the proposal would comply with the Board's
policy statement on small bank holding company formations (appendix
C of this part).
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(7) The holding company would not, as a result of the
reorganization, acquire control of any additional bank or engage in any
activities other than those of managing and controlling banks; and
(8) During this period, neither the appropriate Reserve Bank nor
the Board has objected to the proposal or required the filing of an
application under Sec. 225.15 of this subpart.
(b) Contents of notice. A notice filed under this paragraph must
include:
(1) Certification by the notificant's board of directors that the
requirements of 12 U.S.C. 1842(a)(C) and this section are met by the
proposal;
(2) A list identifying all principal shareholders of the bank prior
to the reorganization and of the holding company following the
reorganization, and specifying the percentage of shares held by each
principal shareholder in the bank and proposed to be held in the new
holding company;
(3) A description of the resulting management of the proposed bank
holding company and its subsidiary bank, including:
(i) Biographical information regarding any senior officers and
directors of the resulting bank holding company who were not senior
officers or directors of the bank prior to the reorganization; and
(ii) A detailed history of the involvement of any officer,
director, or principal shareholder of the resulting bank holding
company in any administrative or criminal proceeding; and
(4) Pro forma financial statements for the holding company, and a
description of the amount, source and terms of debt, if any, that the
bank holding company proposes to incur, and information regarding the
sources and timing for debt service and retirement.
(c) Acknowledgment of notice. Within 7 calendar days following
receipt of a notice under this section, the Reserve Bank shall provide
the notificant with a written acknowledgment of receipt of the notice.
This written acknowledgment shall indicate that the transaction
described in the notice may be consummated on the 30th calendar day
after the date of receipt of the notice if the Reserve Bank or the
Board has not objected to the proposal during that time.
(d) Application required upon objection. The Reserve Bank or the
Board may object to a proposal during the notice period by providing
the bank holding company with a written explanation of the reasons for
the objection. In such case, the bank holding company may file an
application for prior approval of the proposal pursuant to Sec. 225.15
of this subpart.
4. Subpart C is revised to read as follows:
Subpart C--Nonbanking Activities and Acquisitions by Bank Holding
Companies
Sec.
225.21 Prohibited nonbanking activities and acquisitions; exempt
bank holding companies.
225.22 Exempt nonbanking activities and acquisitions.
225.23 Expedited action for nonbanking proposals by well-run bank
holding companies.
[[Page 47269]]
225.24 Procedures for other nonbanking proposals.
225.25 Duration of approval, hearings, alteration of activities and
other matters.
225.26 Factors considered in acting on nonbanking proposals.
225.27 Procedures for determining scope of nonbanking activities.
225.28 List of permissible nonbanking activities.
Subpart C--Nonbanking Activities and Acquisitions by Bank Holding
Companies
Sec. 225.21 Prohibited nonbanking activities and acquisitions; exempt
bank holding companies.
(a) Prohibited nonbanking activities and acquisitions. Except as
provided in Sec. 225.22 of this subpart, a bank holding company or a
subsidiary may not engage in, or acquire or control, directly or
indirectly, voting securities or assets of a company engaged in, any
activity other than:
(1) Banking or managing or controlling banks and other subsidiaries
authorized under the BHC Act; and
(2) An activity that the Board determines to be so closely related
to banking or managing or controlling banks as to be a proper incident
thereto, including any incidental activities that are necessary to
carry on such an activity, if the bank holding company has obtained the
prior approval of the Board for that activity in accordance with and
subject to the requirements of this regulation.
(b) Exempt bank holding companies. The following bank holding
companies are exempt from the provisions of this subpart:
(1) Family-owned companies. Any company that is a ``company covered
in 1970,'' as defined in section 2(b) of the BHC Act, more than 85
percent of the voting securities of which was collectively owned on
June 30, 1968, and continuously thereafter, by members of the same
family (or their spouses) who are lineal descendants of common
ancestors.
(2) Labor, agricultural, and horticultural organizations. Any
company that was on January 4, 1977, both a bank holding company and a
labor, agricultural, or horticultural organization exempt from taxation
under section 501 of the Internal Revenue Code (26 U.S.C. 501(c)).
(3) Companies granted hardship exemption. Any bank holding company
that has controlled only one bank since before July 1, 1968, and that
has been granted an exemption by the Board under section 4(d) of the
BHC Act, subject to any conditions imposed by the Board.
(4) Companies granted exemption on other grounds. Any company that
acquired control of a bank before December 10, 1982, without the
Board's prior approval under section 3 of the BHC Act, on the basis of
a narrow interpretation of the term demand deposit or commercial loan
if the Board has determined that:
(i) Coverage of the company as a bank holding company under this
subpart would be unfair or represent an unreasonable hardship; and
(ii) Exclusion of the company from coverage under this regulation
is consistent with the purposes of the BHC Act and section 106 of the
Bank Holding Company Act Amendments of 1970 (12 U.S.C. 1971, 1972(1)).
The provisions of Sec. 225.4 of subpart A of this regulation are not
applicable to a company exempt under this paragraph.
Sec. 225.22 Exempt nonbanking activities and acquisitions.
(a) Servicing activities. A bank holding company may, without the
Board's prior approval under this subpart, furnish services to or
perform services for, or establish or acquire a company that engages
solely in furnishing services to or performing services for:
(1) The bank holding company or its subsidiaries in connection with
their activities as authorized by law, including services that are
necessary to fulfill commitments entered into by the subsidiaries with
third parties, if the bank holding company or servicing company
complies with the Board's published interpretations and does not act as
principal in dealing with third parties; and
(2) The internal operations of the bank holding company or its
subsidiaries. Services for the internal operations of the bank holding
company or its subsidiaries include, but are not limited to:
(i) Accounting, auditing, and appraising;
(ii) Advertising and public relations;
(iii) Data processing and data transmission services, data bases or
facilities;
(iv) Personnel services;
(v) Courier services;
(vi) Holding or operating property used wholly or substantially by
a subsidiary in its operations or for its future use;
(vii) Liquidating property acquired from a subsidiary;
(viii) Liquidating property acquired from any sources either prior
to May 9, 1956, or the date on which the company became a bank holding
company, whichever is later; and
(ix) Selling, purchasing, or underwriting insurance such as blanket
bond insurance, group insurance for employees, and property and
casualty insurance.
(b) Safe deposit business. A bank holding company or nonbank
subsidiary may, without the Board's prior approval, conduct a safe
deposit business, or acquire voting securities of a company that
conducts such a business.
(c) Nonbanking acquisitions not requiring prior Board approval. The
Board's prior approval is not required under this subpart for the
following acquisitions:
(1) DPC acquisitions. (i) Voting securities or assets, acquired by
foreclosure or otherwise, in the ordinary course of collecting a debt
previously contracted (DPC property) in good faith, if the DPC property
is divested within two years of acquisition.
(ii) The Board may, upon request, extend this two-year period for
up to three additional one-year periods. The Board may permit
additional extensions for up to 5 years (for a total of 10 years), for
real estate or other assets that are demonstrated by the bank holding
company to have value and marketability characteristics similar to real
estate.
(iii) Transfers of DPC property within the bank holding company
system do not extend any period for divestiture of the property.
(2) Securities or assets required to be divested by subsidiary.
Voting securities or assets required to be divested by a subsidiary at
the request of an examining federal or state authority (except by the
Board under the BHC Act or this regulation), if the bank holding
company divests the securities or assets within two years from the date
acquired from the subsidiary.
(3) Fiduciary investments. Voting securities or assets acquired by
a bank or other company (other than a trust that is a company) in good
faith in a fiduciary capacity, if the voting securities or assets are:
(i) Held in the ordinary course of business; and
(ii) Not acquired for the benefit of the company or its
shareholders, employees, or subsidiaries.
(4) Securities eligible for investment by a national bank. Voting
securities of the kinds and amounts explicitly eligible by federal
statute (other than section 4 of the Bank Service Corporation Act, 12
U.S.C. 1864) for investment by a national bank, and voting securities
acquired prior to June 30, 1971, in reliance on section 4(c)(5) of the
BHC Act and interpretations of
[[Page 47270]]
the Comptroller of the Currency under section 5136 of the Revised
Statutes (12 U.S.C. 24(7)).
(5) Securities or property representing 5 percent or less of a
company. Voting securities of a company or property that, in the
aggregate, represent 5 percent or less of the outstanding shares of any
class of voting securities of a company or a 5 percent interest or less
in the property, subject to the provisions of 12 CFR 225.137.
(6) Securities of investment company. Voting securities of an
investment company that is solely engaged in investing in securities
and that does not own or control more than 5 percent of the outstanding
shares of any class of voting securities of any company.
(7) Assets acquired in the ordinary course of business. Assets of a
company acquired in the ordinary course of business, subject to the
provisions of 12 CFR 225.132, if the assets relate to activities in
which the acquiring company has previously received Board approval
under this regulation to engage.
(8) Asset acquisitions by a lending company or industrial bank.
Assets of an office(s) of a company, all or substantially all of which
relate to making, acquiring, or servicing loans if:
(i) The acquiring company has previously received Board approval
under this regulation to engage in lending activities or industrial
banking activities;
(ii) The assets acquired during any 12-month period do not
represent more than 50 percent of the assets (on a consolidated basis)
of the acquiring lending company or industrial bank, or more than $100
million, whichever amount is less;
(iii) The assets acquired do not represent more than 50 percent of
the selling company's consolidated assets that are devoted to lending
activities or industrial banking business;
(iv) The acquiring company notifies the Reserve Bank of the
acquisition within 30 days after the acquisition; and
(v) The acquiring company, after giving effect to the transaction,
meets the Board's capital adequacy guidelines (appendix A of this part)
and the Board has not previously notified the acquiring company that it
may not acquire assets under the exemption in this paragraph.
(d) Acquisition of securities by subsidiary banks.--(1) National
bank. A national bank or its subsidiary may, without the Board's
approval under this subpart, acquire or retain securities on the basis
of section 4(c)(5) of the BHC Act in accordance with the regulations of
the Comptroller of the Currency.
(2) State bank. A state-chartered bank or its subsidiary may,
insofar as federal law is concerned and without the Board's prior
approval under this subpart:
(i) Acquire or retain securities, on the basis of section 4(c)(5)
of the BHC Act, of the kinds and amounts explicitly eligible by federal
statute for investment by a national bank; or
(ii) Acquire or retain all (but, except for directors' qualifying
shares, not less than all) of the securities of a company that engages
solely in activities in which the parent bank may engage, at locations
at which the bank may engage in the activity, and subject to the same
limitations as if the bank were engaging in the activity directly.
(e) Activities and securities of new bank holding companies. A
company that becomes a bank holding company may, for a period of two
years, engage in nonbanking activities and control voting securities or
assets of a nonbank subsidiary, if the bank holding company engaged in
such activities or controlled such voting securities or assets on the
date it became a bank holding company. The Board may grant requests for
up to three one-year extensions of the two-year period.
(f) Grandfathered activities and securities. Unless the Board
orders divestiture or termination under section 4(a)(2) of the BHC Act,
a ``company covered in 1970,'' as defined in section 2(b) of the BHC
Act, may:
(1) Retain voting securities or assets and engage in activities
that it has lawfully held or engaged in continuously since June 30,
1968; and
(2) Acquire voting securities of any newly formed company to engage
in such activities.
(g) Securities or activities exempt under Regulation K. A bank
holding company may acquire voting securities or assets and engage in
activities as authorized in Regulation K (12 CFR part 211).
Sec. 225.23 Expedited action for nonbanking proposals by well-run bank
holding companies.
(a) Filing of notice. A bank holding company that meets the
requirements of paragraph (b) of this section may satisfy the notice
requirement of this subpart in connection with the acquisition of
voting securities or assets of a company engaged in nonbanking
activities by providing the appropriate Reserve Bank with a written
notice containing the following:
(1) A certification that all of the criteria in paragraph (b) of
this section are met;
(2) A description of the transaction that includes identification
of the companies involved in the transaction, the activities to be
conducted, and a commitment to conduct the proposed activities in
conformity with the Board's regulations and orders governing the
conduct of the proposed activity;
(3) In the event the proposal involves an acquisition of a going
concern, a description of the funding for the transaction, a balance
sheet for the acquiring bank holding company reflecting the pro forma
effect of the acquisition, and the market indexes for each relevant
banking market reflecting the pro forma effect of the acquisition; and
(4) A request or evidence of a request that the Board publish
notice of the proposal in the Federal Register as provided in
Sec. 225.24(c)(1).
(b) Criteria for use of expedited procedure. The procedure in this
paragraph is available only if:
(1) Well capitalized organization.--(i) Bank holding company. Both
at the time of and immediately after the proposed transaction, the
acquiring bank holding company is well capitalized; 1
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\1\ For purposes of this paragraph, a bank holding company with
assets under $150 million will be deemed to have met the
requirements of this paragraph if the parent bank holding company's
ratio of pro forma debt to equity is 1.0:1 or less and the proposal
in all other respects meets the requirements of appendix C of this
part.
---------------------------------------------------------------------------
(ii) Insured depository institutions. Both at the time of and
immediately after the transaction;
(A) The lead insured depository institution of the acquiring bank
holding company is well capitalized;
(B) Well capitalized insured depository institutions control at
least 80 percent of the total assets of insured depository institutions
controlled by the acquiring bank holding company; and
(C) No insured depository institution controlled by the acquiring
bank holding company is undercapitalized;
(2) Well managed organization. At the time of the transaction, the
acquiring bank holding company, its lead insured depository
institution, and insured depository institutions that control at least
80 percent of the total assets of insured depository institutions
controlled by such holding company are well managed;
(3) Permissible activity.
(i) The Board has determined by regulation or order that each
activity proposed to be conducted is so closely related to banking or
managing or controlling banks as to be a proper incident thereto;
2 and
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\2\ In the case of the acquisition of a savings association,
the bank holding company and its subsidiary depository institutions
must also meet the CRA requirements of Sec. 225.14(b)(3).
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[[Page 47271]]
(ii) The Board has not indicated that proposals to engage in the
proposed activity are subject to the notice procedure provided in
Sec. 225.24.
(4) Competitive criteria--(i) Competitive screen. In the case of
the acquisition of a going concern, the acquisition, without regard to
any divestitures proposed by the acquiring bank holding company, does
not cause:
(A) The acquiring bank holding company to control in excess of 35
percent of the market share in any relevant market, or
(B) The Herfindahl-Hirschman index to increase by more than 200
points in any relevant market with a post-acquisition index of at least
1800;
(ii) Other competitive factors. The Board has not indicated that
the transaction is subject to close scrutiny on competitive grounds;
(5) Size of acquisition. In the case of an acquisition, the book
value of the aggregate risk-weighted assets acquired by the acquiring
bank holding company in all transactions approved during the previous
12 months under this section and Sec. 225.14 does not exceed 35 percent
of the consolidated risk-weighted assets of the acquiring bank holding
company;
(6) Notification. The bank holding company has not been notified by
the Board prior to the expiration of the period in subsection (d) that
a notice under Sec. 225.24 is required.
(c) Action on notice. The Board or the appropriate Reserve Bank
shall act on a proposal submitted under this section or notify the bank
holding company that the transaction is subject to the procedure in
Sec. 225.24 before the later of:
(1) 15 calendar days following the filing of all of the information
required in paragraph (a) of this section; or
(2) 3 business days following the close of the public comment
period;
(d) Acceptance of notice in event expedited procedure not
available. In the event that the Board or the Reserve Bank determines
after the filing of a notice under this section that a bank holding
company may not use the procedure in this section and must file a
notice under Sec. 225.24, the notice shall be deemed accepted for
purposes of Sec. 225.24 as of the date that the notice was filed under
this section.
Sec. 225.24 Procedures for other nonbanking proposals.
(a) Notice required for nonbanking activities. Except as provided
in Sec. 225.23, a notice for the Board's prior approval under
Sec. 225.21(a) to engage in or acquire a company engaged in a
nonbanking activity shall be filed by a bank holding company (including
a company seeking to become a bank holding company) with the
appropriate Reserve Bank in accordance with this section and the
Board's Rules of Procedure (12 CFR 262.3).
(1) Engaging de novo in listed activities. A bank holding company
seeking to commence or to engage de novo, either directly or through a
subsidiary, in a nonbanking activity listed in Sec. 225.28 shall file a
notice containing the following:
(i) A description of the activities to be conducted;
(ii) The identity of the company that will conduct the activity;
and
(iii) If the notificant proposes to conduct the activity through an
existing subsidiary, a description of the existing activities of the
subsidiary.
(2) Acquiring company engaged in listed activities. A bank holding
company seeking to acquire or control voting securities or assets of a
company engaged in a nonbanking activity listed in Sec. 225.28 shall
file a notice containing the following:
(i) A description of the proposal, including a description of each
proposed activity, and the effect of the proposal on competition among
entities engaging in each proposed activity;
(ii) The identity of any entity involved in the proposal, and if
the notificant proposes to conduct the activity through an existing
subsidiary, a description of the existing activities of the subsidiary;
(iii) A statement of the public benefits that can reasonably be
expected to result from the proposal; and
(iv) A description of the terms and sources of funds for the
transaction, a copy of any pertinent purchase agreement(s), balance-
sheet and income statements for the most recent fiscal quarter and
year-end for any company to be acquired, parent-company-only and
consolidated pro forma balance sheets for the notificant as of the most
recent fiscal quarter, and calculations of pro forma consolidated risk-
based capital ratios and leverage ratio for the notificant as of the
most recent fiscal quarter.
(3) Engaging in or acquiring company to engage in unlisted
activities. A bank holding company seeking to commence or to engage de
novo, or to acquire or control voting securities or assets of a company
engaged in, any activity not listed in Sec. 225.28 shall file a notice
containing the following:
(i) Evidence that the proposed activity is so closely related to
banking or managing or controlling banks as to be a proper incident
thereto, or, in the event that the Board has previously determined by
order that the activity is permissible for a bank holding company to
conduct, a commitment to comply with all conditions and limitations
that have been established by the Board governing the activity; and
(ii) The information required in paragraphs (a)(1) or (a)(2), as
appropriate.
(b) Notice provided to Board. The Reserve Bank shall immediately
send to the Board a copy of any notice received under paragraphs (a)(2)
or (a)(3) of this section.
(c) Notice to public--(1) Listed activities and activities approved
by order.
(i) In a case involving an activity listed in Sec. 225.28 or
previously approved by the Board by order, the Reserve Bank shall
notify the Board for publication in the Federal Register immediately
upon receipt by the Reserve Bank of:
(A) A notice under this section; or
(B) A written request that notice of a proposal under this section
or Sec. 225.23 be published in the Federal Register. Such a request may
be made up to 30 calendar days prior to submission of a notice under
this subpart.
(ii) The Federal Register notice published under this paragraph
shall invite public comment on the proposal, generally for a period of
15 days.
(2) New activities--(i) In general. In the case of a notice under
this subpart involving an activity that is not listed in Sec. 225.28
and that has not been previously approved by the Board by order, the
Board shall send notice of the proposal to the Federal Register for
publication, unless the Board determines that the notificant has not
demonstrated that the activity is so closely related to banking or to
managing or controlling banks as to be a proper incident thereto. The
Federal Register notice shall invite public comment on the proposal for
a reasonable period of time, generally for 30 days.
(ii) Time for publication. The Board shall send the notice required
under this paragraph to the Federal Register within 10 business days of
acceptance by the Reserve Bank. The Board may extend the 10-day period
for an additional 30 calendar days upon notice to the notificant. In
the event notice of a proposal is not published for comment, the Board
shall inform the notificant of the reasons for the decision.
(d) Action on notices--(1) Reserve Bank action--(i) In general.
Within 30 calendar days after receipt by the Reserve Bank of a notice
filed pursuant
[[Page 47272]]
to paragraphs (a)(1) or (a)(2) of this section, the Reserve Banks
shall--
(A) Approve the notice; or
(B) Refer the notice to the Board for decision because action under
delegated authority is not appropriate.
(ii) Return of incomplete notice. Within 7 calendar days of
receipt, the Reserve Bank may return any notice as informationally
incomplete that does not contain all of the information required by
this subpart. The return of such a notice shall be deemed action on the
notice.
(iii) Notice of action. The Reserve Bank shall promptly notify the
bank holding company of any action, referral, or extension under this
paragraph (d)(1) of this section.
(iv) Close of public comment period. The Reserve Bank shall not
approve any notice under this paragraph (d)(1) of this section prior to
the third business day after the close of the public comment period,
unless an emergency exists that requires expedited or immediate action.
(2) Board action--(i) Internal schedule. The Board seeks to act on
every notice referred to it for decision within 60 days of the date
that the notice is filed with the Reserve Bank. If the Board is unable
to act within this period, the Board will notify the notificant and
explain the reasons and the date by which the Board expects to act.
(ii) Required time limit for Board action. The Board shall act on
any notice under this section that is referred to it for decision
within 60 calendar days after the submission of a complete notice.
(iii) Extension of required period for action--(A) In general. The
Board may extend the 60-day period required for Board action under
paragraph (d)(2)(ii) of this section for an additional 30 days upon
notice to the notificant.
(B) Unlisted activities. If a notice involves a proposal to engage
in an activity that is not listed in Sec. 225.28, the Board may extend
the period required for Board action under paragraph (d)(2)(ii) of this
section for an additional 90 days. This 90-day extension is in addition
to the 30-day extension period provided in paragraph (d)(2)(iii)(A) of
this section. The Board shall notify the notificant that the notice
period has been extended and explain the reasons for the extension.
(3) Requests for additional information. The Board or the Reserve
Bank may at any time request any additional information that either
believes is needed for a decision on any notice under this subpart.
(4) Tolling of period. The Board or the Reserve Bank, as the case
may be, may at any time extend or toll the time period for action on a
notice for any period with the consent of the notificant.
Sec. 225.25 Duration of approval, hearings, alteration of activities
and other matters.
(a) Duration of approval. A bank holding company that receives
approval pursuant to this subpart to engage de novo in a nonbanking
activity may conduct that activity de novo at any time following the
date approval is received so long as:
(1) At the time the activity is commenced, the bank holding company
has one of the highest two composite inspection ratings and is
adequately capitalized;
(2) Prior to commencing the activity, the Board has not informed
the company that it may not commence the activity; and
(3) The order approving the activity does not specifically require
that the activity be commenced within a given period.
(b) Hearings. (1) Procedure to request hearing. Any request for a
hearing on a notice under this subpart shall comply with the provisions
of 12 CFR 262.3(e).
(2) Determination to hold hearing. The Board may order a formal or
informal hearing or other proceeding on a notice as provided in 12 CFR
262.3(i)(2). The Board shall order a hearing only if there are disputed
issues of material fact that cannot be resolved in some other manner.
(3) Extension of period for hearing. The Board may extend the time
for action on any notice for such time as is reasonably necessary to
conduct a hearing and evaluate the hearing record. Such extension shall
not exceed 91 calendar days after the date of submission to the Board
of the complete record on the notice. The procedures for computation of
the 91-day rule as set forth in Sec. 225.16(e) apply to notices under
this subpart that involve hearings.
(c) Approval through failure to act--(1) Except as provided in
paragraph (b) of this section or Sec. 225.24(d)(4), a notice under this
subpart shall be deemed to be approved at the conclusion of the period
that begins on the date the complete notice is received by the Reserve
Bank or the Board and that ends 60 calendar days plus any applicable
extension and tolling period thereafter.
(2) Complete notice. For purposes of paragraph (c) of this section,
a notice shall be deemed to be complete for purposes of this subpart at
such time as it contains all information required by this subpart and
all other information requested by the Board or the Reserve Bank in
connection with the particular notice.
(d) Notice to expand or alter nonbanking activities.--(1) De novo
expansion. A notice under this subpart is required to open a new office
or to form a subsidiary to engage in, or to relocate an existing office
engaged in, a nonbanking activity that the Board has previously
approved for the bank holding company under this regulation, only if:
(i) The Board's prior approval was limited geographically;
(ii) The activity is to be conducted in a country outside of the
United States and the bank holding company has not previously received
prior Board approval under this regulation to engage in the activity in
that country; or
(iii) The Board or appropriate Reserve Bank has notified the
company that a notice under this subpart is required.
(2) Activities outside United States. With respect to activities to
be engaged in outside the United States that require approval under
this subpart, the procedures of this section apply only to activities
to be engaged in directly by a bank holding company that is not a
qualifying foreign banking organization or by a nonbank subsidiary of a
bank holding company approved under this subpart. Regulation K (12 CFR
part 211) governs other international operations of bank holding
companies.
(3) Alteration of nonbanking activity. Unless otherwise permitted
by the Board, a notice under this subpart is required to alter a
nonbanking activity in any material respect from that considered by the
Board in acting on the application or notice to engage in the activity.
(e) Emergency thrift-institution acquisitions. In the case of a
notice to acquire a thrift institution, the Board may modify or
dispense with the public-notice and hearing requirements of this
subpart if the Board finds that an emergency exists that requires the
Board to act immediately and the primary federal regulator of the
institution concurs.
Sec. 225.26 Factors considered in acting on nonbanking proposals.
(a) In general. In evaluating a notice under Sec. 225.23 or
Sec. 225.24, the Board shall consider whether the performance by the
notificant of the activities can reasonably be expected to produce
benefits to the public (such as greater convenience, increased
competition, and gains in efficiency) that outweigh possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, and unsound banking practices).
[[Page 47273]]
(b) Financial and managerial resources. Consideration of the
factors in paragraph (a) of this section includes an evaluation of the
financial and managerial resources of the notificant, including its
subsidiaries and any company to be acquired, the effect of the proposed
transaction on those resources, and the management expertise, internal
control and risk management systems, and capital of the entity
conducting the activity.
(c) Competitive effect of de novo proposals. Unless the record
demonstrates otherwise, the commencement or expansion of a nonbanking
activity de novo is presumed to result in benefits to the public
through increased competition.
(d) Denial for lack of information. The Board may deny any notice
submitted under this subpart if the notificant neglects, fails, or
refuses to furnish all information required by the Board.
Sec. 225.27 Procedures for determining scope of nonbanking activities.
(a) Advisory opinions regarding the scope of permissible nonbanking
activities.--(1) Requests for an advisory opinion. Any person may
submit a request to the Board for an advisory opinion regarding the
scope any permissible nonbanking activity. The request must be
submitted in writing to the Board and must identify the proposed
parameters of the activity or a description of the service or product
that is intended to be provided as well as an explanation supporting an
interpretation regarding the scope of the permissible nonbanking
activity.
(2) Response to a request. The Board shall provide an advisory
opinion within 45 days of receiving a written request under this
subsection.
(b) Procedure for consideration of new activities.--(1) Initiation
of proceeding. The Board may at any time, on its own initiative or in
response to a written request from any person, initiate a proceeding to
determine whether any activity is so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
(2) Requests for determination. Any request that the Board consider
that an activity is so closely related to banking or managing or
controlling banks as to be a proper incident thereto shall be submitted
to the Board in writing and shall contain evidence that the proposed
activity is so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
(3) Publication. The Board shall publish in the Federal Register
notice that it is considering the permissibility of a new activity and
invite public comment for a period of at least 30 calendar days. In the
case of a request submitted under paragraph (b) of this section, the
Board may determine not to publish notice of the request if the Board
determines that the requester has provided no reasonable basis for a
determination that the activity is so closely related to banking or
managing or controlling banks as to be a proper incident thereto and
notifies the requester of that determination.
(4) Comments and hearing requests. Any comment and any request for
a hearing regarding a proposal under this section shall comply with the
provisions of Sec. 262.3(e) of the Board's Rules of Procedure (12 CFR
262.3(e)).
Sec. 225.28 List of permissible nonbanking activities.
(a) Closely related nonbanking activities. The activities listed in
paragraph (b) of this section are so closely related to banking or
managing or controlling banks as to be a proper incident thereto and
may be engaged in by a bank holding company or a subsidiary thereof in
accordance with and subject to the requirements of this regulation.
(b) Activities determined by regulation to be permissible.-- (1)
Extending credit and servicing loans. Making, acquiring, brokering or
servicing loans or other extensions of credit (including issuing
letters of credit and accepting drafts) for the company's account or
for the account of others.
(2) Activities related to extending credit. Any activity usual in
connection with making, acquiring, brokering or servicing loans or
other extensions of credit, as determined by the Board. The Board has
determined that the following activities are usual in connection with
making, acquiring, brokering or servicing loans or other extensions of
credit:
(i) Real estate and personal property appraising. Performing
appraisals of real estate and tangible and intangible personal
property, including securities.
(ii) Arranging commercial real estate equity financing. Acting as
intermediary for the financing of commercial or industrial income-
producing real estate by arranging for the transfer of the title,
control and risk of such a real estate project to one or more
investors, if the bank holding company and its affiliates do not have
an interest in, or participate in managing or developing, a real estate
project for which it arranges equity financing, and do not promote or
sponsor the development of such property.
(iii) Check-guaranty services. Authorizing a subscribing merchant
to accept personal checks tendered by the merchant's customers in
payment for goods and services and purchasing from the merchant validly
authorized checks that are subsequently dishonored.
(iv) Collection agency services. Collecting overdue accounts
receivable, either retail or commercial.
(v) Credit bureau services. Maintaining information related to the
credit history of consumers and providing that information to a credit
grantor who is considering a borrower's application for credit or who
has extended credit to the borrower.
(vi) Asset management, servicing, and collection activities.
Engaging under contract with a third party in asset management,
servicing, and collection 3 for assets of a type that an insured
depository institution may originate and own, if the company does not
engage in real property management or real estate brokerage services as
part of these services.
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\3\ Asset management services include acting as agent in the
liquidation or sale of loans and collateral for loans, including
real estate and other assets acquired through foreclosure or in
satisfaction of debts previously contracted.
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(vii) Acquiring debt in default. Acquiring debt that is in default
at the time of acquisition, if the company:
(A) Divests shares or assets securing debt in default that are not
permissible investments for bank holding companies within the time
period required for divestiture of property acquired in satisfaction of
a debt previously contracted under Sec. 225.12(b); 4
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\4\ For this purpose, the divestiture period for property begins
on the date that the debt is acquired regardless of when legal title
to the property is acquired.
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(B) Stands only in the position of a creditor and does not purchase
equity of obligors of debt in default (other than equity that may be
collateral for such debt); and
(C) Does not acquire debt in default secured by shares of a bank or
bank holding company.
(viii) Real-estate settlement servicing. Providing real-estate
settlement services.5
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\5\ For purposes of this section, real-estate settlement
services do not include providing title insurance as principal,
agent or broker.
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(3) Leasing personal or real property. Leasing personal or real
property or acting as agent, broker, or adviser in leasing such
property if:
(i) The lease is on a nonoperating basis; 6
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\6\ For purposes of the leasing of automobiles, the requirement
that the lease be on a nonoperating basis means that the bank
holding company may not, directly or indirectly: (1) Provide for the
servicing, repair, or maintenance of the leased vehicle during the
lease term; (2) purchase parts and accessories in bulk or for an
individual vehicle after the lessee has taken delivery of the
vehicle; (3) provide for the loan of an automobile during servicing
of the leased vehicle; (4) purchase insurance for the lessee; or (5)
provide for the renewal of the vehicle's license merely as a service
to the lessee where the lessee could renew the license without
authorization from the lessor. The bank holding company may arrange
for a third party to provide these services or products.
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[[Page 47274]]
(ii) The initial term of the lease is at least 90 days;
(iii) In the case of leases involving real property:
(A) At the inception of the initial lease the effect of the
transaction will yield a return that will compensate the lessor for not
less than the lessor's full investment in the property plus the
estimated total cost of financing the property over the term of the
lease from rental payments, estimated tax benefits and the estimated
residual value of the property at the expiration of the initial lease;
and
(B) The estimated residual value of property for purposes of
paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent of
the acquisition cost of the property to the lessor.
(4) Operating nonbank depository institutions--(i) Industrial
banking. Owning, controlling or operating an industrial bank, Morris
Plan bank, or industrial loan company, so long as the institution is
not a bank.
(ii) Operating a savings association. Owning, controlling or
operating a savings association, if the savings association engages
only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies under this subpart C.
(5) Trust company functions. Performing functions or activities
that may be performed by a trust company (including activities of a
fiduciary, agency, or custodial nature), in the manner authorized by
federal or state law, so long as the company is not a bank for purposes
of section 2(c) of the Bank Holding Company Act.
(6) Financial and investment advisory activities. Acting as
investment or financial advisor to any person, including (without in
any way limiting the foregoing):
(i) Serving as investment adviser (as defined in section 2(a)(20)
of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an
investment company registered under that act, including sponsoring,
organizing, and managing a closed-end investment company;
(ii) Furnishing general economic information and advice, general
economic statistical forecasting services and industry studies;
(iii) Providing advice in connection with mergers, acquisitions,
divestitures, joint ventures, leveraged buyouts, recapitalizations,
capital structurings, and financing transactions, and conducting
financial feasibility studies; 7
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\7\ Feasibility studies do not include assisting management with
the planning or marketing for a given project or providing general
operational or management advice.
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(iv) Providing information, statistical forecasting and advice with
respect to any transaction in foreign exchange, forward contracts,
options, futures, swaps or similar transactions;
(v) Providing educational courses, and instructional materials to
consumers on individual financial management matters; and
(vi) Providing tax-planning and tax-preparation services to any
person.
(7) Agency transactional services for customer investments--(i)
Securities brokerage. Providing securities brokerage services, whether
alone or in combination with investment advisory services, and
incidental activities (including related securities credit activities
and custodial services), if the securities brokerage services are
restricted to buying and selling securities solely as agent for the
account of customers and do not include securities underwriting or
dealing.
(ii) Riskless principal transactions. Buying and selling in the
secondary market all types of securities on the order of customers as a
``riskless principal'' to the extent of engaging in a transaction in
which the company, after receiving an order to buy (or sell) a security
from a customer, purchases (or sells) the security for its own account
to offset a contemporaneous sale to (or purchase from) the customer.
This does not include:
(A) Selling bank-ineligible securities 8 at the order of a
customer that is the issuer of the securities or selling bank-
ineligible securities in any transaction where the company has a
contractual agreement to place the securities as agent of the issuer;
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\8\ A bank-ineligible security is any security that a State
member bank is not permitted to underwrite or deal in under 12
U.S.C. 24 and 335.
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(B) Acting as a riskless principal in any transaction involving a
bank-ineligible security for which the company or any of its affiliates
makes a market; 9
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\9\ A company or its affiliates may not enter quotes for
specific bank-ineligible securities in any dealer quotation system
in connection with the company's riskless principal transactions;
except that the company or its affiliates may enter ``bid'' or
``ask'' quotations, or publish ``offering wanted'' or ``bid wanted''
notices on trading systems other than NASDAQ or an exchange, if
company or its affiliate does not enter price quotations on
different sides of the market for a particular security during any
two day period.
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(C) Engaging in any riskless principal transaction involving any
bank-ineligible security carried in the inventory of the company or any
of its affiliates;
(D) Acting as riskless principal in any transaction on behalf of
any U.S. or foreign affiliate that engages in bank-ineligible
securities underwriting and dealing.
(iii) Private placement services. Acting as agent for the private
placement of securities in accordance with the requirements of the
Securities Act of 1933 (1933 Act) and the rules of the Securities and
Exchange Commission (SEC) if the company does not purchase or
repurchase for its own account the securities being placed, or hold in
inventory unsold portions of issues of these securities.
(iv) Futures commission merchant. Acting as a futures commission
merchant (FCM) for unaffiliated persons in the execution, clearance, or
execution and clearance of futures contracts and options on futures
contracts traded on an exchange in the United States or abroad if--
(A) The activity is conducted through a separately incorporated
subsidiary of the bank holding company, which may engage in activities
other than FCM activities;
(B) The subsidiary does not become a clearing member of any
exchange or clearing association that requires the parent corporation
of the clearing member to also become a member of that exchange or
clearing association, unless a waiver of the requirement is obtained;
and
(C) In connection with clearing activities in which the subsidiary
does not also execute the transaction, the clearing subsidiary--
(1) Does not serve as a primary or qualifying clearing firm for the
customer; and
(2) Clears trades pursuant to customer and other agreements that
grant the subsidiary the right to decline to accept those trades that
the subsidiary has determined present unacceptable risks.
(v) Other transactional services. Providing to customers as agent
transactional services with respect to any transaction described in
paragraph (b)(8) of this section, that the company may engage in for
its own account.
(8) Investment transactions as principal.--(i) Underwriting and
dealing in government obligations and money market instruments.
Underwriting and dealing in obligations of the United
[[Page 47275]]
States, general obligations of states and their political subdivisions,
and other obligations that state member banks of the Federal Reserve
System may be authorized to underwrite and deal in under 12 U.S.C. 24
and 335, including banker's acceptances and certificates of deposit,
under the same limitations as would be applicable if the activity were
performed by the bank holding company's subsidiary member banks or its
subsidiary nonmember banks as if they were member banks.
(ii) Trading activities. Engaging as principal for the account of
the bank holding company or any of its affiliates in transactions in:
(A) Foreign exchange, or
(B) Forward contracts, options, futures, swaps, and similar
contracts, whether traded on exchanges or not, on any financial asset
(including gold, silver, platinum or palladium), nonfinancial asset, or
group or index of value thereof, other than a bank ineligible
security,10 if:
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\10\ A bank-ineligible security is any security that a State
member bank is not permitted to underwrite or deal in under 12
U.S.C. 24 and 335.
---------------------------------------------------------------------------
(1) A state member bank is authorized to invest in the asset
underlying the contract;
(2) The contract requires cash settlement; or
(3) The contract allows for assignment, termination or offset prior
to delivery or expiration and the company makes every reasonable effort
to avoid taking or making delivery.
(iii) Buying and selling bullion and related activities. Buying and
selling gold, silver, platinum and palladium bars, rounds, bullion and
coins for the company's own account and the account of others and
providing incidental services such as arranging for the storage, safe
custody, assaying and shipment of gold, silver, platinum and palladium.
(9) Management consulting and counseling activities.--(i)
Management consulting. (A) Providing management consulting
advice:11
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\11\ In performing this activity, bank holding companies are not
authorized to perform tasks or operations or provide services to
client institutions either on a daily or continuing basis, except as
necessary to instruct the client institution on how to perform such
services for itself. See also the Board's interpretation of bank
management consulting advice (12 CFR 225.131).
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(1) On any matter to unaffiliated depository institutions,
including commercial banks, savings and loan associations, savings
banks, credit unions, industrial banks, Morris Plan banks, cooperative
banks, industrial loan companies, trust companies and branches or
agencies of foreign banks;
(2) On any financial, economic, accounting or audit matter to any
other company.
(B) A company conducting management consulting activities under
this subparagraph and any affiliate of such company may not--
(1) Own or control, directly or indirectly, more than 5 percent of
the voting securities of the client institution; and
(2) Allow a management official, as defined in 12 CFR 212.2(h), of
the company or any of its affiliates to serve as a management official
of the client institution, except where such interlocking relationship
is permitted pursuant to an exemption granted under 12 CFR 212.4(b) or
otherwise permitted by the Board.
(C) A company conducting management consulting activities may
provide management consulting services to customers not described in
paragraph (b)(9)(i)(A)(1) of this section or regarding matters not
described in paragraph (b)(9)(i)(A)(2) if the total annual revenue
derived from those management consulting services does not exceed 30
percent of the company's total annual revenue derived from management
consulting activities.
(ii) Employee benefits consulting services. Providing consulting
services to employee benefit, compensation and insurance plans,
including designing plans, assisting in the implementation of plans,
providing administrative services to plans, and developing employee
communication programs for plans.
(iii) Career counseling services. Providing career counseling
services to:
(A) A financial organization 12 and individuals currently
employed by, or recently displaced from, a financial organization;
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\12\ The term financial organization refers to insured
depository institution holding companies and their subsidiaries,
other than nonbanking affiliates of diversified savings and loan
holding companies that engage in activities not permissible under
section 4(c)(8) of the Bank Holding Company Act (12 U.S.C.
1842(c)(8)).
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(B) Individuals who are seeking employment at a financial
organization; and
(C) Individuals who are currently employed in or who seek positions
in the finance, accounting and audit departments of any company.
(10) Support services.--(i) Courier services. Providing courier
services for--
(A) Checks, commercial papers, documents, and written instruments
(excluding currency or bearer-type negotiable instruments) that are
exchanged among banks and financial institutions; and
(B) Audit and accounting media of a banking or financial nature and
other business records and documents used in processing such
media.13
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\13\ See also the Board's interpretation on courier activities
(12 CFR 225.129), which sets forth conditions for bank holding
company entry into the activity.
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(ii) Printing and selling MICR-encoded items. Printing and selling
checks and related documents, including corporate image checks, cash
tickets, voucher checks, deposit slips, savings withdrawal packages,
and other forms that require Magnetic Ink Character Recognition (MICR)
encoding.
(11) Insurance agency and underwriting.--(i) Credit insurance.
Acting as principal, agent, or broker for insurance (including home
mortgage redemption insurance) that is--
(A) directly related to an extension of credit by the bank holding
company or any of its subsidiaries; and
(B) limited to ensuring the repayment of the outstanding balance
due on the extension of credit 14 in the event of the death,
disability, or involuntary unemployment of the debtor.
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\14\ ``Extension of credit'' includes direct loans to borrowers,
loans purchased from other lenders, and leases of real or personal
property so long as the leases are nonoperating and full-payout
leases that meet the requirements of paragraph (b)(5) of this
section.
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(ii) Finance company subsidiary. Acting as agent or broker for
insurance directly related to an extension of credit by a finance
company 15 that is a subsidiary of a bank holding company, if:
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\15\ ``Finance company'' includes all non-deposit-taking
financial institutions that engage in a significant degree of
consumer lending (excluding lending secured by first mortgages) and
all financial institutions specifically defined by individual states
as finance companies and that engage in a significant degree of
consumer lending.
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(A) The insurance is limited to ensuring repayment of the
outstanding balance on such extension of credit in the event of loss or
damage to any property used as collateral for the extension of credit;
and
(B) The extension of credit is not more than $10,000, or $25,000 if
it is to finance the purchase of a residential manufactured home
16 and the credit is secured by the home; and
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\16\ These limitations increase at the end of each calendar
year, beginning with 1982, by the percentage increase in the
Consumer Price Index for Urban Wage Earners and Clerical Workers
published by the Bureau of Labor Statistics.
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(C) The applicant commits to notify borrowers in writing that:
(1) They are not required to purchase such insurance from the
applicant;
(2) Such insurance does not insure any interest of the borrower in
the collateral; and
[[Page 47276]]
(3) The applicant will accept more comprehensive property insurance
in place of such single-interest insurance.
(iii) Insurance in small towns. Engaging in any insurance agency
activity in a place where the bank holding company or a subsidiary of
the bank holding company has a lending office and that:
(A) Has a population not exceeding 5,000 (as shown in the preceding
decennial census); or
(B) Has inadequate insurance agency facilities, as determined by
the Board, after notice and opportunity for hearing.
(iv) Insurance-agency activities conducted on May 1, 1982. Engaging
in any specific insurance-agency activity 17 if the bank holding
company, or subsidiary conducting the specific activity, conducted such
activity on May 1, 1982, or received Board approval to conduct such
activity on or before May 1, 1982.18 A bank holding company or
subsidiary engaging in a specific insurance agency activity under this
clause may:
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\17\ Nothing contained in this provision shall preclude a bank
holding company subsidiary that is authorized to engage in a
specific insurance-agency activity under this clause from continuing
to engage in the particular activity after merger with an affiliate,
if the merger is for legitimate business purposes and prior notice
has been provided to the Board.
\18\ For the purposes of this paragraph, activities engaged in
on May 1, 1982, include activities carried on subsequently as the
result of an application to engage in such activities pending before
the Board on May 1, 1982, and approved subsequently by the Board or
as the result of the acquisition by such company pursuant to a
binding written contract entered into on or before May 1, 1982, of
another company engaged in such activities at the time of the
acquisition.
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(A) Engage in such specific insurance agency activity only at
locations--
(1) In the state in which the bank holding company has its
principal place of business (as defined in 12 U.S.C. 1842(d));
(2) In any state or states immediately adjacent to such state; and
(3) In any state in which the specific insurance-agency activity
was conducted (or was approved to be conducted) by such bank holding
company or subsidiary thereof or by any other subsidiary of such bank
holding company on May 1, 1982; and
(B) Provide other insurance coverages that may become available
after May 1, 1982, so long as those coverages insure against the types
of risks as (or are otherwise functionally equivalent to) coverages
sold or approved to be sold on May 1, 1982, by such bank holding
company or subsidiary.
(v) Supervision of retail insurance agents. Supervising on behalf
of insurance underwriters the activities of retail insurance agents who
sell--
(A) Fidelity insurance and property and casualty insurance on the
real and personal property used in the operations of the bank holding
company or its subsidiaries; and
(B) Group insurance that protects the employees of the bank holding
company or its subsidiaries.
(vi) Small bank holding companies. Engaging in any insurance-agency
activity if the bank holding company has total consolidated assets of
$50 million or less. A bank holding company performing insurance-agency
activities under this paragraph may not engage in the sale of life
insurance or annuities except as provided in paragraphs (b)(11) (i) and
(iii) of this section, and it may not continue to engage in insurance-
agency activities pursuant to this provision more than 90 days after
the end of the quarterly reporting period in which total assets of the
holding company and its subsidiaries exceed $50 million.
(vii) Insurance-agency activities conducted before 1971. Engaging
in any insurance-agency activity performed at any location in the
United States directly or indirectly by a bank holding company that was
engaged in insurance-agency activities prior to January 1, 1971, as a
consequence of approval by the Board prior to January 1, 1971.
(12) Community development activities--(i) Financing and investment
activities. Making equity and debt investments in corporations or
projects designed primarily to promote community welfare, such as the
economic rehabilitation and development of low-income areas by
providing housing, services, or jobs for residents.
(ii) Advisory activities. Providing advisory and related services
for programs designed primarily to promote community welfare.
(13) Money orders, savings bonds, and traveler's checks. The
issuance and sale at retail of money orders and similar consumer-type
payment instruments; the sale of U.S. savings bonds; and the issuance
and sale of traveler's checks.
(14) Data processing. (i) Providing to others data processing and
data transmission services, facilities (including data processing and
data transmission hardware, software, documentation or operating
personnel), data bases, advice and access to such services, facilities,
or data bases by any technological means, if:
(A) The data to be processed or furnished are financial, banking,
or economic; and
(B) The hardware provided in connection therewith is offered only
in conjunction with software designed and marketed for the processing
and transmission of financial, banking, or economic data, and where the
general purpose hardware does not constitute more than 30 percent of
the cost of any packaged offering.
(ii) A company conducting data processing and data transmission
activities may conduct data processing and data transmission activities
not described in paragraph (b)(14)(i)(A) of this section if the total
annual revenue derived from those data processing and data transmission
activities does not exceed 30 percent of the company's total annual
revenues derived from data processing and data transmission activities.
5. Subpart E is revised to read as follows:
Subpart E--Change in Bank Control
Sec.
225.41 Transactions requiring prior notice.
225.42 Transactions not requiring prior notice.
225.43 Procedures for filing, processing, publishing and acting on
notices.
225.44 Reporting of stock loans.
Subpart E--Change in Bank Control
Sec. 225.41 Transactions requiring prior notice.
(a) Prior notice requirement. Any person acting directly or
indirectly, or through or in concert with one or more persons, shall
give the Board 60 days written notice, as specified in Sec. 225.43 of
this subpart, before acquiring control of a state member bank or bank
holding company, unless the acquisition is exempt under Sec. 225.42.
(b) Definitions. For purposes of this subpart:
(1) Acquisition includes a purchase, assignment, transfer, or
pledge of voting securities, or an increase in percentage ownership of
a state member bank or a bank holding company resulting from a
redemption of voting securities.
(2) Acting in concert includes knowing participation in a joint
activity or parallel action towards a common goal of acquiring control
of a state member bank or bank holding company whether or not pursuant
to an express agreement.
(3) Immediate family includes a person's father, mother,
stepfather, stepmother, brother, sister, stepbrother, stepsister, son,
daughter, stepson, stepdaughter, grandparent, grandson, granddaughter,
father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-
law, daughter-in-law, the spouse of any of the foregoing, and the
person's spouse.
(c) Acquisitions requiring prior notice.--(1) Acquisition of
control. The
[[Page 47277]]
acquisition of voting securities of a state member bank or bank holding
company constitutes the acquisition of control under the Bank Control
Act, requiring prior notice to the Board, if, immediately after the
transaction, the acquiring person (or persons acting in concert) will
own, control, or hold with power to vote 25 percent or more of any
class of voting securities of the institution.
(2) Rebuttable presumption of control. The Board presumes that an
acquisition of voting securities of a state member bank or bank holding
company constitutes the acquisition of control under the Bank Control
Act, requiring prior notice to the Board, if, immediately after the
transaction, the acquiring person (or persons acting in concert) will
own, control, or hold with power to vote 10 percent or more of any
class of voting securities of the institution, and if:
(i) The institution has registered securities under section 12 of
the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
(ii) No other person will own, control or hold the power to vote a
greater percentage of that class of voting securities immediately after
the transaction.1
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\1\ If two or more persons, not acting in concert, each propose
to acquire simultaneously equal percentages of 10 percent or more of
a class of voting securities of the state member bank or bank
holding company, each such person must file prior notice to the
Board.
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(d) Rebuttable presumption of concerted action. The following
persons shall be presumed to be acting in concert for purposes of this
subpart:
(1) A company and any controlling shareholder, partner, trustee, or
management official of such company if both the company and the person
own voting securities of the state member bank or bank holding company;
(2) An individual and the individual's immediate family;
(3) Companies under common control;
(4) Persons who are parties to any agreement, contract,
understanding, relationship, or other arrangement, whether written or
otherwise, regarding the acquisition, voting, or transfer of control of
voting securities of a state member bank or bank holding company, other
than through a revocable proxy as described in Sec. 225.42(a)(5) of
this subpart;
(5) Persons that have made, or propose to make, a joint filing
under sections 13 or 14 of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78n), and the rules promulgated thereunder by the
Securities and Exchange Commission; and
(6) A person and any trust for which such person serves as trustee.
(e) Acquisitions of loans in default. The Board presumes an
acquisition of a loan in default that is secured by voting securities
of a state member bank or bank holding company to be an acquisition of
the underlying securities for purposes of this section.
(f) Other transactions. Transactions other than those set forth in
paragraph (c) of this section resulting in a person's control of less
than 25 percent of a class of voting securities of a state member bank
or bank holding company are not deemed by the Board to constitute
control for purposes of the Bank Control Act.
(g) Rebuttal of presumptions. Prior notice to the Board is not
required for any acquisition of voting securities under the presumption
of control set forth in this section, if the Board finds that the
acquisition will not result in control. The Board will afford any
person seeking to rebut a presumption in this section an opportunity to
present views in writing or, if appropriate, orally before its
designated representatives at an informal conference.
Sec. 225.42 Transactions not requiring prior notice.
(a) Exempt transactions. The following transactions do not require
notice to the Board under this subpart:
(1) Existing control relationships. The acquisition of additional
voting securities of a state member bank or bank holding company by a
person who:
(i) Continuously since March 9, 1979 (or since that institution
commenced business, if later), held power to vote 25 percent or more of
any class of voting securities of that institution; or
(ii) is presumed, under Sec. 225.41(c)(2) of this subpart, to have
controlled the institution continuously since March 9, 1979, if the
aggregate amount of voting securities held does not exceed 25 percent
or more of any class of voting securities of the institution or, in
other cases, where the Board determines that the person has controlled
the bank continuously since March 9, 1979;
(2) Increase of previously authorized acquisitions. Unless the
Board or the Reserve Bank otherwise provides in writing, the
acquisition of additional shares of a class of voting securities of a
state member bank or bank holding company by any person (or persons
acting in concert) who has lawfully acquired and maintained control of
the institution (for purposes of Sec. 225.41(c) of this subpart) after
complying with the procedures and receiving approval to acquire voting
securities of the institution under this subpart or in connection with
an application approved under section 3 of the BHC Act (12 U.S.C. 1842;
Sec. 225.11 of subpart B of this part) or section 18(c) of the Federal
Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
(3) Acquisitions subject to approval under BHC Act or Bank Merger
Act. Any acquisition of voting securities subject to approval under
section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of subpart B of
this part), or section 18(c) of the Federal Deposit Insurance Act (Bank
Merger Act, 12 U.S.C. 1828(c)).
(4) Transactions exempt under BHC Act. Any transaction described in
sections 2(a)(5), 3(a)(A), or 3(a)(B) of the BHC Act (12 U.S.C.
1841(a)(5), 1842(a)(A), and 1842(a)(B)), by a person described in those
provisions;
(5) Proxy solicitation. The acquisition of the power to vote
securities of a state member bank or bank holding company through
receipt of a revocable proxy in connection with a proxy solicitation
for the purposes of conducting business at a regular or special meeting
of the institution, if the proxy terminates within a reasonable period
after the meeting;
(6) Stock dividends. The receipt of voting securities of a state
member bank or bank holding company through a stock dividend or stock
split if the proportional interest of the recipient in the institution
remains substantially the same; and
(7) Acquisition of foreign banking organization. The acquisition of
voting securities of a qualifying foreign banking organization. (This
exemption does not extend to the reports and information required under
paragraphs 9, 10, and 12 of the Bank Control Act (12 U.S.C. 1817(j)
(9), (10), and (12) and Sec. 225.44 of this subpart.)
(b) Prior notice exemption. (1) The following acquisitions of
voting securities of a state member bank or bank holding company, which
would otherwise require prior notice under this subpart, are not
subject to the prior notice requirements if the acquiring person
notifies the appropriate Reserve Bank within 90 calendar days after the
acquisition and provides any relevant information requested by the
Reserve Bank:
(i) The acquisition of voting securities through inheritance;
(ii) The acquisition of voting securities as a bona fide gift; and
(iii) The acquisition of voting securities in satisfaction of a
debt previously contracted (DPC) in good faith.
[[Page 47278]]
(2) The following acquisitions of voting securities of a state
member bank or bank holding company which would otherwise require prior
notice under this subpart are not subject to the prior notice
requirements if the acquiring person does not reasonably have advance
knowledge of the transaction, and provides the written notice required
under Sec. 225.43 to the appropriate Reserve Bank within 90 calendar
days after the transaction occurs:
(i) The acquisition of voting securities resulting from a
redemption of voting securities by the issuing bank or bank holding
company; and
(ii) the acquisition of voting securities as a result of actions
(including the sale of securities) by any third party that is not
within the control of the acquiror.
(3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits
the authority of the Board to disapprove a notice pursuant to
Sec. 225.43(h) of this subpart.
Sec. 225.43 Procedures for filing, processing, publishing, and acting
on notices.
(a) Filing notice. (1) A notice required under this subpart shall
be filed with the appropriate Reserve Bank and shall contain all the
information required by paragraph 6 of the Bank Control Act (12 U.S.C.
1817(j)(6)), or prescribed in the designated Board form.
(2) The Board may waive any of the informational requirements of
the notice if the Board determines that it is in the public interest.
(3) A notificant must notify the appropriate Reserve Bank or the
Board immediately of any material changes in a notice submitted to the
Reserve Bank, including changes in financial or other conditions.
(4) When the acquiring person is an individual, or group of
individuals acting in concert, the requirement to provide personal
financial data may be satisfied by a current statement of assets and
liabilities and an income summary, as required in the designated Board
form, together with a statement of any material changes since the date
of the statement or summary. The Reserve Bank or the Board,
nevertheless, may request additional information if appropriate.
(b) Acceptance of notice. The 60-day notice period specified in
Sec. 225.41 of this subpart shall commence on the date of receipt of a
complete notice. The Reserve Bank shall notify the person or persons
submitting a notice under this subpart in writing of the date the
notice is or was complete and thereby accepted for processing. The
Reserve Bank or the Board may request additional relevant information
at any time after the date of acceptance.
(c) Publication--(1) Newspaper announcement. Any person(s) filing a
notice under this subpart must publish, in a form prescribed by the
Board, an announcement soliciting public comment on the proposed
acquisition. The announcement shall be published in a newspaper of
general circulation in the community in which the head office of the
state member bank to be acquired is located or, in the case of a
proposed acquisition of a bank holding company, in the community in
which its head office is located and in the community in which the head
office of each of its subsidiary banks is located. The announcement
must be published no earlier than 30 calendar days prior to the filing
of the notice with the appropriate Reserve Bank and no later than 10
calendar days after the filing date, and the publisher's affidavit of a
publication must be provided to the appropriate Reserve Bank.
(2) Contents of newspaper announcement. The newspaper announcement
shall state:
(i) The name of each person identified in the notice as a proposed
acquiror of the bank or bank holding company;
(ii) The name of the bank or bank holding company to be acquired,
including, in the case of a bank holding company, the name of each of
its subsidiary banks; and
(iii) A statement that interested persons may submit comments on
the notice to the Board or the appropriate Reserve Bank for a period of
20 days or such shorter period as may be provided pursuant to paragraph
(c)(5) of this section.
(3) Federal Register announcement. The Board will, upon filing of a
notice under this subpart, publish announcement in the Federal Register
of receipt of the notice. The Federal Register announcement will
contain the information required under paragraphs (c)(2)(i) and
(c)(2)(ii) of this section and a statement that interested persons may
submit comments on the proposed acquisition for a period of 15 calendar
days or such shorter period as may be provided pursuant to paragraph
(c)(5) of this section. The Board may waive publication in the Federal
Register if the Board determines that such action is appropriate.
(4) Delay of publication. The Board may permit delay in the
publication required under paragraphs (c)(1) and (c)(3) of this section
if the Board determines, for good cause shown, that it is in the public
interest to grant such a delay. Requests for delay of publication may
be submitted to the appropriate Reserve Bank.
(5) Shortening or waiving notice. The Board may shorten or waive
the public comment requirements or this paragraph, waive the newspaper
publication requirements of this paragraph, or act on a notice before
the expiration of a public comment period, if it determines in writing
either that an emergency exists or that disclosure of the notice,
solicitation of public comment, or delay until expiration of the public
comment period would seriously threaten the safety or soundness of the
bank or bank holding company to be acquired.
(6) Consideration of public comments. In acting upon a notice filed
under this subpart, the Board shall consider all public comments
received in writing within the period specified in the newspaper or
Federal Register announcement, whichever is later. At the Board's
option, comments received after this period may, but need not, be
considered.
(7) Standing. No person (other than the acquiring person) who
submits comments or information on a notice filed under this subpart
shall thereby become a party to the proceeding or acquire any standing
or right to participate in the Board's consideration of the notice or
to appeal or otherwise contest the notice or the Board's action
regarding the notice.
(d) Time period for Board action--(1) Consummation of acquisition.
(i) The notificant(s) may consummate the proposed acquisition 60 days
after submission to the Reserve Bank of a complete notice under
paragraph (a) of this section, unless within that period the Board
disapproves the proposed acquisition or extends the 60-day period as
provided under paragraph (d)(2) of this section.
(ii) The notificant(s) may consummate the proposed transaction
before the expiration of the 60-day period if the Board notifies the
notificant(s) in writing of the Board's intention not to disapprove the
acquisition.
(2) Extensions of time period.
(i) The Board may extend the 60-day period in paragraph (d)(1) of
this section for an additional 30 days by notifying the acquiring
person(s).
(ii) The Board may further extend the period during which it may
disapprove a notice for two additional periods of not more than 45 days
each if the Board determines that:
(A) Any acquiring person has not furnished all the information
required under paragraph (a) of this section;
(B) Any material information submitted is substantially inaccurate;
(C) The Board is unable to complete the investigation of an
acquiring person
[[Page 47279]]
because of inadequate cooperation or delay by that person; or
(D) Additional time is needed to investigate and determine that no
acquiring person has a record of failing to comply with the
requirements of the Bank Secrecy Act, subchapter II of chapter 53 of
Title 31, United States Code.
(iii) If the Board extends the time period under this paragraph, it
shall notify the acquiring person(s) of the reasons therefore and shall
include a statement of the information, if any, deemed incomplete or
inaccurate.
(e) Advice to bank supervisory agencies. (1) Upon accepting a
notice relating to acquisition of securities of a state member bank,
the Reserve Bank shall send a copy of the notice to the appropriate
state bank supervisor, which shall have 30 calendar days from the date
the notice is sent in which to submit its views and recommendations to
the Board. The Reserve Bank also shall send a copy of any notice to the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
and the Office of Thrift Supervision.
(2) If the Board finds that it must act immediately in order to
prevent the probable failure of the bank or bank holding company
involved, the Board may dispense with or modify the requirements for
notice to the state supervisor.
(f) Investigation and report. (1) After receiving a notice under
this subpart, the Board or the appropriate Reserve Bank shall conduct
an investigation of the competence, experience, integrity, and
financial ability of each person by and for whom an acquisition is to
be made. The Board shall also make an independent determination of the
accuracy and completeness of any information required to be contained
in a notice under paragraph (a) of this section. In investigating any
notice accepted under this subpart, the Board or Reserve Bank may
solicit information or views from any person, including any bank or
bank holding company involved in the notice, and any appropriate state,
federal, or foreign governmental authority.
(2) The Board or the appropriate Reserve Bank shall prepare a
written report of its investigation, which shall contain, at a minimum,
a summary of the results of the investigation.
(g) Factors considered in acting on notices. In reviewing a notice
filed under this subpart, the Board shall consider the information in
the record, the views and recommendations of the appropriate bank
supervisor, and any other relevant information obtained during any
investigation of the notice.
(h) Disapproval and hearing.--(1) Disapproval of notice. The Board
may disapprove an acquisition if it finds adverse effects with respect
to any of the factors set forth in paragraph 7 of the Bank Control Act
(12 U.S.C. 1817(j)(7)) (i.e., competitive, financial, managerial,
banking or incompleteness of information).
(2) Disapproval notification. Within three days after its decision
to issue a notice of intent to disapprove any proposed acquisition, the
Board shall notify the acquiring person in writing of the reasons for
the action.
(3) Hearing. Within 10 calendar days of receipt of the notice of
the Board's intent to disapprove, the acquiring person may submit a
written request for a hearing. Any hearing conducted under this
paragraph shall be in accordance with the Rules of Practice for Formal
Hearings (12 CFR part 263). At the conclusion of the hearing, the Board
shall, by order, approve or disapprove the proposed acquisition on the
basis of the record of the hearing. If the acquiring person does not
request a hearing, the notice of intent to disapprove becomes final and
unappealable.
Sec. 225.44 Reporting of stock loans.
(a) Requirements. (1) Any financial institution and any affiliate
of a financial institution that has credit outstanding to any person or
group of persons, in the aggregate, which is secured, directly or
indirectly, by 25 percent or more of any class of voting securities of
a state member bank must file a consolidated report with the
appropriate Reserve Bank for the state member bank.
(2) The financial institution also must file a copy of the report
with its appropriate Federal banking agency.
(3) Any shares of the state member bank held by the financial
institution or any of its affiliates as principal must be included in
the calculation of the number of shares in which the financial
institution or its affiliates has a security interest for purposes of
paragraph (a) of this section.
(b) Definitions. For purposes of paragraph (a) of this section:
(1) Financial institution includes any insured depository
institution (as defined in section 3(c)(2) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(c)(2)) and any foreign bank that is
subject to the provisions of the BHC Act pursuant to section 8 of the
International Banking Act (12 U.S.C. 3106).
(2) Credit outstanding includes any loan or extension of credit;
the issuance of a guarantee, acceptance, or letter of credit, including
an endorsement or standby letter of credit; and any other type of
transaction that extends credit or financing to the person or group of
persons.
(3) Group of persons includes any number of persons that the
financial institution has reason to believe:
(i) Are acting together, in concert, or with one another to acquire
or control shares of the same insured depository institution, including
an acquisition of shares of the same depository institution at
approximately the same time under substantially the same terms; or
(ii) Have made, or propose to make, a joint filing under section 13
or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n),
and the rules promulgated thereunder by the Securities and Exchange
Commission regarding ownership of the shares of the same insured
depository institution.
(c) Exceptions. Compliance with paragraph (a) of this section is
not required if:
(1) The person or group of persons referred to in that paragraph
has disclosed the amount borrowed and the security interest therein to
the Board or appropriate Reserve Bank in connection with a notice filed
under Sec. 225.41 of this subpart or another application filed with the
Board or Reserve Bank as a substitute for a notice under Sec. 225.41 of
this subpart, including an application filed under section 3 of the BHC
Act (12 U.S.C. 1842) or section 18(c) of the Federal Deposit Insurance
Act (Bank Merger Act, 12 U.S.C. 1828(c)), or an application for
membership in the Federal Reserve System; or
(2) The transaction involves a person or group of persons that has
been the owner or owners of record of the stock for a period of one
year or more; or, if the transaction involves stock issued by a newly
chartered bank, before the bank is opened for business.
(d) Report requirements. (1) The consolidated report must indicate
the number and percentage of shares securing each applicable extension
of credit, the identity of the borrower, and the number of shares held
as principal by the financial institution and any affiliate of the
financial institution.
(2) Financial institutions must file the consolidated report in
writing within 30 days of the date on which the financial institution
or any affiliate first believes that the security for any outstanding
credit consists of 25 percent or more of any class of voting securities
of a state member bank.
(e) Other reporting requirements. A state member bank that is
required to report to another Federal banking agency credit outstanding
that is
[[Page 47280]]
secured by the shares of an insured depository institution also must
file a copy of the report with the appropriate Reserve Bank.
6. Subpart G is amended by revising the heading to read as follows:
Subpart G--Appraisal Standards for Federally Related Transactions
7. Subpart H is amended by revising Secs. 225.71 through 225.73 to
read as follows:
Subpart H--Notice of Addition or Change of Directors and Senior
Executive Officers
Sec. 225.71 Definitions.
(a) Senior executive officer means a person who holds the title or,
without regard to title, salary, or compensation, performs the function
of one or more of the following positions: president, chief executive
officer, chief operating officer, chief financial officer, chief
lending officer, or chief investment officer. Senior executive officer
also includes any other person identified by the Board or Reserve Bank,
whether or not hired as an employee, with significant influence over
major policymaking decisions of the state member bank or bank holding
company.
(b) Director means a person who serves on the board of directors of
a state member bank or bank holding company, except that this term does
not include an advisory director who:
(1) Is not elected by the shareholders of the state member bank or
bank holding company;
(2) Is not authorized to vote on any matters before the board of
directors;
(3) Solely provides general policy advice to the board of directors
and any committee thereof; and
(4) Has not been identified by the Board or Reserve Bank as a
person who performs the functions of a director for purposes of this
subpart.
(c) Troubled condition for a state member bank or bank holding
company means an institution that:
(1) Has a composite rating, as determined in its most recent report
of examination or inspection, of 4 or 5 under the commercial bank
Uniform Interagency Bank Rating System or under the Federal Reserve
Bank Holding Company Rating System;
(2) Is subject to a cease-and-desist order or formal written
agreement that requires action to improve the financial condition of
the institution, unless otherwise informed in writing by the Board or
Reserve Bank; or
(3) Is informed in writing by the Board or Reserve Bank that it is
in troubled condition for purposes of the requirements of this subpart
on the basis of the institution's most recent report of condition or
report of examination or inspection, or other information available to
the Board or Reserve Bank.
Sec. 225.72 Director and officer appointments; prior notice
requirement.
(a) Prior notice by institution. (1) A state member bank or bank
holding company shall give the Board 30 days' written notice, as
specified in Sec. 225.73, before adding or replacing any member of its
board of directors, employing any person as a senior executive officer
of the state member bank or bank holding company, or changing the
responsibilities of any senior executive officer so that the person
would assume a different senior executive officer position, if:
(i) The state member bank has operated under its charter for less
than two years;
(ii) The state member bank or bank holding company has undergone a
change in control within the preceding two years that required a notice
to be filed pursuant to the Change in Bank Control Act or subpart E of
this part;
(iii) The bank holding company became a registered bank holding
company within the preceding two years, unless:
(A) The bank holding company is owned or controlled by a registered
bank holding company; or
(B) The bank holding company was formed in a reorganization in
which substantially all shareholders of the bank holding company were
shareholders of its subsidiary bank prior to the bank holding company's
formation; or
(iv) The state member bank or bank holding company is not in
compliance with all minimum capital requirements applicable to the
institution as determined on the basis of the institution's most recent
report of condition or report of examination or inspection, or is
otherwise in troubled condition.
(2) A state member bank will be considered to have operated under
its charter for more than two years for purposes of
Sec. 225.72(a)(1)(i) if:
(i) In a charter conversion, the predecessor insured depository
institution operated under its charter for at least two years; or
(ii) The state member bank was chartered solely to facilitate the
acquisition of another insured depository institution that operated
under its charter for at least two years.
(b) Prior notice by an individual. The prior notice required by
paragraph (a) of this section may be provided by an individual seeking
election to the board of directors of a state member bank or bank
holding company who has not been proposed by management.
Sec. 225.73 Procedures for filing, processing, and acting on notices;
standards for disapproval; waiver of notice.
(a) Filing notice--(1) Content. The notice required in Sec. 225.72
shall be filed with the appropriate Reserve Bank and shall contain:
(i) The information required by paragraph 6(A) of the Change in
Bank Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the
designated Board form;
(ii) Additional information consistent with the Federal Financial
Institutions Examination Council's Joint Statement of Guidelines on
Conducting Background Checks and Change in Control Investigations as
set forth in the designated Board form; and
(iii) Such other information as may be required by the Board or
Reserve Bank.
(2) Modification. The Reserve Bank may modify or accept other
information in place of the requirements of Sec. 225.73(a)(1) for a
notice filed under this subpart.
(3) Acceptance of notice. The 30-day notice period specified in
Sec. 225.72 shall begin on the date all information required to be
submitted by the notificant pursuant to Sec. 225.73(a)(1) is received
by the appropriate Reserve Bank. The Reserve Bank shall notify the
state member bank or bank holding company or individual submitting the
notice of the date on which all required information is received and
the notice is accepted for processing, and of the date on which the 30-
day notice period will expire.
(b) Commencement of service--(1) At expiration of period. A
proposed director or senior executive officer may begin service after
the end of the 30-day period which begins on the day that a complete
notice under paragraph (a) of this section has been accepted by the
Reserve Bank unless the Board or Reserve Bank issues a notice of
disapproval of the proposed addition or employment before the end of
the 30-day period.
(2) Prior to expiration of period. A proposed director or senior
executive officer may begin service before the expiration of the 30-day
period if the Board or the Reserve Bank notifies in writing the state
member bank or bank holding company or individual submitting the notice
of the Board's or Reserve Bank's intention not to disapprove the
addition or employment.
(c) Notice of disapproval. The Board or Reserve Bank shall
disapprove a
[[Page 47281]]
notice under Sec. 225.72 if the Board or Reserve Bank finds that the
competence, experience, character, or integrity of the individual with
respect to whom the notice is submitted indicates that it would not be
in the best interests of the depositors of the state member bank or in
the best interests of the public to permit the individual to be
employed by, or associated with, the state member bank or bank holding
company. The notice of disapproval shall contain a statement of the
basis for disapproval and shall be sent to the state member bank or
bank holding company and the disapproved individual.
(d) Appeal of a notice of disapproval. (1) A disapproved individual
or a state member bank or bank holding company that has submitted a
notice that is disapproved under this section may appeal the
disapproval to the Board within 15 days of the effective date of the
notice of disapproval. An appeal shall be in writing and explain the
reasons for the appeal and include all facts, documents, and arguments
that the appealing party wishes to be considered in the appeal, and
state whether the appealing party is requesting an informal hearing.
(2) Written notice of the final decision of the Board shall be sent
to the appealing party within 60 days of the receipt of an appeal,
unless the appealing party's request for an informal hearing is
granted.
(3) The disapproved individual may not serve as a director or
senior executive officer of the state member bank or bank holding
company while the appeal is pending.
(e) Informal hearing. (1) An individual, state member bank or bank
holding company whose notice under this section has been disapproved
may request an informal hearing on the notice. A request for an
informal hearing shall be in writing and shall be submitted within 15
days of a notice of disapproval. The Board may, in its sole discretion,
order an informal hearing if the Board finds that oral argument is
appropriate or necessary to resolve disputes regarding material issues
of fact.
(2) An informal hearing shall be held within 30 days of a request,
if granted, unless the requesting party agrees to a later date.
(3) Written notice of the final decision of the Board shall be
given to the individual and the state member bank or bank holding
company within 60 days of the conclusion of any informal hearing
ordered by the Board unless the requesting party agrees to a later
date.
(f) Waiver of notice--(1) Waiver requests. The Board or Reserve
Bank may permit an individual to serve as a senior executive officer or
director before the notice required under this subpart is provided, if
the Board or Reserve Bank finds that:
(i) Delay would threaten the safety or soundness of the state
member bank or bank holding company or any of its subsidiary banks;
(ii) Delay would not be in the public interest; or
(iii) Other extraordinary circumstances exist that justify waiver
of prior notice.
(2) Automatic waiver. An individual who is not proposed by the
management of a state member bank or bank holding company and who is
elected as a new member of the board of directors at a meeting of the
state member bank or bank holding company may serve as a director and
may comply with the notice requirements of Sec. 225.72(a) by providing
to the appropriate Reserve Bank all the information required in
Sec. 225.73(a) within two (2) business days after the individual's
election.
(3) Effect on disapproval authority. Any waiver granted under this
section shall not affect the authority of the Board or Reserve Bank to
issue a notice of disapproval within 30 days after such waiver.
8. Section 225.125 is amended by revising paragraphs (f) and (g)
to read as follows:
Sec. 225.125 Investment adviser activities.
* * * * *
(f) In the Board's opinion, the Glass-Steagall Act provisions, as
interpreted by the U.S. Supreme Court, forbid a bank holding company to
sponsor, organize or control a mutual fund. However, the Board does not
believe that such restrictions apply to closed-end investment companies
as long as such companies are not primarily or frequently engaged in
the issuance, sale and distribution of securities. A bank holding
company should not act as investment adviser to an investment company
which has a name that is similar to the name of the holding company or
any of its subsidiary banks unless the prospectus of the investment
company contains the disclosures required in paragraph (h) of this
section. In no case should a bank holding company act as investment
adviser to an investment company which has either a name that is the
same as the name of the holding company or any of its subsidiary banks,
or a name that contains the word ``bank''.
(g) In view of the potential conflicts of interests that may exist,
a bank holding company and its bank and nonbank subsidiaries should not
purchase in their sole discretion in a fiduciary capacity (including as
managing agent) securities of any investment company for which the bank
holding company acts as investment adviser unless the purchase is
specifically authorized by the terms of the instrument creating the
fiduciary relationship, by court order, or by the law of the
jurisdiction under which the trust is administered.
* * * * *
9. Appendix C is revised to read as follows:
Appendix C to Part 225--Small Bank Holding Company Policy Statement
Policy Statement on Assessment of Financial Factors
In acting on applications filed under the Bank Holding Company
Act, the Board has adopted, and continues to follow, the principle
that bank holding companies should serve as a source of strength for
their subsidiary banks. When bank holding companies incur debt and
rely upon the earnings of their subsidiary banks as the means of
repaying such debt, a question arises as to the probable effect upon
the financial condition of the company and its subsidiary bank or
banks.
The Board believes that a high level of debt at the parent
holding company level impairs the ability of a bank holding company
to provide financial assistance to its subsidiary bank(s) and in
some cases the servicing requirements on such debt may be a
significant drain on the resources of the bank(s). For these reasons
the Board has not favored the use of acquisition debt in the
formation of bank holding companies or in the acquisition of
additional banks. Nevertheless, the Board has recognized that the
transfer of ownership of small banks often requires the use of
acquisition debt. The Board therefore has permitted the formation
and expansion of small-bank holding companies with debt levels
higher than would be permitted for larger holding companies.
Approval of these applications has been given on the condition that
the small-bank holding companies demonstrate the ability to service
the acquisition debt without straining the capital of their
subsidiary bank(s) and, further, that such companies restore their
ability to serve as a source of strength for their subsidiary
bank(s) within a relatively short period of time.
In the interest of furthering its policy of facilitating the
transfer of ownership in banks without diluting bank safety and
soundness, the Board has, as described below, adopted certain
revisions to its procedures and standards for the formation and
expansion of small bank holding companies.
A. Size criterion and grandfathering: This policy applies only
to bank holding companies with pro forma consolidated assets of less
than $150 million that: (i) Are not engaged in nonbank activity
involving
[[Page 47282]]
significant leverage; 1 and (ii) do not have a significant
amount of outstanding debt that is held by the general public.
Small-bank holding companies formed before the effective date of
this policy may switch to a plan that adheres to the intent of this
policy provided they comply with the requirements set forth under
paragraphs C., D.2, D.3, and D.4 below.
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\1\ A bank holding company that is engaged in significant off
balance sheet activities would generally be deemed to be engaged in
activities that involve significant leverage.
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B. The two categories of small bank holding company proposals:
Category I (low leverage) proposal: A proposal in which the
parent bank holding company has a pro-forma debt-equity ratio of
1.0:1 or less and meets all applicable requirements of this policy
statement;
Category II (highly leveraged or other) proposal: A proposal in
which the parent bank holding company has a pro-forma debt-equity
ratio of greater than 1.0:1, or any proposal by a small bank holding
company under Section 3 of the Bank Holding Company Act that does
not meet one of the applicable requirements of this policy
statement.
C. Examination ratings and bank capitalization: Generally, the
Board expects that an applicant's existing and proposed subsidiary
bank(s) will have satisfactory examination ratings and be well
managed, and that all present and proposed bank subsidiaries will be
designated well-capitalized. Although the Board recognizes that
there may be instances in which proposals merit favorable
consideration despite the failure to meet these and the other
requirements of this policy statement, such proposals will be
subject to more intense evaluation and will not be subject to the
expedited procedures set forth in Regulation Y that apply to
Category I (low leverage) proposals. Proposals involving de novo
banks or those that otherwise have not been examined would be
processed as Category II (highly leveraged) proposals.
D. Other financial considerations: In evaluating applications
filed pursuant to section 3 of the Bank Holding Company Act, as
amended, when an applicant intends to incur debt to finance the
acquisition of a small bank or banks, the Board will continue to
take into account a full range of financial and other information
about the applicant, and its current and proposed subsidiary
bank(s), including the recent trend and stability of earnings, past
and prospective growth, asset quality, the ability to meet debt
servicing requirements without placing an undue strain on the
resources of the bank(s), and the record and competency of
management. In addition, the Board will require applicants to meet
the minimum requirements set forth below. As a general rule, failure
to meet any of these requirements will result in denial of the
application; however, the Board reserves the right to make
exceptions if the circumstances warrant.
1. Minimum down payment: The amount of acquisition debt should
not exceed 75 percent of the purchase price of the bank(s) to be
acquired. When the owner(s) of the holding company incur debt to
finance the purchase of the bank(s), such debt will be considered
acquisition debt even though it does not represent an obligation of
the bank holding company, unless the owner(s) can demonstrate that
such debt can be serviced without reliance on the resources of the
bank(s) or bank holding company.
2. Capital adequacy: Each subsidiary bank of a small bank
holding company subject to this policy statement is expected to
maintain a well-capitalized designation.
3. Reduction in parent company leverage: Small-bank holding
companies subject to this policy statement are to reduce their
parent company debt to equity ratios consistent with the statutory
requirement that all debt be retired within 25 years of being
incurred. The Board also generally expects that small bank holding
companies reach a debt to equity level of 30 percent or less within
12 years of the incurrence of the debt. The holding company must
also safely meet debt servicing and other requirements imposed by
its creditors.2
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\2\ The term debt, as used in the ratio of debt to equity, means
any borrowed funds (exclusive of short-term borrowings that arise
out of current transactions, the proceeds of which are used for
current transactions), and any securities issued by, or obligations
of, the holding company that are the functional equivalent of
borrowed funds.
The term equity, as used in the ratio of debt to equity, means
the total stockholders' equity of the bank holding company adjusted
to reflect the periodic amortization of ``goodwill'' (defined as the
excess of cost of any acquired company over the sum of the amounts
assigned to identifiable assets acquired, less liabilities assumed)
in accordance with generally accepted accounting principles. In
determining the total amount of stockholders' equity, the bank
holding company should account for its investments in the common
stock of subsidiaries by the equity method of accounting.
Ordinarily the Board does not view redeemable preferred stock as
a substitute for common stock in a small-bank holding company.
Nevertheless, to a limited degree and under certain circumstances,
the Board will consider redeemable preferred stock as equity in the
capital accounts of the holding company if the following conditions
are met: (1) The preferred stock is redeemable only at the option of
the issuer and (2) the debt to equity ratio of the holding company
would be at or remain below 30 percent following the redemption or
retirement of any preferred stock. Preferred stock that is
convertible into common stock of the holding company may be treated
as equity.
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4. Dividend restrictions: A small bank holding company with a
Category II (highly leveraged) proposal as described above is not
expected to pay corporate dividends on common stock until such time
as it reduces its debt to equity ratio to 1.0:1 or less and
otherwise qualifies as a Category I (low leverage) proposal.3
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\3\ Dividends may be paid by small bank holding companies with
debt to equity at or below 1.0:1 if the dividends are reasonable in
amount, do not adversely affect the ability of the bank holding
company to service its debt in an orderly manner, and do not
adversely affect the ability of the subsidiary bank(s) to maintain
well-capitalized designations. It is expected that dividends will be
eliminated if the holding company is not meeting the projections,
made at the time the application was filed, regarding the ability of
the holding company to reduce the debt to equity ratio to 30 percent
within 12 years of consummation of the proposal.
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E. Subsequent acquisitions: Small bank holding companies may
make acquisitions of additional banks after their formation if they
continue to meet the requirements of this policy statement and other
relevant statutory factors. It is expected that expanding small bank
holding companies will be in satisfactory financial condition and
well managed. Small bank holding companies whose expansion proposals
otherwise qualify as Category I (low leverage) proposals must also
be rated BOPEC composite 1-S or 2-S as of their most recent
inspection in order to qualify for the expedited processing
procedures. Proposals from unrated small bank holding companies will
be subject to a more intense review and, therefore, will not be
eligible for the expedited procedures.
By order of the Board of Governors of the Federal Reserve
System, August 28, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-22402 Filed 9-5-96; 8:45 am]
BILLING CODE 6210-01-P
