[Federal Register Volume 61, Number 244 (Wednesday, December 18, 1996)]
[Rules and Regulations]
[Pages 66561-66579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31639]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 545, 559, 560, 563, 567, 571
[No. 96-119]
RIN 1550-AA88
Subsidiaries and Equity Investments
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of Thrift Supervision (OTS or agency) is today
issuing a final rule updating and substantially streamlining its
regulations and policy statements concerning subsidiaries and other
subordinate organizations in which
[[Page 66562]]
savings associations have ownership interests (including operating
subsidiaries and service corporations) and equity investments
(including pass-through investments). These amendments are being made
pursuant to the Regulatory Reinvention Initiative of the Vice
President's National Performance Review (Reinvention Initiative) and
section 303 of the Community Development and Regulatory Improvement Act
of 1994 (CDRIA), which requires OTS and other federal banking agencies
to review, streamline, and modify regulations and policies to improve
efficiency, reduce unnecessary costs, and remove inconsistent, outmoded
and duplicative requirements.
EFFECTIVE DATE: January 1, 1997.
FOR FURTHER INFORMATION CONTACT: Deborah Merkle, Project Manager,
Supervision Policy, (202) 906-5688; Donna Deale, Manager, Supervision
Policy, (202) 906-7488; Susan Miles, Senior Attorney, Regulations and
Legislation Division, (202) 906-6798; Dean Shahinian, Senior Counsel
for Corporate Activities, Business Transactions Division, (202) 906-
7289; or Deborah Dakin, Deputy Chief Counsel, (202) 906-6445,
Regulations and Legislation Division, Chief Counsel's Office, Office of
Thrift Supervision, 1700 G Street, NW., Washington, D.C. 20552.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Summary of Comments and Description of the Final Rule
A. General Discussion of the Comments
B. Section-by-Section Analysis
III. Disposition of Existing Rules
IV. Executive Order 12866
V. Paperwork Reduction Act
VI. Regulatory Flexibility Act Analysis
VII. Unfunded Mandates Act of 1995
VIII. Administrative Procedure Act and Effective Date
I. Background
Pursuant to section 303 of the CDRIA 1 and the
Administration's Reinvention Initiative, OTS began a comprehensive
review of its regulations in the spring of 1995. Early in that process,
OTS identified its regulations governing operating subsidiaries,
service corporations and other equity investments as one of the most
important areas for updating and streamlining. Each regulation in this
area was reviewed to determine whether it was current and
understandable; imposed the least possible burden consistent with
safety and soundness and statutory requirements; addressed subject
matter more suited for handbook guidance; and was written in a clear,
straightforward manner. OTS also sought industry input regarding
staff's initial recommendations through an industry focus group
consisting of thrift representatives, an industry trade association,
and OTS staff. The consensus that emerged from this process was that
regulatory burden could be reduced primarily by enhancing flexibility
and clarifying investment options available to savings associations,
including operating subsidiaries, service corporations, and pass-
through investments.
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\1\ 12 U.S.C. 4803(a)(1).
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As a result of this review, OTS identified a number of ways in
which its regulations could be revised to reduce regulatory burden. On
June 13, 1996, OTS issued a notice of proposed rulemaking.2 The
proposal reorganized some regulations into a chart to facilitate
comparisons of the different types of subordinate organizations;
replaced several application procedures with more streamlined notice
requirements; standardized the requirements applicable to pass-through
investments; revised the list of activities preapproved for thrift
service corporations; removed regulations dealing with finance
subsidiaries (which have largely been replaced by operating
subsidiaries); and restated the regulations in plain language.
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\2\ 61 FR 29976 (June 13, 1996).
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Today's final rule is substantially similar to the June proposal,
but incorporates several changes and clarifications in response to
comments received.
II. Summary of Comments and Description of the Final Rule
A. General Discussion of the Comments
The public comment period on the proposal closed on August 12,
1996. Ten commenters, including six federal savings associations, three
trade associations, and one mortgage guaranty insurance corporation,
submitted comments.
Eight of the ten commenters supported OTS efforts to clarify,
consolidate, and reorganize these regulations. They agreed that the
proposed regulatory changes will make it easier to make investments in
subordinate organizations. Several commenters specifically supported
the plain language drafting and accompanying chart, stating that these
changes will be useful and will reduce the burden of compliance with
the regulations. Most commenters who supported the proposal also made
suggestions for clarifications and modifications, which are discussed
in the section-by-section analysis. Two commenters, representing
current or potential competitors of savings associations or their
service corporations, urged OTS not to adopt, or to proceed more slowly
with, changes that would expand the list of preapproved activities for
service corporations of federal savings associations.
B. Section-by-Section Analysis
New Part 559-Subordinate Organizations
OTS proposed to adopt a new Part 559, Subsidiaries, that would
include all of the agency's regulations affecting thrift subsidiaries.
Commenters generally agreed with OTS's view that this reorganization
will make it much easier for savings associations to find and use these
regulations. OTS has retitled this part as ``Subordinate
Organizations'' in order to avoid potential confusion arising from the
use of the term ``subsidiary'' both as a generic term for a business
organization in which a savings association has an ownership interest
and as a more specific term used to describe a narrower category of
companies in which the savings association's ownership interest is
significant enough to give it direct or indirect control. A federal
savings association's ownership interest in a service corporation may
not be large enough to make that service corporation a ``subsidiary''
of the thrift, but the service corporation is still subject to federal
regulation under this part because the savings association is an owner
of the service corporation.
Section 559.1 What Does This Part Cover?
This section explains the scope of new Part 559 and sets forth
OTS's basic statutory authority over subordinate organizations. No
commenters addressed this section, which is adopted as proposed, with
minor technical corrections.
Section 559.2 Definitions (new)
As OTS reviewed the comments received on the proposal, it became
clear that adding a definitional section to Part 559 would help users
to identify more readily what types of entities are affected by the
various regulatory provisions. New Sec. 559.2 gathers in one location
definitions of key terms describing different types of entities in
which savings associations may invest.
[[Page 66563]]
These definitions are derived in large part from existing regulatory
definitions. The term ``subordinate organization'' encompasses all
business organizations in which a savings association has a direct or
indirect ownership interest except where that ownership interest has
been acquired through the use of the savings association's pass-through
investment authority (discussed below). ``Subsidiary'' is defined using
language taken from the Federal Deposit Insurance Corporation's
regulations governing notices filed for savings association
subsidiaries, 12 CFR 303.13(a)(1996). This definition turns primarily
on whether an association has control of the entity in which it
invests. For these purposes, OTS will use its standard definition of
``control,'' which appears in its change-of-control regulations, 12 CFR
Part 574. ``Operating subsidiary'' is defined as any entity that
satisfies the operating subsidiary requirements of new Sec. 559.3 and
is designated as an operating subsidiary by the investing association.
There are three basic characteristics of an operating subsidiary: (a) a
majority of its voting shares must be owned by the investing
association; (b) it must be controlled by the association; and (c) it
may engage only in activities that are permissible for the association.
``Service corporation'' is defined as any entity that satisfies the
service corporation requirements of new Sec. 559.3 and the authorizing
statute, 12 U.S.C. 1464(c)(4)(B), and is designated as a service
corporation by the investing association. Service corporations may
engage in activities reasonably related to the operation of a financial
institution. However, the amount of funds a federal savings association
may invest in service corporations is limited (as discussed below).
``Lower-tier entity,'' a new term, includes all business organizations
in which an operating subsidiary, service corporation, or other
subordinate organization has an ownership interest. It includes
entities often commonly referred to as ``second-tier service
corporations'' or ``service corporation subsidiaries.'' ``GAAP-
consolidated subsidiary'' is a newly defined term that describes all
operating subsidiaries and any service corporations or lower-tier
entities that are consolidated with a savings association for purposes
of filing reports in accordance with Generally Accepted Accounting
Principles (GAAP).
Section 559.3 What Are the Characteristics of, and What Requirements
Apply to, Subordinate Organizations of Federal Savings Associations?
Section 559.3 (proposed as Sec. 559.2) authorizes federal savings
associations to establish or acquire operating subsidiaries and service
corporations. Most of this section takes the form of a chart that lists
and compares the different characteristics of, and requirements that
apply to, operating subsidiaries and service corporations (including
lower-tier entities in which these companies invest). The chart is
derived in large part from the current regulations at 12 CFR 545.74
(service corporations) and 545.81 (operating subsidiaries). Where
appropriate, and for ease of reference, it cross-references other
applicable OTS regulations that have been the subject of frequent
questions to the agency. The chart reiterates that, in addition to
preapproved service corporation activities, a federal thrift may
continue to apply to OTS for case-by-case approval for a service
corporation to engage in any activity that is reasonably related to the
operation of a financial institution.
Commenters thought the chart would be a comprehensive and concise
reference source that would make it easier to compare these two
structures and determine which best fits the association's needs.
Commenters addressed several substantive areas covered by the
chart:
Preemption
The regulation sets forth OTS's long-standing position that state
law is preempted for operating subsidiaries to the same extent as it is
for the parent federal savings association. OTS has taken this position
because an operating subsidiary--which may only engage in activities
permissible for its parent federal savings association and must be
controlled by the investing savings association--is treated as the
equivalent of a department of the parent thrift for regulatory and
reporting purposes. In the past, OTS has not preempted state law for
service corporations because service corporations are not so closely
tied to the parent thrift.
One commenter asked that we reexamine whether state law should be
preempted for those service corporations that must be incorporated in
the state where the parent federal savings association is incorporated
(commonly referred to as first-tier service corporations).
Alternatively, this commenter urged that OTS consider relaxing or
eliminating the requirement that first-tier service corporations (in
contrast to operating subsidiaries and lower-tier entities) must be
organized in the state where their parent thrift has its home office.
The commenter argued that Sec. 5(c)(4)(B) of the Home Owners' Loan Act
(HOLA) only requires that a service corporation be incorporated in the
federal savings association's home state where a service corporation is
owned by more than one savings association.
Upon review, OTS continues to believe that state law should not be
preempted for service corporations of federal savings associations to
the same extent that it has been for federal savings associations and
their operating subsidiaries. Service corporations engage in activities
that are related to and promote, but go beyond, those permitted for
federal savings associations themselves. In contrast, operating
subsidiaries engage only in activities that could be conducted at the
parent thrift level. Additionally, unlike an operating subsidiary, a
service corporation need not be controlled by its parent thrift.
Moreover, a federal thrift may only invest a small portion of its
assets in service corporations, while no such limits apply to operating
subsidiaries. These distinctions make service corporations less
critical to the operations of federal savings associations. Therefore,
to date OTS has concluded that broad federal preemption for service
corporations is not necessary to facilitate the safe and sound
operation of federal savings associations, to enable federal savings
associations to conduct their operations in accordance with the best
practices of thrift institutions in the United States, or to further
other purposes of the HOLA. Although the agency could promulgate
preemptive regulations if circumstances warranting federal preemption
arise, the agency does not believe such circumstances exist at this
time. Accordingly, service corporations continue to be subject to state
law except where state law comes into direct conflict with federal law.
The home-state incorporation restriction that the commenter
alternatively suggests that OTS relax or eliminate is a statutory
requirement found at HOLA Sec. 5(c)(4)(B). That section provides that
federal savings associations may make investments ``in the capital
stock, obligations, or other securities of any corporation organized
under the laws of the State in which the Federal savings association's
home office is located, if such corporation's entire capital stock is
available for purchase only by savings associations of such State and
by Federal savings
[[Page 66564]]
associations having their home offices in such State.'' 3 The most
natural reading of this language is that a service corporation must
both: (a) be organized in the parent thrift's home state, and (b) sell
capital stock only to thrifts that have their home offices in that
state. This is how OTS and its predecessor have long read the statute.
OTS does not have the authority to override the statute. Nevertheless,
OTS would support a statutory change eliminating the home state
incorporation requirement. In our view, this requirement is an
unnecessary procedural hurdle with no connection to safety and
soundness.
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\3\ 12 U.S.C. 1464(c)(4)(B) (emphasis added).
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Inapplicability of HOLA Section 5(c) Investment Limits to Service
Corporations
One trade association commenter representing competitors of federal
savings associations reiterated a comment it had submitted on OTS's
Lending and Investment proposal. It argued that OTS should aggregate
commercial loans made by a federal thrift's service corporation with
commercial loans made by the thrift itself for purposes of calculating
investment limits under section 5(c)(2)(A). To do otherwise, it argues,
would circumvent Congress' intent to establish a ceiling on commercial
loan activity by savings associations.
The requirement that a service corporation's commercial loans be
aggregated with those of the parent thrift to determine compliance with
the limitation on commercial loans was previously established by OTS
regulation, not the HOLA. This requirement was removed by the final
Lending and Investments Rule, effective as of October 30, 1996.4
As discussed in the preamble to that regulation, the statutory language
imposing investment limits on commercial lending by savings
associations nowhere refers to loans made by service
corporations.5 Similarly, section 5(c)(4)(B) of the HOLA, which
authorizes investments in service corporations of up to 3% of a
thrift's assets, does not contain any sublimit on commercial lending by
service corporations.
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\4\ 61 FR 50951 (September 30, 1996).
\5\ We also note that on September 30, 1996, following
publication of the January Lending and Investment proposal setting
forth OTS's interpretation of HOLA section 5(c)(2)(A), the Economic
Growth and Regulatory Paperwork Reduction Act of 1996 (``EGRPRA'')
enhanced the commercial lending authority of federal thrifts under
HOLA section 5(c)(2)(A), raising it by an additional 10% of assets
for commercial loans made to small businesses. In amending this
section, Congress did not in either statutory language or
legislative history indicate disapproval of OTS's interpretation of
this provision or the HOLA service corporation provision.
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Accordingly, as proposed, the chart that appears in Sec. 559.3
reiterates that loans and investments made by service corporations are
not subject to the limits that apply to federal savings associations
under HOLA section 5(c).
Structure of Operating Subsidiaries and Service Corporations
One commenter specifically supported the provisions in the chart
that streamline the procedure for converting service corporations to
operating subsidiaries or operating subsidiaries to service
corporations. We reiterate that a savings association converting its
service corporation to an operating subsidiary must be certain that the
activity is permissible for a federal savings association.
Two commenters also suggested that the chart should address whether
an operating subsidiary may be structured as a limited partnership or
limited liability company (LLC).6 Both of these forms of
organization limit the liability of their owners to the amount of their
investment in much the same way as the liability of a stockholder of a
corporation is limited. While OTS expects that the vast majority of
operating subsidiaries will continue to be structured as corporations,
in the interest of increasing federal thrifts' flexibility in
structuring their operations, the agency has modified the chart by
removing specific references to ``incorporation''. An operating
subsidiary must still satisfy the basic requirements of majority
ownership interest, limited liability, and effective operating control.
Not all forms of organization will meet those requirements. OTS will
therefore continue to address requests by thrifts to establish an
operating subsidiary in a noncorporate form on a case-by-case basis
through its Sec. 559.11 notice and review process. Organizational forms
that meet the requirements of the regulation and do not present safety
and soundness concerns will be permitted.
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\6\ LLCs are a relatively new form of business organization,
that have certain advantages of both the corporate and partnership
forms of ownership. They have become increasingly popular because
the Internal Revenue Service has allowed LLCs meeting certain
requirements to be taxed as partnerships.
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The chart has been similarly amended to give service corporations
the potential to be organized in other forms. EGRPRA amended the Bank
Service Corporation Act to confirm that first-tier bank service
corporations may be established as LLCs. HOLA was not similarly
amended. Nothing in EGRPRA's legislative history or the legislative
history of the HOLA addresses whether savings association service
corporations may be organized as LLCs. Absent such guidance, OTS will
follow its standard practice of interpreting the HOLA in a manner that
does not elevate form over substance. Thus, OTS believes the HOLA
authorization to invest in service corporations should be read to
permit any organizational form that provides the same basic protections
as the corporate form of organization, including limited liability. Any
proposal to organize an LLC or a limited partnership as a first-tier
service corporation will be carefully reviewed in the Sec. 559.11
notice process to ascertain whether liability will in fact be limited
and whether any other safety and soundness concerns are presented.
Consolidation of Operating Subsidiaries with Their Parent Savings
Associations
One commenter urged OTS to amend the chart to allow for waiver of
the requirement that operating subsidiaries are generally consolidated
with their parent thrift for purposes of investment authority and other
regulatory requirements. OTS does not believe that a specific waiver
provision is necessary. OTS regulations already provide, at 12 CFR
500.30(a), that the OTS Director ``may, for good cause and to the
extent permitted by statute, waive the applicability of any provision
of this chapter.'' That provision covers all OTS regulations except for
those containing statutorily mandated provisions. Because the operating
subsidiary form of organization is permitted by, but not specifically
addressed in OTS's statutory authority over federal savings
associations, most requirements governing operating subsidiaries are
not mandated by statute. OTS will review any requests to waive a
consolidation requirement on a case-by-case basis to determine whether
good cause exists.
OTS has also modified provisions of the chart summarizing the
capital and Qualified Thrift Lender (QTL) requirements to reflect
changes made to the underlying regulations in this or other recently
adopted OTS regulations. Other technical, non-substantive changes have
been made to make the chart easier to understand.
Section 559.4 What Activities Are Preapproved for Service
Corporations?
This section (proposed as Sec. 559.3) replaces the list of
preapproved activities found in current Sec. 545.74(c). This section
does not purport to list all possible activities that may be
permissible for service corporations of federal savings associations,
but only
[[Page 66565]]
those that have been preapproved and may be conducted by well-run
institutions upon notice to OTS. Other unlisted activities that are
reasonably related to the operation of financial institutions will be
considered on a case-by-case basis upon application to OTS.
The proposal revised the list of preapproved activities to:
Affirm that any activity a federal thrift may conduct
directly, except deposit-taking, is preapproved for a service
corporation, when conducted in the same manner as allowed at the
federal savings association level. This includes all activities listed
in the HOLA and Part 560, as well as other incidental powers addressed
in OTS legal opinions and guidance.
Include certain activities that the OTS already routinely
approves on a case-by-case basis.
Allow business and professional activities that involve
financial documents, financial clients, or are generally finance-
related to be performed for any person.
Permit a limited number of services that have not been
previously authorized, but are reasonably related to the operation of a
financial institution and have been permitted for bank operating
subsidiaries or bank service corporations.
Three commenters thought the proposed additions to the list of
preapproved activities for service corporations would be helpful in a
variety of ways: business plans could be developed more efficiently;
uncertainty over whether activities are permissible would be
eliminated; and, as a result, federal savings associations could
function more efficiently.
One commenter requested that the agency clarify that the presence
of an activity on the list of preapproved activities does not
necessarily imply that federal savings associations cannot conduct the
activity directly. This is correct, but it should also be noted that
the activities listed in the regulation may be conducted without being
subject to the same limits that apply to the parent federal savings
association except where specifically provided. For example, service
corporations may perform some services for third parties that the
federal savings association may only perform for itself.
One trade association commenter representing competitors of savings
associations argued that the proposed regulation would expand the
activities permissible for service corporations too far. It only
supported the modification of preapproved activities to include those
previously authorized and permitted for bank operating subsidiaries or
bank service corporations. This commenter also objected to permitting
preapproved ``financial-related'' or ``credit-related'' activities to
be performed for anyone (rather than only primarily for financial
institutions), and characterized the proposal's changes as
``substantive modifications that go beyond regulatory burden
reduction.''
OTS does not agree. The effect of today's amendments is not to
expand the scope of permissible service corporation activities. The
service corporation regulation has never purported to list all
``permissible'' activities of service corporations of federal savings
associations, but only those ``preapproved.'' Under both the current
and the new regulation, federal savings associations may apply to OTS
for approval of any proposed service corporation activity that is
``reasonably related'' to the activities of federal savings
associations and other financial institutions.7 OTS believes that
once it has become familiar with an activity and determined that it is
``reasonably related,'' the activity should be added to the preapproved
list. No purpose is served by requiring well-run institutions to file
applications (rather than notices) to engage in these activities, pay
higher fees, and wait for agency approvals. Today's action merely
reduces the procedural hurdles that service corporations of well-run
federal savings associations must scale before engaging in certain
permissible activities by replacing application requirements with
notice requirements.
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\7\ See the introductory text to current 12 CFR 545.74(c)(1996).
See also Sec. 559.3(e)(2)(i) of today's final rule.
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Of course, savings associations may continue to apply to OTS for
case-by-case approval for their service corporations to engage in
activities not on the preapproved list, or for the service corporation
to provide services to a broader range of customers than those
specified for some categories of activities on the preapproved list.
Today's additions to the preapproved list will place federal
thrifts on a more level playing field with competitors (including non-
depository financial institutions) by allowing thrift service
corporations to engage in profitable businesses that do not carry
significant risks and that may be synergistic with the core thrift
business.
Mortgage Insurance
OTS requested comment on whether service corporations should be
permitted to engage in activities related to private mortgage insurance
(mortgage insurance). As part of its recent Conflicts of Interest,
Corporate Opportunity, and Hazard Insurance rulemaking,8 OTS has
removed Sec. 563.44 of its regulations, which had significantly limited
the mortgage insurance activities of federal savings associations and
their subordinate organizations, by, among other things, limiting the
circumstances under which a savings association could insure any loan
with a mortgage insurance company in which it had a significant direct
or indirect interest.
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\8\ 61 FR 60173 (November 27, 1996).
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One trade association commenter urged OTS not to make underwriting
mortgage insurance a preapproved activity for service corporations and
to proceed with caution in allowing service corporations to enter the
mortgage insurance business. This commenter believed that mortgage
insurance underwriting presents different risks than other insurance
products because, among other reasons, it is non-cancelable, its
premium is fixed for the duration of the policy, and it covers the
riskiest type of single-family mortgage. If underwriting mortgage
insurance is permitted, this commenter believed OTS should require an
application, separate capitalization of the subsidiary, and arms'
length transactions.
A second commenter urged OTS to make underwriting of captive
mortgage reinsurance (``CMR'') (reinsurance solely of loans originated
by an affiliated federal savings association and insured by a primary
mortgage insurance provider) a preapproved activity. This commenter
pointed out that the mortgage insurance industry is a highly regulated
industry subject to comprehensive state and federal insurance
regulatory requirements and oversight, as well as the ongoing scrutiny
of the mortgage lending industry and secondary markets. The commenter
specifically did not address the direct underwriting of mortgage
insurance or general reinsurance of mortgage insurance.
Based on this commenter's description of CMR, it appears that CMR
could be an activity ``reasonably related to the activities of
financial institutions.'' At this point, however, OTS believes that the
underwriting of captive mortgage reinsurance and other mortgage
insurance-related activities should be considered on a case-by-case,
rather than a preapproved, basis. This is consistent with the approach
OTS has generally taken when authorizing new service corporation
activities in order to
[[Page 66566]]
gain additional supervisory experience with a particular business over
time before prescribing standards for preapproval. A savings
association that is interested in conducting reinsurance activity
through a service corporation may file an application with the agency
describing how it would propose to conduct the activity and what
safeguards it would put in place.
In addition to the activities listed as preapproved in the
proposal, the final rule adds two activities that the Federal Reserve
Board, on September 6, 1996, proposed to authorize for bank holding
companies: (1) finance-related management consulting and management
consulting for financial institution clients; and (2) printing and
selling checks and related documents. If the Federal Reserve's rule is
adopted in final form, these activities will automatically become
authorized for bank service corporations by operation of 12 U.S.C.
1864(f).
In its proposal, OTS signalled its intent to review activities
authorized for bank service corporations in making additions to the
preapproved list. Although the two activities described above have not
yet been adopted in final form by the Federal Reserve Board, they are
clearly ``reasonably related'' to the business of financial
institutions and, unlike the reinsurance activities described above, do
not require significant capital or present other novel issues.
Accordingly, the two activities have been added to the preapproved
list.
Section 559.5 How Much May a Savings Association Invest in Service
Corporations or Lower-Tier Entities?
Proposed Sec. 559.4 (now Sec. 559.5) replaced Sec. 545.74(d), and
reiterated that a federal savings association may invest in the
aggregate 3% of its assets in one or more service corporations as long
as the excess investment over 2% serves primarily community, inner
city, or community development purposes. The proposal simplified the
rules governing when a federal savings association may make loans to
service corporations separate from the 3% of assets limit. Under the
proposal, the only restrictions were that such additional loans: (1) be
authorized elsewhere under the HOLA; (2) satisfy applicable percentage
of assets limits (e.g., 10-20% of assets for commercial loans); and (3)
comply with the loans-to-one-borrower (LTOB) regulation.
Commenters generally agreed that the proposal would significantly
condense and simplify the rules governing when a federal savings
association may make loans to service corporations separate from the 3%
of assets limit. Two commenters supported the proposed changes to these
limits, believing that simplification would help institutions operate
more efficiently. One thought the proposed changes would enhance growth
opportunities without undermining the parent's safety and soundness and
allow greater flexibility within multiple service corporation
structures.
Two commenters, however, expressed concern with the requirement
that loans by a thrift to its service corporations and lower-tier
entities comply with the LTOB regulation. They argued that under the
current regulation, some institutions are making loans in a safe and
sound manner, not posing significant concentration risks, and are
exceeding the thrift's LTOB limits. After reviewing the commenters'
concerns, we agree that there are better ways to promote the goals of
limiting and prudently diversifying the risks presented by savings
associations' loans to subordinate organizations. In fashioning a final
rule, we looked at not only the protections provided by LTOB, but also
those afforded by the capital regulation and the HOLA section 5(c)
investment limits.
The final rule continues to allow federal thrifts the flexibility
to place loans to service corporations or lower-tier entities in either
the HOLA section 5(c)(4)(B) investment category (service corporation
investments), or another applicable HOLA investment category (e.g.,
HOLA section 5(c)(2)(A)'s commercial lending authority), provided they
have available capacity in the chosen category. Section 559.5 does not
further limit the amount of such loans to a thrift's GAAP-consolidated
subsidiaries (regardless of whether such GAAP-consolidated subsidiaries
are service corporations or lower-tier entities). OTS believes that
there is no need to impose separate limits on loans to GAAP-
consolidated subsidiaries for several reasons. First, if the GAAP-
consolidated subsidiary is engaged only in activities permissible for a
national bank, its structure and risk are the equivalent of those of a
traditional national bank operating subsidiary. Pursuant to 12 CFR
32.1(c), a national bank's loans to its operating subsidiaries are not
subject to lending limits. Second, if the GAAP-consolidated subsidiary
is engaged in activities that are not permissible for a national bank,
the savings association must deduct its entire debt and equity
investment in calculating its core capital under 12 CFR
567.5(a)(2)(iv), regardless of the authority under which such
investments are made. As a result, even if the thrift were to lose its
entire investment, there would be no adverse impact on its regulatory
capital compliance. This provides assurance that such loans, if made,
will not adversely affect the viability of a federal savings
association. Therefore, we do not believe that any additional
limitations under Sec. 559.5 are necessary for GAAP-consolidated
subsidiaries.
For subordinate organizations that are not GAAP-consolidated
subsidiaries, Sec. 559.5 has been revised from the proposal to impose a
limit of 15% of the thrift's total capital on loans to any one
subordinate organization. The regulation further imposes a 50% of total
capital aggregate limit on loans to all subordinate organizations that
are not GAAP-consolidated subsidiaries. By contrast, the proposed rule
would have subjected all loans to a service corporation (even if GAAP-
consolidated) and to its lower-tier entities to an aggregate 15% of
capital limit.
To determine compliance with the ``15/50'' limits of the final
rule, a thrift's loans to the subordinate organization must be
aggregated with loans made by any GAAP-consolidated subsidiary to that
subordinate organization. The Regional Director may modify the 15/50
limits on a case-by-case basis for safety and soundness reasons.
One commenter requested clarification that the additional loan
authority is a separate authority from the HOLA section 5(c)(4)(B)
investment authority, and not something that is limited to situations
where that authority has been exhausted. This is correct.
A commenter requested that, where an entity may be considered
either a service corporation or a pass-through entity under Sec. 560.32
(discussed below), OTS clarify that the investment could be apportioned
between the two authorities. OTS's longstanding position remains that
investments that are authorized under two or more separate provisions
of law may be made under either provision, or allocated between both
provisions, to the extent that the savings association has remaining
investment authority available under the applicable limits.
Subpart B--Regulations Applicable to All Savings Associations
Section 559.10 How Must Separate Corporate Identities be Maintained?
This section describes what a savings association and its
subordinate organizations must do to establish and maintain separate
identities. The purpose for these requirements, derived
[[Page 66567]]
from current Secs. 545.81(f), 563.37, and 571.21, is to reduce the
potential for customer confusion or for a court to hold the parent
liable for the subordinate organization's conduct or obligations. Two
commenters specifically supported this section. One of these commenters
noted generally, however, that corporate separateness should not
unnecessarily restrict the ability to advertise and cross-market
products. OTS does not believe that the continuation of these long-
standing requirements will in any way hamper the ability of a savings
association and its subordinate organizations to advertise or cross-
market each other's products. The section is being adopted as proposed.
Section 559.11 What Notices Are Required to Establish or Acquire a New
Subsidiary or Engage in New Activities Through an Existing Subsidiary?
This section combines and streamlines the overlapping notice
requirements currently contained in Secs. 545.74(b)(2), 545.81(c), and
563.37(c). Two commenters expressly supported the streamlined notice
and application procedures. This section is being adopted as proposed.
Section 559.12 How May a Subsidiary of a Savings Association Issue
Securities?
OTS proposed this section to replace current Sec. 563.132,
requiring that a savings association notify OTS before a subsidiary
issues securities. The proposed section also incorporated requirements
from current Sec. 545.82 (finance subsidiaries of federal savings
associations) requiring that securities issued by all subsidiaries
indicate that they are not covered by federal deposit insurance and may
not be called or accelerated in the event of the savings association's
insolvency.
One commenter requested clarification that Sec. 559.12 does not
apply to securities issuances to the parent or for a subsidiary's own
corporate needs (as compared to issuing securities to a third party and
forwarding the proceeds to the parent), arguing that such issuances
were not covered by Sec. 563.132 or Sec. 545.82 and that applying the
regulation to such issuances would increase regulatory burden. OTS has
reexamined the scope of not only Secs. 563.132 and 545.82, but also the
notice requirements of new Sec. 559.11, which requires savings
associations to provide OTS with 30-days advance notice before
conducting a new activity in a subsidiary. OTS has always considered
the issuance of securities to be an activity covered by these
provisions. Issuance of securities by a subsidiary, especially if the
parent savings association expects to transfer any assets or make any
guarantees in connection with the issuance, is a matter of which the
regulator needs to be aware.
Upon review, however, OTS believes that its supervisory concerns
can be satisfied by receiving initial notice that the subsidiary will
be issuing securities. The more detailed reporting requirements of
proposed Sec. 559.12 have been replaced by a less burdensome
recordkeeping requirement so that the examination process can
thereafter monitor the actual securities issuances. Accordingly, a
savings association must notify OTS under Sec. 559.11 before it
initially issues securities through a subsidiary, regardless of the
purpose to which the proceeds will be put. Thereafter, no further
notices are required, but savings associations and their subsidiaries
should maintain records of their securities issuances under Sec. 559.12
available for review by OTS examiners for as long as the securities are
outstanding. Section 559.12 has been modified accordingly.
Section 559.13 How May a Savings Association Exercise its Salvage
Power in Connection With its Service Corporation or Lower-Tier
Entities?
This section replaces the application procedure for salvage
investments of current Sec. 563.38 with a 30-day notice requirement. In
its notice, an institution must fully document its additional
investment in a service corporation or a lower-tier entity in a manner
that demonstrates how its action is consistent with safety and
soundness and document other salvage alternatives considered. If the
agency has concerns, it may take objection to, or grant conditional
approval of, a notice to exercise such salvage power. One commenter
expressly supported the change to a notice requirement.
This section is being adopted as proposed, with one modification.
Language is being added to emphasize that investments made using
salvage power authority are, as they have always been, considered
investments for purposes of the capital regulation. Thus, for example,
a salvage investment in a nonincludable subsidiary would be deducted in
calculating the thrift's capital.
Amendments to Part 560--Lending and Investment
OTS also proposed to add certain provisions dealing with
subordinate organizations and equity-related investments, such as
service corporations, pass-through investments and de minimis
investments to Part 560, Lending and Investments. These additions will
make that part a comprehensive resource for users seeking information
on federal savings associations' lending and investment authorities.
Section 560.30 General Lending and Investment Powers for Federal
Savings Associations
In the interest of completeness, OTS proposed to add several
equity-related investments to the lending and investment powers chart
contained in this regulation. Investments in the following entities are
being added as proposed: Small business investment corporations
chartered pursuant to Sec. 301(d) of the Small Business Act; open-end
management investment companies; and service corporations. The chart
has also been modified to reflect recent statutory amendments enhancing
and clarifying federal savings associations' educational, credit card,
and small business lending authority enacted as part of EGRPRA.
Finally, the chart is being amended to clarify that liquidity
investments are authorized under 12 U.S.C. 1464(c)(1)(M) as long as
they are of a type that would qualify as liquid asset investments under
12 CFR part 566. The maturity limitations of that part generally do not
affect this authorization. This carries forward language from former 12
CFR 545.71 that was inadvertently omitted from the final lending and
investment rule when liquidity investments were added to the chart.
Section 560.32 Pass-Through Investments
This new section codifies federal savings associations' authority
to invest in entities, such as limited partnerships and mutual funds,
that hold only assets, and engage only in activities, permissible for
federal savings associations. By clarifying the rules applicable to
pass-through investments, this section enhances savings associations'
access to this investment option. The section also establishes uniform
safety and soundness constraints, ensuring that the OTS is aware of,
and has the opportunity to object to, any move by a thrift to place
significant amounts of its assets under the operating control of third
parties.
A federal savings association's ability to make pass-through
investments is derived from the same incidental authority pursuant to
which it invests in operating subsidiaries. Pass-through entities
differ from operating subsidiaries, however, in that a thrift
[[Page 66568]]
must have majority ownership of an operating subsidiary but may not
control a pass-through entity. Unlike a service corporation, which is
usually structured as a corporation and which may potentially engage in
a broader range of activities than a federal savings association, pass-
through investments (except for investments made primarily in order to
use a corporation's services under Sec. 560.32(b)(5)(v)) may take the
form of stock investments only with special approval from OTS and may
only be made in entities that engage in activities that a federal
savings association could conduct directly.
Investments that satisfy the conditions enumerated in this section
will not require advance notice to OTS. A savings association must
provide written notice to OTS before making any pass-through investment
that does not meet those standards. OTS will review these notices and
may object or impose conditions for supervisory, legal, or safety and
soundness reasons.
Loans that a savings association makes to an entity in which it has
made a pass-through equity investment will be subject to the LTOB rule
in the same manner as loans by a savings association to any third
party. Absent particular safety and soundness concerns, such loans will
not be aggregated with pass-through equity investments made pursuant to
this section for purposes of either LTOB restrictions or restrictions
under this section.
Commenters supported codifying pass-through investments because the
requirements would be more clearly set forth and the approval process
would be more predictable.
One commenter requested that OTS confirm that the restrictions
applicable to pass-through investments do not apply to operating
subsidiaries. A thrift's investment in its operating subsidiary is not
subject to the restrictions set forth in this section. Pass-through
investments made by an operating subsidiary would, however, be subject
to this section.
Two commenters argued that LLCs should be a preapproved structure
for pass-through investments. OTS agrees that LLCs should be a
preapproved pass-through investment structure, as they offer a number
of benefits to thrifts while containing adequate safeguards. Consistent
with other preapproved entities, LLCs are generally structured to
provide a thrift with limited liability equal to the amount invested.
OTS believes that by preapproving this structure for potential pass-
through investments, thrifts will enjoy greater flexibility and a lower
regulatory burden, especially in the community development area.
Section 560.36 De minimis investments
This section (proposed as Sec. 560.33) specifically confirms that a
federal savings association may make de minimis equity investments in
community organizations in which national banks may invest. Total
investments made under this section may not exceed the greater of \1/4\
of 1% of an association's total capital or $100,000.
Two commenters argued that OTS should increase the permissible
investment for well-capitalized, CAMEL 1- or 2-rated institutions to 5%
of capital, in the aggregate, so long as deducting the investment from
capital would not cause the institution to fall into a lower capital
category and up to 10% of capital on application to OTS. This would
parallel limits for national banks under 12 U.S.C. 24 (Eleventh) and 12
CFR part 24.
The HOLA does not contain a provision paralleling the authority of
12 U.S.C. 24 (Eleventh). However, OTS and its predecessor have long
recognized that a federal savings association's incidental powers
include the ability to make charitable contributions that assist its
community. New Sec. 560.36 allows thrifts to contribute to their
communities by making equity investments in community organizations
that do not exceed what they could otherwise generally directly
contribute and deduct for tax purposes. Because this is a new
regulation and federal thrifts have other community development
investment options not available to national banks, OTS is not inclined
to increase the de minimis limit at this time.
In this regard, we note that federal thrifts may, in addition to
the de minimis authority set forth under this section, make community-
related investments through their 3% of assets service corporation
investment authority. The HOLA, in fact, requires that a thrift wishing
to take full advantage of its authority to invest up to 3% of its
assets in service corporations must dedicate at least 1% of those
assets to investments promoting community, inner-city, or community
development purposes. Additional investments may also be possible using
an operating subsidiary, lower-tier entity, or pass-through investment.
Accordingly, this section is adopted as proposed, with the limits
proposed.
Amendments to Other Regulatory Sections
Section 545.74 Service Corporations
The bulk of this section has been incorporated into new part 559,
Subordinate Organizations. The one exception is the safeguards that
apply to securities brokerage activities of service corporations, which
have been governed by 12 CFR 545.74(c)(4). OTS proposed to amend this
paragraph to remove a prohibition against savings associations
contracting with third parties for securities brokerage activities, but
to otherwise leave it unchanged while the agency considered whether to
incorporate this paragraph into part 559 or to modify the safeguards
and apply them to all securities sales programs taking place on thrift
premises by any entity, including service corporations, affiliates, and
third party broker-dealers.
One commenter addressed this issue. The commenter supported the
removal of the prohibition on federal savings associations contracting
with third parties for securities brokerage activities, but argued that
all of Sec. 545.74(c)(4) duplicates existing regulations and
interagency guidelines and should be removed. At this point, the agency
has decided to deal with the broader issues of securities sales on
association premises, including sales by service corporations, as part
of a later rulemaking. This comment will be considered as part of that
rulemaking. Accordingly, Sec. 545.74(c)(4) is being amended and
retained as Sec. 545.74, ``Securities Brokerage,'' to better reflect
its new scope.
Section 545.77 Real Estate for Offices and Related Facilities
This section was not addressed in the proposal. It sets forth
federal savings associations' incidental authority to acquire real
estate for their current and anticipated future office needs. The
section is being recodified as new Sec. 560.37 without substantive
change.
Section 545.82 Finance Subsidiaries
The proposal proposed to remove this section and to deem all
existing finance subsidiaries to be operating subsidiaries. All of the
functions performed by finance subsidiaries may already be done with
fewer restrictions by an operating subsidiary. The two commenters
addressing this section supported the proposal. Accordingly,
Sec. 545.82 is being deleted.
Section 560.93 Lending Limitations
This section is being amended in connection with the amendments
made today to new Sec. 559.5. Under the current
[[Page 66569]]
section, a thrift's loans to its subsidiaries (defined as 5% or greater
ownership) or affiliates are not subject to the LTOB limitations of
this section. Loans by a thrift or any of its subsidiaries to a third
party are aggregated, however, for purposes of this section. As
amended, the section will generally not apply to loans made by a
savings association to any of its subordinate organizations as the
amount of such loans is governed by new Sec. 559.5.9 As presently,
it will also not apply to loans made to an affiliate of the savings
association, as the amount of those loans continues to be governed by
Sec. 563.41. Loans by a savings association or any of its subsidiaries
(now defined as entities of which the savings association has direct or
indirect control) to a third party are subject to this section.
---------------------------------------------------------------------------
\9\ Loans that a thrift makes to a third party that invests in
the thrift's subordinate organization will be aggregated with any
loans by the thrift to that subordinate organization in accordance
with the combination rules that generally apply under the LTOB
regulation.
---------------------------------------------------------------------------
Section 563.41 Loans and Other Transactions With Affiliates and
Subsidiaries
OTS proposed to modify the definition of ``subsidiary'' in
Sec. 563.41 to mirror the statutory definition of section 23A of the
Federal Reserve Act, 12 U.S.C. 371c, rather than the OTS capital
regulation. The statutory definition turns on control, whereas the
capital regulation was based on a 5% ownership interest. No commenters
addressed this issue, but one commenter requested that OTS allow
sister-bank treatment between a thrift subsidiary and sister thrift.
Consistent with staff interpretations of the Federal Reserve, OTS has
interpreted the sister-bank exemption to be available between a thrift
subsidiary and sister thrift, provided the transaction would be covered
by the sister-bank exemption if conducted by the parent thrift of the
subsidiary.
The definition of ``subsidiary'' in Sec. 563.41 is being modified
as proposed.
Part 567--Capital
OTS proposed to simplify the calculation of investments in
subsidiaries for capital purposes by changing the definition of
``subsidiary'' in Sec. 567.1(dd) from 5% ownership to more than 50%
ownership, paralleling the treatment of subsidiaries by the other
federal banking agencies, and by removing language that defined
investments in subsidiaries in a manner that has resulted in savings
associations holding disproportionate amounts of capital against risks
presented by investments made in some lower-tier entities. Two
commenters supported these changes, stating that they would reduce
regulatory burden. OTS is adopting these changes as proposed with one
modification. Instead of referring to an ownership interest of 50% or
greater, the regulation will refer to ownership interests that would be
consolidated under GAAP. These are generally majority investments, so
this change will not affect most savings associations. However, this
modification will help to reduce confusion in the limited situations
where GAAP, which is used as the basis for reporting under the Thrift
Financial Report that savings associations file quarterly with OTS,
uses a different standard than majority ownership.
III. Disposition of Existing Rules
------------------------------------------------------------------------
Original provision New provision Comment
------------------------------------------------------------------------
545.74(a)................... .................... Removed.
545.74(b) introductory text. 560.30.............. Incorporated into
lending and
investment powers
chart.
545.74(b)(1)................ 559.3(e)(2).........
545.74(b)(2)................ 559.11..............
545.74(b)(3)................ 559.3(e)(2)(ii).....
545.74(b)(4)................ 559.3(o)(2).........
545.74(b)(5)................ 559.1(a)............
545.74(c) introductory text. 559.3(e)(2).........
545.74(c)(1)-(7) except for 559.4...............
(c)(4).
545.74(c)(4)................ 545.74.............. Modified.
545.74(d)................... 559.5............... Substantially
revised.
545.74(e)................... 559.3(q)(2).........
545.76(a)................... 560.30..............
545.76(b)................... .................... Removed.
545.77...................... 560.37..............
545.80...................... 560.30..............
545.81(a)................... 559.3...............
545.81(b)................... 559.3(c)(1), (e)(1).
545.81(c)(1), (2)........... 559.3(a)(1).........
545.81(c)(3)................ 559.11..............
545.81(d)................... 559.3(p)............
545.81(e)................... 559.3(h)(1).........
545.81(f)................... 559.10..............
545.81(g)................... 559.3(o)(1).........
545.81(h)................... 559.1(a)............
545.81(i)................... 559.1(b)............ Modified.
545.81(j)................... 559.3(e)(1).........
545.81(k)................... 559.3(p)............
545.82...................... .................... Removed.
560.93(a)................... .................... Modified.
563.37(a), (b).............. 559.10.............. Modified.
563.37(c)................... 559.11..............
563.38...................... 559.13.............. Modified.
563.41(b)(4)................ .................... Modified.
563.132(a), (b)............. .................... Removed.
563.132(c).................. 559.12.............. Modified.
[[Page 66570]]
567.1(l).................... .................... Modified.
567.1(dd)................... .................... Modified.
571.21...................... 559.10.............. Modified.
------------------------------------------------------------------------
IV. Executive Order 12866
The Director of the OTS has determined that this final rule does
not constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
V. Paperwork Reduction Act
The reporting requirements at 12 CFR 560.32 have been submitted to
and approved by the Office of Management and Budget under OMB control
number 1550-0078. The information is needed by the OTS to assist in
regulating savings associations and their subsidiaries.
The final rule differs from the proposal in that 12 CFR 559.12 no
longer contains the requirement to notify the OTS in writing following
a securities issuance. The information that would have been contained
in the notice is now a recordkeeping requirement. At the proposed rule
stage, the burden attributed to Sec. 559.12, approved under OMB control
no. 1550-0013, remained unchanged. Since the change from the notice
requirement to a recordkeeping requirement constitutes a reduction in
burden, the information collection package under 1550-0013 has been
submitted to OMB for review.
Comments on the collections of information should be sent to the
Office of Management and Budget, Paperwork Reduction Project (1550),
Washington, DC 20503, with copies to the Office of Thrift Supervision,
1700 G Street, NW., Washington, D.C. 20552.
Under the Paperwork Reduction Act of 1995, no persons are required
to respond to a collection of information unless it displays a valid
OMB control number. The valid OMB control number assigned to the
collection of information in this final rule will be displayed in the
table at 12 CFR 506.1(b).
VI. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, OTS
certifies that this final rule will not have a significant impact on a
substantial number of small entities. The final rule streamlines
requirements for all savings associations. It simplifies the
requirements that apply when savings associations create, invest in, or
conduct new activities through a variety of subordinate organizations
or pass-through investments, and clarifies the statutorily required
notices for such actions. The final rule will make it easier for small
savings associations to locate the rules that apply to their
investments.
VII. Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
federal mandate that may result in expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
this final rule reduces regulatory burden. OTS has determined that the
final rule will not result in expenditures by state, local, or tribal
governments or by the private sector of $100 million or more.
Accordingly, this rulemaking is not subject to section 202 of the
Unfunded Mandates Act.
VIII. Administrative Procedure Act and Effective Date
This final rule results from the notice of proposed rulemaking OTS
published on June 13, 1996. In addition to the regulatory language
proposed in that notice, OTS is today redesignating, without
substantive change, other regulations located in Part 545 into new Part
559. The chart in Part 560 has also been updated to reflect changes in
statutory provisions in EGRPRA on September 30, 1996. Pursuant to
section 553(b) of the Administrative Procedure Act, OTS hereby finds
that good cause exists not to publish those provisions for public
notice and comment. These provisions are merely being renumbered and
updated for the convenience of users, thus public notice and
opportunity to comment are unnecessary.
Section 553(d) of the Administrative Procedure Act, 5 U.S.C. 553(d)
permits an agency to waive the normal 30-day delay in effective date
when a rule relieves a restriction. OTS finds good cause to make the
rule effective in fewer than 30 days because the rule imposes no new
regulatory burdens and relieves restrictions by streamlining
application and notice requirements.
List of Subjects
12 CFR Part 545
Accounting, Consumer protection, Credit, Electronic funds
transfers, Investments, Reporting and recordkeeping requirements,
Savings associations.
12 CFR Part 559
Reporting and recordkeeping requirements, Savings associations,
Subsidiaries.
12 CFR Part 560
Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 563
Accounting, Advertising, Conflicts of Interest, Corporate
Opportunity, Crime, Currency, Investments, Mortgages, Reporting and
recordkeeping requirements, Savings associations, Securities, Surety
bonds.
12 CFR Part 567
Capital, Savings associations.
12 CFR Part 571
Accounting, Investments, Reporting and recordkeeping requirements,
Savings associations.
Accordingly, and for the reasons set forth in the preamble, the
Office of Thrift Supervision amends chapter V, title 12, Code of
Federal Regulations, as set forth below.
PART 545--OPERATIONS
1. The authority citation for part 545 continues to read as
follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.
2. Section 545.74 is amended by:
a. Revising the section heading;
b. Removing paragraphs (a), (b), the paragraph heading and
introductory text of paragraph (c), paragraphs (c)(1) through (c)(3),
paragraph (c)(4)(ii)(F), paragraphs (c)(5) through (c)(7), and
paragraphs (d) and (e);
c. Removing the paragraph heading of paragraph (c)(4);
[[Page 66571]]
d. Redesignating paragraphs (c)(4)(i) introductory text,
(c)(4)(i)(A) through (c)(4)(i)(E), (c)(4)(ii) introductory text,
(c)(4)(ii)(A) through (c)(4)(ii)(E), (c)(4)(ii)(G), (c)(4)(iii), and
(c)(4)(iv) as paragraphs (a) introductory text, (a)(1) through (a)(5),
(b) introductory text, (b)(1) through (b)(5), (b)(6), (c), and (d),
respectively;
e. Revising the introductory text of newly designated paragraph
(a);
f. Removing, in newly designated paragraph (b) introductory text,
the phrase ``this paragraph (c)(4)(ii)'', and by adding in lieu thereof
the phrase ``this paragraph (b)'';
g. Removing, in newly designated paragraph (b)(1), the phrase
``under paragraph (c)(3) of this section'', and by adding in lieu
thereof the phrase ``Sec. 559.4 of this chapter''; and
h. Removing, in newly designated paragraph (c), the phrase
``paragraph (c)(4) of'', wherever it appears.
The revisions read as follows:
Sec. 545.74 Securities brokerage.
(a) A service corporation may execute securities transactions on an
agency or riskless principal basis solely upon the order of and for the
account of customers, and may provide standardized and individualized
investment advice to individuals or entities, provided that the service
corporation:
* * * * *
Secs. 545.76, 545.77, 545.80-545.82 [Removed]
3. Sections 545.76, 545.77, 545.80, 545.81, and 545.82 are removed.
4. Part 559 is added to read as follows:
PART 559--SUBORDINATE ORGANIZATIONS
Sec.
559.1 What does this part cover?
559.2 Definitions.
Subpart A--Regulations Applicable to Federal Savings Associations
559.3 What are the characteristics of, and what requirements apply
to, subordinate organizations of federal savings associations?
559.4 What activities are preapproved for service corporations?
559.5 How much may a savings association invest in service
corporations or lower-tier entities?
Subpart B--Regulations Applicable to All Savings Associations
559.10 How must separate corporate identities be maintained?
559.11 What notices are required to establish or acquire a new
subsidiary or engage in new activities through an existing
subsidiary?
559.12 How may a subsidiary of a savings association issue
securities?
559.13 How may a savings association exercise its salvage power in
connection with its service corporation or lower-tier entities?
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828.
Sec. 559.1 What does this part cover?
(a) OTS is issuing this part 559 pursuant to its general rulemaking
and supervisory authority under the Home Owners' Loan Act, 12 U.S.C.
1462 et seq., and its specific authority under section 18(m) of the
Federal Deposit Insurance Act, 12 U.S.C. 1828(m). Subpart A of this
part 559 applies to subordinate organizations of federal savings
associations. Subpart B of this part applies to subordinate
organizations of all savings associations. OTS may, at any time, limit
a savings association's investment in any of these entities, or may
limit or refuse to permit any activities of any of these entities for
supervisory, legal, or safety and soundness reasons.
(b) Notices under this part are applications for purposes of
statutory and regulatory references to ``applications.'' Any conditions
that OTS imposes in approving any application are enforceable as a
condition imposed in writing by the OTS in connection with the granting
of a request by a savings association within the meaning of 12 U.S.C.
1818(b) or 1818(i).
Sec. 559.2 Definitions.
For purposes of this part:
Control has the same meaning as in part 574 of this chapter.
GAAP-consolidated subsidiary means an entity in which a savings
association has a direct or indirect ownership interest and whose
assets are consolidated with those of the savings association for
purposes of reporting under Generally Accepted Accounting Principles
(GAAP). Generally, these are entities in which a savings association
has a majority ownership interest.
Lower-tier entity includes any company in which an operating
subsidiary or a service corporation has a direct or indirect ownership
interest.
Operating subsidiary means any entity that satisfies all of the
requirements for an operating subsidiary set forth in Sec. 559.3 of
this part and that is designated by the parent savings association as
an operating subsidiary pursuant to Sec. 559.3 of this part. More than
50% of the voting shares of an operating subsidiary must be owned,
directly or indirectly, by a federal savings association and no other
person or entity may exercise effective operating control. An operating
subsidiary may only engage in activities permissible for a federal
savings association.
Ownership interest means any equity interest in a business
organization, including stock, limited or general partnership
interests, or shares in a limited liability company.
Service corporation means any entity that satisfies all of the
requirements for service corporations in 12 U.S.C. 1464(c)(4)(B) and
Sec. 559.3 of this part and that is designated by the investing savings
association as a service corporation pursuant to Sec. 559.3 of this
part. A service corporation must be organized under the laws of the
state where the federal savings association's home office is located,
may only be owned by savings associations with home offices in that
state, and may engage in the activities identified in Secs. 559.3(e)(2)
and 559.4 of this part.
Subordinate organization means any corporation, partnership,
business trust, association, joint venture, pool, syndicate, or other
similar business organization in which a savings association has a
direct or indirect ownership interest, unless that ownership interest
qualifies as a pass-through investment pursuant to Sec. 560.32 of this
chapter and is so designated by the investing savings association.
Subsidiary means any subordinate organization directly or
indirectly controlled by a savings association.
Subpart A--Regulations Applicable to Federal Savings Associations
Sec. 559.3 What are the characteristics of, and what requirements
apply to, subordinate organizations of federal savings associations?
A federal savings association (``you'') that meets the requirements
of this section, as detailed in the following chart, may establish, or
obtain an interest in an operating subsidiary or a service corporation.
For ease of reference, this section cross-references other regulations
in this chapter affecting operating subsidiaries and service
corporations. You should refer to those regulations for the details of
how they apply. The chart also discusses the regulations that may apply
to lower-tier entities in which you have an indirect ownership interest
through your operating subsidiary or service corporation. The chart
follows:
[[Page 66572]]
----------------------------------------------------------------------------------------------------------------
Operating subsidiary Service corporation
----------------------------------------------------------------------------------------------------------------
(a) How may a federal savings (1) You must file a notice (2) You must file a notice
association (``you'') establish an satisfying Sec. 559.11. Any satisfying Sec. 559.11. Depending
operating subsidiary or a service finance subsidiary that existed on upon your condition and the
corporation? January 1, 1997 is deemed an activities in which the service
operating subsidiary without corporation will engage, Sec.
further action on your part. 559.3(e)(2) may require you to file
an application.
----------------------------------------------------------------------------------------------------------------
(b) Who may be an owner? (1) Anyone may have an ownership (2) Only savings associations with
interest in an operating home offices in the state where you
subsidiary. have your home office may have an
ownership interest in any service
corporation in which you invest.
----------------------------------------------------------------------------------------------------------------
(c) What ownership requirements (1) You must own, directly or (2) You are not required to have any
apply? indirectly, more than 50% of the particular percentage ownership
voting shares of the operating interest and need not have control
subsidiary. No one else may of the service corporation.
exercise effective operating
control.
----------------------------------------------------------------------------------------------------------------
(d) What geographic restrictions (1) An operating subsidiary may be (2) A service corporation must be
apply? organized in any geographic organized in the state where your
location. home office is located.
----------------------------------------------------------------------------------------------------------------
(e) What activities are permissible? (1) After you have notified OTS in (2)(i) If you are eligible for
accordance with Sec. 559.11, an expedited treatment under Sec.
operating subsidiary may engage in 516.3(a) of this chapter, and
any activity that you may conduct notify OTS as required by Sec.
directly. You may hold another 559.11, your service corporation
insured depository institution as may engage in the preapproved
an operating subsidiary. activities listed in Sec. 559.4.
You may request OTS approval for
your service corporation to engage
in any other activity reasonably
related to the activities of
financial institutions by filing an
application in accordance with Sec.
516.1 of this chapter.
(ii) If you are subject to standard
treatment under Sec. 516.3(b) of
this chapter, and notify OTS as
required by Sec. 559.11, your
service corporation may engage in
any activity that you may conduct
directly except taking deposits.
You may request OTS approval for
your service corporation to engage
in any other activity reasonably
related to the activities of
financial institutions, including
the activities set forth in Sec.
559.4(b)-(i), by filing an
application in accordance with Sec.
516.1 of this chapter.
----------------------------------------------------------------------------------------------------------------
(f) May the operating subsidiary or (1)(i) An operating subsidiary may
service corporation invest in lower- itself hold an operating
tier entities? subsidiary. Part 559 applies
equally to a lower-tier operating
subsidiary. In applying the
regulations in this part, the
investing operating subsidiary
should substitute ``investing
operating subsidiary'' wherever the
part uses ``you'' or ``savings
association.''
(2) A service corporation may invest
[[Page 66573]]
(ii) An operating subsidiary may
also invest in other types of lower-
tier entities. These entities must
comply with all of the requirements
of this part 559 that apply to
service corporations except for
paragraphs (b)(2) and (d)(2) of
this section.
----------------------------------------------------------------------------------------------------------------
(g) How much may a federal savings (1) There are no limits on the (2) Section 559.5 limits your
association invest? amount you may invest in your aggregate investments in service
operating subsidiaries, either corporations and indicates when
separately or in the aggregate. your investments (both debt and
equity) in lower-tier entities be
aggregated with your investments in
service corporations.
----------------------------------------------------------------------------------------------------------------
(h) Do federal statutes and (1) Unless otherwise specifically (2) (i) If the federal statute or
regulations that apply to the provided by statute, regulation, or regulation specifically refers to
savings association apply? OTS policy, all federal statutes ``service corporation,'' it applies
and regulations apply to operating to all service corporations, even
subsidiaries in the same manner as if you do not control the service
they apply to you. You and your corporation or it is not a GAAP-
operating subsidiary are generally consolidated subsidiary.
consolidated and treated as a unit
for statutory and regulatory
purposes.
----------------------------------------------------------------------------------------------------------------
(i) Do the investment limits that (1) Your assets and those of your (2) Your service corporation's
apply to federal savings operating subsidiary are aggregated assets are not subject to the same
associations (HOLA section 5(c) and when calculating investment investment limitations that apply
part 560 of this chapter) apply? limitations. to you. The investment activities
of your service corporation are
governed by paragraph (e)(2) of
this section and Sec. 559.4.
----------------------------------------------------------------------------------------------------------------
(j) How does the capital regulation (1) Your assets and those of your (2) The capital treatment of a
(part 567 of this chapter) apply? operating subsidiary are service corporation depends upon
consolidated for all capital whether it is an includable
purposes. subsidiary. That determination is
based upon factors set forth in
part 567 of this chapter, including
your percentage ownership of the
service corporation and the
activities in which the service
corporation engages. Both debt and
equity investments in service
corporations that are GAAP-
consolidated subsidiaries are
considered investments in
subsidiaries for purposes of the
capital regulation, regardless of
the authority under which they are
made.
----------------------------------------------------------------------------------------------------------------
(k) How does the loans-to-one- (1) The LTOB regulation does not (2) The LTOB regulation does not
borrower (LTOB) regulation (Sec. apply to loans from you to your apply to loans from you to your
560.93 of this chapter) apply? operating subsidiary or loans from service corporation or from your
your operating subsidiary to you. service corporation to you.
Other loans made by your operating However, Sec. 559.5 imposes
subsidiary are aggregated with your restrictions on the amount of loans
loans for LTOB purposes. you may make to certain service
corporations. Loans made by a
service corporation that you
control to entities other than you
or your subordinate organizations
are aggregated with your loans for
LTOB purposes.
----------------------------------------------------------------------------------------------------------------
[[Page 66574]]
(l) How do the transactions with (1) Section 563.41 of this chapter (2) Section 563.41 of this chapter
affiliates (TWA) regulations (Secs. explains how TWA applies. explains how TWA applies.
563.41 and 563.42 of this chapter) Generally, an operating subsidiary Generally, a service corporation
apply? of a savings association is not that is controlled by a savings
deemed to be an affiliate unless it association is not deemed to be an
is a depository institution or the affiliate of that savings
parent holding company or another association unless it is a
affiliate has control of the depository institution or the
subsidiary outside of the ownership parent holding company or another
chain that runs through the thrift. affiliate has control of the
Transactions that an operating service corporation outside of the
subsidiary engages in with an ownership chain that runs through
affiliate of the thrift are the thrift. Transactions that a
aggregated with those of the service corporation that is
thrift. directly or indirectly controlled
by the savings association engages
in with an affiliate of the savings
association are aggregated with
those of the savings association.
----------------------------------------------------------------------------------------------------------------
(m) How does the Qualified Thrift (1) Under 12 U.S.C. 1467a(m)(5), you (2) Under 12 U.S.C. 1467a(m)(5), you
Lender (QTL) (12 U.S.C. 1467a(m)) may determine whether to may determine whether to
test apply? consolidate the assets of a consolidate the assets of a
particular operating subsidiary for particular service corporation for
purposes of calculating your purposes of calculating your
qualified thrift investments. If qualified thrift investments. If a
the operating subsidiary's assets service corporation's assets are
are not consolidated with yours for not consolidated with yours for
that purpose, your investment in that purpose, your investment in
the operating subsidiary will be the service corporation will be
considered in calculating your considered in calculating your
qualified thrift investments. qualified thrift investments.
----------------------------------------------------------------------------------------------------------------
(n) Does state law apply? (1) State law applies to operating (2) State law applies to service
subsidiaries only to the extent it corporations regardless of whether
applies to you. it applies to you, except where
there is a conflict with federal
law.
----------------------------------------------------------------------------------------------------------------
(o) May OTS conduct examinations? (1) An operating subsidiary is (2) Before you invest in a service
subject to examination by OTS. corporation, you must obtain its
written agreement to permit and to
pay the cost of such examinations
as OTS deems necessary.
----------------------------------------------------------------------------------------------------------------
(p) What must be done to redesignate (1) Before redesignating an (2) Before redesignating a service
an operating subsidiary as a operating subsidiary as a service corporation as an operating
service corporation or a service corporation, you should consult subsidiary, you should consult with
corporation as an operating with the OTS Regional Director for the OTS Regional Director for the
subsidiary? the Region in which your home Region in which your home office is
office is located. You must located. You must maintain adequate
maintain adequate internal records, internal records, available for
available for examination by OTS, examination by OTS, demonstrating
demonstrating that the redesignated that the redesignated operating
service corporation meets all of subsidiary meets all of the
the applicable requirements of this applicable requirements of this
part and that your board of part and that your board of
directors has approved the directors has approved the
redesignation. redesignation.
----------------------------------------------------------------------------------------------------------------
[[Page 66575]]
(q) What are the consequences of (1) If an operating subsidiary, or (2) If a service corporation, or any
failing to comply with the any lower-tier entity in which the lower-tier entity in which the
requirements of this part? operating subsidiary invests service corporation invests
pursuant to paragraph (f)(1) of pursuant to paragraph (f)(2) of
this section fails to meet any of this section, fails to meet any of
the requirements of this section, the requirements of this section,
you must notify OTS. Unless you must notify OTS. Unless
otherwise advised by OTS, if the otherwise advised by OTS, if the
company cannot comply within 90 company cannot comply within 90
days with all of the requirements days with all of the requirements
for either an operating subsidiary for either an operating subsidiary
or a service corporation under this or a service corporation under this
section, or any other investment section, or any other investment
authorized by 12 U.S.C. 1464(c) or authorized by 12 U.S.C. 1464(c) or
part 560 of this chapter, you must part 560 of this chapter, you must
promptly dispose of your promptly dispose of your
investment. investment.
----------------------------------------------------------------------------------------------------------------
Sec. 559.4 What activities are preapproved for service corporations?
This section sets forth the activities that have been preapproved
for service corporations. Section 559.3(e)(2) of this part sets forth
the procedures that govern engaging in a broader scope of activities on
a case-by-case basis. You should read these two sections together to
determine whether you must file a notice with OTS under Sec. 559.11 of
this part, or whether you must file an application under Sec. 516.1 of
this chapter and receive prior written OTS approval in order for your
service corporation to engage in a particular activity. To the extent
permitted by Sec. 559.3(e)(2) of this part, a service corporation may
engage in the following activities:
(a) Any activity that all federal savings associations may conduct
directly, except taking deposits.
(b) Business and professional services. The following services are
preapproved for service corporations only when they are limited to
financial documents or financial clients or are generally finance-
related:
(1) Accounting or internal audit;
(2) Advertising, marketing research and other marketing;
(3) Clerical;
(4) Consulting;
(5) Courier;
(6) Data processing;
(7) Data storage facilities operation and related services;
(8) Office supplies, furniture, and equipment purchasing and
distribution;
(9) Personnel benefit program development or administration;
(10) Printing and selling forms that require Magnetic Ink Character
Recognition (MICR) encoding;
(11) Relocation of personnel;
(12) Research studies and surveys;
(13) Software development and systems integration; and
(14) Remote service unit operation, leasing, ownership or
establishment.
(c) Credit-related activities.
(1) Abstracting;
(2) Acquiring and leasing personal property;
(3) Appraising;
(4) Collection agency;
(5) Credit analysis;
(6) Check or credit card guaranty and verification;
(7) Escrow agent or trustee (under deeds of trust, including
executing and deliverance of conveyances, reconveyances and transfers
of title); and
(8) Loan inspection.
(d) Consumer services.
(1) Financial advice or consulting;
(2) Foreign currency exchange;
(3) Home ownership counseling;
(4) Income tax return preparation;
(5) Postal services;
(6) Stored value instrument sales;
(7) Welfare benefit distribution;
(8) Check printing and related services; and
(9) Remote service unit operation, leasing, ownership, or
establishment.
(e) Real estate related services.
(1) Acquiring real estate for prompt development or subdivision,
for construction of improvements, for resale or leasing to others for
such construction, or for use as manufactured home sites, in accordance
with a prudent program of property development;
(2) Acquiring improved real estate or manufactured homes to be held
for rental or resale, for remodeling, renovating, or demolishing and
rebuilding for sale or rental, or to be used for offices and related
facilities of a stockholder of the service corporation;
(3) Maintaining and managing real estate; and
(4) Real estate brokerage for property owned by a savings
association that owns capital stock of the service corporation, the
service corporation, or a lower-tier entity in which the service
corporation invests.
(f) Securities brokerage, insurance and related services.
(1) Execution of transactions in securities or other nondeposit
investment products on an agency or riskless principal basis solely
upon the order of and for the account of customers, provided that the
service corporation complies with the provisions of Sec. 545.74 of this
chapter;
(2) Investment advice, provided that the service corporation
complies with the provisions of Sec. 545.74 of this chapter;
(3) Insurance brokerage or agency for liability, casualty,
automobile, life, health, accident or title insurance;
(4) Liquidity management;
(5) Issuing notes, bonds, debentures or other obligations or
securities; and
(6) Purchase or sale of coins issued by the U.S. Treasury.
(g) Investments.
(1) Tax-exempt bonds used to finance residential real property for
family units;
(2) Tax-exempt obligations of public housing agencies used to
finance housing projects with rental assistance subsidies;
(3) Small business investment companies licensed by the U.S. Small
Business Administration to invest in small businesses engaged
exclusively in the activities listed in paragraphs (a) through (i) of
this section; and
(4) Investing in savings accounts of an investing thrift.
(h) Community development and charitable activities:
(1) Investments in governmentally insured, guaranteed, subsidized
or otherwise sponsored programs for housing, small farms, or businesses
that are local in character;
(2) Investments that meet the community development needs of, and
[[Page 66576]]
primarily benefit, low- and moderate-income communities;
(3) Investments in low-income housing tax credit projects and
entities authorized by statute (e.g., community development financial
institutions) to promote community, inner city, and community
development purposes; and
(4) Establishing a corporation that is recognized by the Internal
Revenue Service as organized for charitable purposes under 26 U.S.C.
501(c)(3) of the Internal Revenue Code and making a reasonable
contribution to capitalize it, provided that the corporation engages
exclusively in activities designed to promote the well-being of
communities in which the owners of the service corporation operate.
(i) Activities reasonably incident to those listed in paragraphs
(a) through (h) of this section if the service corporation engages in
those activities.
Sec. 559.5 How much may a savings association invest in service
corporations or lower-tier entities?
The amount that a federal savings association (``you'') may invest
in a service corporation or any lower-tier entity depends upon several
factors. These include your total assets, your capital, the purpose of
the investment, and your ownership interest in the service corporation
or entity.
(a) Under section 5(c)(4)(B) of the HOLA, you may invest up to 3%
of your assets in the capital stock, obligations, and other securities
of service corporations. Any investment you make under this paragraph
that would cause your investment, in the aggregate, to exceed 2% of
your assets must serve primarily community, inner city, or community
development purposes. You must designate the investments serving those
purposes, which include:
(1) Investments in governmentally insured, guaranteed, subsidized
or otherwise sponsored programs for housing, small farms, or businesses
that are local in character;
(2) Investments for the preservation or revitalization of either
urban or rural communities;
(3) Investments designed to meet the community development needs
of, and primarily benefit, low- and moderate-income communities; or
(4) Other community, inner city, or community development-related
investments approved by OTS.
(b) In addition to the amounts you may invest under paragraph (a)
of this section, and to the extent that you have authority under other
provisions of section 5(c) of the HOLA and part 560 of this chapter,
and available capacity within any applicable investment limits, you may
make loans to any service corporation and any lower-tier entity,
subject to the following conditions:
(1) You and your GAAP-consolidated subsidiaries may, in the
aggregate, make loans of up to 15% of your capital as defined in
Sec. 567.5(c) of this chapter to each subordinate organization that
does not qualify as a GAAP-consolidated subsidiary. All loans made
under this paragraph (b)(1) may not, in the aggregate, exceed 50% of
your total capital, as defined in Sec. 567.5(c) of this chapter.
(2) The Regional Director may limit the amount of loans to a GAAP-
consolidated subsidiary, or may adjust the limits set forth in
paragraph (b)(1) of this section where safety and soundness
considerations warrant such action.
(c) For purposes of this section, the terms ``loans'' and
``obligations'' include all loans and other debt instruments (except
accounts payable incurred in the ordinary course of business and paid
within 60 days) and all guarantees or take-out commitments of such
loans or debt instruments.
Subpart B--Regulations Applicable to All Savings Associations
Sec. 559.10 How must separate corporate identities be maintained?
(a) Each savings association and subordinate organization thereof
must be operated in a manner that demonstrates to the public that each
maintains a separate corporate existence. Each must operate so that:
(1) Their respective business transactions, accounts, and records
are not intermingled;
(2) Each observes the formalities of their separate corporate
procedures;
(3) Each is adequately financed as a separate unit in light of
normal obligations reasonably foreseeable in a business of its size and
character;
(4) Each is held out to the public as a separate enterprise; and
(5) Unless the parent savings association has guaranteed a loan to
the subordinate organization, all borrowings by the subordinate
organization indicate that the parent is not liable.
(b) OTS regulations that apply both to savings associations and
subordinate organizations shall not be construed as requiring a savings
association and its subordinate organizations to operate as a single
entity.
Sec. 559.11 What notices are required to establish or acquire a new
subsidiary or engage in new activities through an existing subsidiary?
When required by section 18(m) of the Federal Deposit Insurance
Act, a savings association (``you'') must file a notice (``Notice'') in
accordance with Sec. 516.1(c) of this chapter at least 30 days before
establishing or acquiring a subsidiary or engaging in new activities in
a subsidiary. The Notice must contain all of the information the
Federal Deposit Insurance Corporation (FDIC) requires pursuant to 12
CFR 303.13. Providing OTS with a copy of the notice you file with the
FDIC will satisfy this requirement. If OTS notifies you within 30 days
that the Notice presents supervisory concerns, or raises significant
issues of law or policy, you must apply for and receive OTS's prior
written approval in accordance with Sec. 516.1(c) of this chapter
before establishing or acquiring the subsidiary or engaging in new
activities in the subsidiary.
Sec. 559.12 How may a subsidiary of a savings association issue
securities?
(a) A subsidiary may issue, either directly or through a third
party intermediary, any securities that its parent savings association
(``you'') may issue. The subsidiary must not state or imply that the
securities it issues are covered by federal deposit insurance. A
subsidiary may not issue any security the payment, maturity, or
redemption of which may be accelerated upon the condition that you are
insolvent or have been placed into receivership.
(b) You must file a notice with OTS in accordance with Sec. 559.11
of this part at least 30 days before your first issuance of any
securities through an existing subsidiary or in conjunction with
establishing or acquiring a new subsidiary. If OTS notifies you within
30 days that the notice presents supervisory concerns or raises
significant issues of law or policy, you must receive OTS's prior
written approval before issuing securities through your subsidiary.
(c) For as long as any securities are outstanding, you must
maintain all records generated through each securities issuance in the
ordinary course of business, including a copy of any prospectus,
offering circular, or similar document concerning such issuance, and
make such records available for examination by OTS. Such records must
include, but are not limited to:
(1) The amount of your assets or liabilities (including any
guarantees you make with respect to the securities issuance) that have
been transferred or made available to the subsidiary; the percentage
that such amount represents of the current book value of your assets on
an unconsolidated basis; and the current book value of all such assets
of the subsidiary;
[[Page 66577]]
(2) The terms of any guarantee(s) issued by you or any third party;
(3) A description of the securities the subsidiary issued;
(4) The net proceeds from the issuance of securities (or the pro
rata portion of the net proceeds from securities issued through a
jointly owned subsidiary); the gross proceeds of the securities
issuance; and the market value of assets collateralizing the securities
issuance (any assets of the subsidiary, including any guarantees of its
securities issuance you have made);
(5) The interest or dividend rates and yields, or the range
thereof, and the frequency of payments on the subsidiary's securities;
(6) The minimum denomination of the subsidiary's securities; and
(7) Where the subsidiary marketed or intends to market the
securities.
(d) Sales of the subsidiary's securities to retail customers must
comply with Sec. 545.74 of this chapter.
Sec. 559.13 How may a savings association exercise its salvage power
in connection with a service corporation or lower-tier entities?
(a) In accordance with this section, a savings association
(``you'') may exercise your salvage power to make a contribution or a
loan (including a guarantee of a loan made by any other person) to your
service corporation or lower-tier entity (``salvage investment'') that
exceeds the maximum amount otherwise permitted under law or regulation.
You must notify OTS at least 30 days before making such a salvage
investment. This notice must demonstrate that:
(1) The salvage investment protects your interest in the service
corporation or lower-tier entity;
(2) The salvage investment is consistent with safety and soundness;
and
(3) You considered alternatives to the salvage investment and
determined that such alternatives would not adequately satisfy
paragraphs (a)(1) and (a)(2) of this section.
(b) If OTS notifies you within 30 days that the Notice presents
supervisory concerns, or raises significant issues of law or policy,
you must apply for and receive OTS's prior written approval in
accordance with Sec. 516.1(c) of this chapter before making a salvage
investment.
(c) If your service corporation or lower-tier entity is a GAAP-
consolidated subsidiary, your salvage investment under this section
will be considered an investment in a subsidiary for purposes of part
567 of this chapter.
PART 560--LENDING AND INVESTMENT
5. The authority citation for part 560 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3,
1828, 3803, 3806; 42 U.S.C. 4106.
6. Section 560.30 is revised to read as follows:
Sec. 560.30 General lending and investment powers of federal savings
associations.
Pursuant to section 5(c) of the Home Owners' Loan Act (HOLA), 12
U.S.C. 1464(c), a federal savings association may make, invest in,
purchase, sell, participate in, or otherwise deal in (including
brokerage or warehousing) all loans and investments allowed under
section 5(c) of the HOLA including, without limitation, the following
loans, extensions of credit, and investments, subject to the
limitations indicated and any such terms, conditions, or limitations as
may be prescribed from time to time by the OTS by policy directive,
order, or regulation:
Lending and Investment Powers Chart
------------------------------------------------------------------------
Statutory investment
limitations
(Endnotes contain
Category HOLA authorization applicable
regulatory
limitations)
------------------------------------------------------------------------
Bankers' bank stock......... 5(c)(4)(E).......... Same terms as
applicable to
national banks.
Business development credit 5(c)(4)(A).......... The lesser of .5% of
corporations. total outstanding
loans or $250,000.
Commercial loans............ 5(c)(2)(A).......... 20% of total assets,
provided that
amounts in excess
of 10% of total
assets may be used
only for small
business loans.
Commercial paper and 5(c)(2)(D).......... Up to 35% of total
corporate debt securities. assets.1, 2
Community development loans 5(c)(3)(B).......... 5% of total assets,
and equity investments. provided equity
investments do not
exceed 2% of total
assets.3
Construction loans without 5(c)(3)(D).......... In the aggregate,
security. the greater of
total capital or 5%
of total assets.
Consumer loans.............. 5(c)(2)(D).......... Up to 35% of total
assets.1, 4.
Credit card loans or loans (5)(c)(1)(T)........ None.5.
made through credit card
accounts.
Deposits in insured 5(c)(1)(G).......... None.5
depository institutions.
Education loans............. 5(c)(1)(U).......... None.5
Federal government and 5(c)(1)(C), None.5
government-sponsored 5(c)(1)(D),
enterprise securities and 5(c)(1)(E),
instruments. 5(c)(1)(F).
Finance leasing............. 5(c)(1)(B), Based on purpose and
5(c)(2)(A), property financed.6
5(c)(2)(B),
5(c)(2)(D).
Foreign assistance 5(c)(4)(C).......... 1% of total assets.7
investments.
General leasing............. 5(c)(2)(C).......... 10% of assets.6
Home improvement loans...... 5(c)(1)(J).......... None.5
Home (residential) loans 8.. 5(c)(1)(B).......... None.5, 9
HUD-insured or guaranteed 5(c)(1)(O).......... None.5
investments.
Insured loans............... 5(c)(1)(I), None.5
5(c)(1)(K).
Liquidity investments....... 5(c)(1)(M).......... None.5, 10
Loans secured by deposit 5(c)(1)(A).......... None.5, 11
accounts.
Loans to financial 5(c)(1)(L).......... None.5, 12
institutions, brokers, and
dealers.
Manufactured home loans..... 5(c)(1)(J).......... None.5, 13
Mortgage-backed securities.. 5(c)(1)(R).......... None.5
National Housing Partnership 5(c)(1)(N).......... None.5
Corporation and related
partnerships and joint
ventures.
Nonconforming loans......... 5(c)(3)(C).......... 5% of total assets.
[[Page 66578]]
Nonresidential real property 5(c)(2)(B).......... 400% of total
loans. capital.14
Open-end management 5(c)(1)(Q).......... None.5
investment companies \15\.
Service corporations........ 5(c)(4)(B).......... 3% of total assets,
as long as any
amounts in excess
of 2% of total
assets further
community, inner
city, or community
development
purposes.16
Small business investment 5(c)(4)(D).......... 1% of total assets.
companies \17\.
Small-business-related 5(c)(1)(S).......... None.5
securities.
State and local government 5(c)(1)(H).......... None.5, 18
obligations.
State housing corporations.. 5(c)(1)(P).......... None.5, 19
Transaction account loans, 5(c)(1)(A).......... None.5, 20
including overdrafts.
------------------------------------------------------------------------
Notes:
1 For purposes of determining a Federal savings association's percentage
of assets limitation, investment in commercial paper and corporate
debt securities must be aggregated with the Federal savings
association's investment in consumer loans.
2 A Federal savings association may invest in commercial paper and
corporate debt securities, which includes corporate debt securities
convertible into stock, subject to the provisions of Sec. 560.40.
Amounts in excess of 30% of assets, in the aggregate, may be invested
only in obligations purchased by the association directly from the
original obligor and for which no finder's or referral fees have been
paid.
3 The 2% of assets limitation is a sublimit for investments within the
overall 5% of assets limitation on community development loans and
investments. The qualitative standards for such loans and investments
are set forth in HOLA section 5(c)(3)(B), as explained in an opinion
of the OTS Chief Counsel dated May 10, 1995 (available upon request at
the address set forth in Sec. 516.1(a) of this chapter).
4 Amounts in excess of 30% of assets, in aggregate, may be invested only
in loans made by the association directly to the original obligor and
for which no finder's or referral fees have been paid. A Federal
savings association may include loans to dealers in consumer goods to
finance inventory and floor planning in the total investment made
under this section.
5 While there is no statutory limit on certain categories of loans and
investments, including credit card loans, home improvement loans,
education loans, and deposit account loans, OTS may establish an
individual limit on such loans or investments if the association's
concentration in such loans or investments presents a safety and
soundness concern.
6 A Federal savings association may engage in leasing activities subject
to the provisions of Sec. 560.41.
7 This 1% of assets limitation applies to the aggregate outstanding
investments made under the Foreign Assistance Act and in the capital
of the Inter-American Savings and Loan Bank. Such investments may be
made subject to the provisions of Sec. 560.43.
8 A home (or residential) loan includes loans secured by one-to-four
family dwellings, multi-family residential property and loans secured
by a unit or units of a condominium or housing cooperative.
9 A Federal savings association may make home loans subject to the
provisions of Secs. 560.33, 560.34 and 560.35.
10 The assets qualifying as liquidity investments are described in Sec.
566.1(g) of this chapter. The maturity limitations (except those for
bankers acceptances) of Sec. 566.1(g) of this chapter do not apply
for purposes of this section.
11 Loans secured by savings accounts and other time deposits may be made
without limitation, provided the Federal savings association obtains a
lien on, or a pledge of, such accounts. Such loans may not exceed the
withdrawable amount of the account.
12 A Federal savings association may only invest in these loans if they
are secured by obligations of, or by obligations fully guaranteed as
to principal and interest by, the United States or any of its agencies
or instrumentalities, the borrower is a financial institution insured
by the Federal Deposit Insurance Corporation or is a broker or dealer
registered with the Securities and Exchange Commission, and the market
value of the securities for each loan at least equals the amount of
the loan at the time it is made.
13 If the wheels and axles of the manufactured home have been removed
and it is permanently affixed to a foundation, a loan secured by a
combination of a manufactured home and developed residential lot on
which it sits may be treated as a home loan.
14 Without regard to any limitations of this part, a Federal savings
association may make or invest in the fully insured or guaranteed
portion of nonresidential real estate loans insured or guaranteed by
the Economic Development Administration, the Farmers Home
Administration, or the Small Business Administration. Unguaranteed
portions of guaranteed loans must be aggregated with uninsured loans
when determining an association's compliance with the 400% of capital
limitation for other real estate loans.
15 This authority is limited to investments in open-end management
investment companies that are registered with the Securities and
Exchange Commission under the Investment Company Act of 1940. The
portfolio of the investment company must be restricted by the
company's investment policy (changeable only if authorized by
shareholder vote) solely to investments that a Federal savings
association may, without limitation as to percentage of assets, invest
in, sell, redeem, hold, or otherwise deal in. Separate and apart from
this authority, a Federal savings association may make pass-through
investments to the extent authorized by Sec. 560.32.
16 A Federal savings association may invest in service corporations
subject to the provisions of part 559 of this chapter.
17 A Federal savings association may only invest in small business
investment companies formed pursuant to section 301(d) of the Small
Business Investment Act of 1958.
18 This category includes obligations issued by any state, territory, or
possession of the United States or political subdivision thereof
(including any agency, corporation, or instrumentality of a state or
political subdivision), subject to Sec. 560.42.
19 A Federal savings association may invest in state housing
corporations subject to the provisions of Sec. 560.121.
20 Payments on accounts in excess of the account balance (overdrafts) on
commercial deposit or transaction accounts shall be considered
commercial loans for purposes of determining the association's
percentage of assets limitation.
7. Sections 560.32, 560.36, and 560.37 are added to read as
follows:
Sec. 560.32 Pass-through investments.
(a) A federal savings association (``you'') may make pass-through
investments. A pass-through investment occurs when you invest in an
entity (``company'') that engages only in activities that you may
conduct directly and the investment meets the requirements of this
section. If an investment is authorized under both this section and
some other provision of law, you may designate under which authority or
authorities the investment is made. When making a pass-through
investment, you must comply with all the statutes and regulations that
would apply if you were engaging in the activity directly. For example,
your proportionate share of the company's assets will be aggregated
with the assets you hold directly in calculating investment limits
(e.g., no more than 400% of total capital may be invested in
nonresidential real property loans).
(b) You may make a pass-through investment without prior notice to
OTS if all of the following conditions are met:
(1) You do not invest more than 15% of your total capital in one
company;
(2) The book value of your aggregate pass-through investments does
not
[[Page 66579]]
exceed 50% of your total capital after making the investment;
(3) Your investment would not give you direct or indirect control
of the company;
(4) Your liability is limited to the amount of your investment; and
(5) The company falls into one of the following categories:
(i) A limited partnership;
(ii) An open-end mutual fund;
(iii) A closed-end investment trust;
(iv) A limited liability company; or
(v) An entity in which you are investing primarily to use the
company's services (e.g., data processing).
(c) If you want to make other pass-through investments, you must
provide OTS with 30 days' advance notice. If within that 30-day period
OTS notifies you that an investment presents supervisory, legal, or
safety and soundness concerns, you must file an application with OTS in
accordance with Sec. 516.1 of this chapter and may not make the
investment without first receiving OTS's prior written approval.
Notices under this section are deemed to be applications for purposes
of statutory and regulatory references to ``applications.'' Any
conditions that OTS imposes on any pass-through investment shall be
enforceable as a condition imposed in writing by the OTS in connection
with the granting of a request by a savings association within the
meaning of 12 U.S.C. 1818(b) or 1818(i).
Sec. 560.36 De minimis investments.
A federal savings association may invest in the aggregate up to the
greater of one-fourth of 1% of its total capital or $100,000 in
community development investments of the type permitted for a national
bank under 12 CFR Part 24.
Sec. 560.37 Real estate for office and related facilities.
A federal savings association may invest in real estate (improved
or unimproved) to be used for office and related facilities of the
association, or for such office and related facilities and for rental
or sale, if such investment is made and maintained under a prudent
program of property acquisition to meet the federal savings
association's present needs or its reasonable future needs for office
and related facilities. A federal savings association may not make an
investment that would cause the outstanding book value of all such
investments (including investments under Sec. 559.4(e)(2) of this
chapter) to exceed its total capital.
8. Section 560.93 is amended by revising paragraph (a) to read as
follows:
Sec. 560.93 Lending limitations.
(a) Scope. This section applies to all loans and extensions of
credit to third parties made by a savings association and its
subsidiaries. This section does not apply to loans made by a savings
association or a GAAP-consolidated subsidiary to subordinate
organizations or affiliates of the savings association. The terms
subsidiary, GAAP-consolidated subsidiary, and subordinate organization
have the same meanings as specified in Sec. 559.2 of this chapter. The
term affiliate has the same meaning as specified in Sec. 563.41 of this
chapter.
* * * * *
PART 563--OPERATIONS
9. The authority citation for part 563 continues to read as
follows:
Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,
1817, 1828, 3806; 42 U.S.C. 4106.
Secs. 563.37, 563.38, 563.132 [Removed]
10. Sections 563.37, 563.38, and 563.132 are removed.
11. Section 563.41 is amended by revising paragraph (b)(4) to read
as follows:
Sec. 563.41 Loans and other transactions with affiliates and
subsidiaries.
* * * * *
(b) * * *
(4) The term subsidiary, when used in connection with a savings
association means a company that is controlled by that savings
association within the meaning of part 574 of this chapter;
* * * * *
PART 567--CAPITAL
12. The authority citation for part 567 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).
13. Section 567.1 is amended by removing in paragraph (l)(1) the
phrase ``(either directly or through ownership of a subsidiary)'', and
by revising paragraph (dd) to read as follows:
Sec. 567.1 Definitions.
* * * * *
(dd) Subsidiary. The term subsidiary means any corporation,
partnership, business trust, joint venture, association or similar
organization in which a savings association directly or indirectly
holds an ownership interest and the assets of which are consolidated
with those of the savings association for purposes of reporting under
Generally Accepted Accounting Principles (GAAP). Generally, these are
majority-owned subsidiaries.1 This definition does not include
ownership interests that were taken in satisfaction of debts previously
contracted, provided that the reporting association has not held the
interest for more than five years or a longer period approved by the
OTS.
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\1\ The OTS reserves the right to review a savings
association's investment in a subsidiary on a case-by-case basis. If
the OTS determines that such investment is more appropriately
treated as an equity security or an ownership interest in a
subsidiary, it will make such determination regardless of the
percentage of ownership held by the savings association.
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* * * * *
PART 571--STATEMENTS OF POLICY
14. The authority citation for part 571 continues to read as
follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.
Sec. 571.21 [Removed]
15. Section 571.21 is removed.
Dated: December 6, 1996.
By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 96-31639 Filed 12-17-96; 8:45 am]
BILLING CODE 6720-01-P
