[Federal Register Volume 61, Number 232 (Monday, December 2, 1996)]
[Rules and Regulations]
[Pages 63972-63986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30779]
[[Page 63971]]
_______________________________________________________________________
Part VI
Department of the Treasury
_______________________________________________________________________
Office of the Comptroller of the Currency
_______________________________________________________________________
12 CFR Parts 1 and 7
Investment Securities; Final Rule
Federal Register / Vol. 61, No. 232 / Monday, December 2, 1996 /
Rules and Regulations
[[Page 63972]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 1 and 7
[Docket No. 96-26]
RIN 1557-AB37
Investment Securities
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
clarifying and updating its rules that prescribe the standards under
which national banks may purchase and sell, deal in, and underwrite
securities. This final rule is another component of the OCC's
Regulation Review Program, a project designed to review, modernize, and
simplify OCC regulations and reduce unnecessary regulatory burdens on
national banks. The final rule reorganizes the regulation by placing
related subjects together, clarifies certain areas, and updates various
provisions to address market developments and to incorporate
significant OCC interpretations, judicial decisions, and statutory
amendments.
EFFECTIVE DATE: December 31, 1996.
FOR FURTHER INFORMATION CONTACT: Lee Walzer, Senior Attorney,
Securities and Corporate Practices Division, 202-874-5210; Kurt
Wilhelm, Senior Investment Advisor, Capital Markets, 202-874-5070;
Daniel L. Cooke, Attorney, and Stuart E. Feldstein, Assistant Director,
Legislative and Regulatory Activities Division, 202-874-5090. Office of
the Comptroller of the Currency, 250 E Street, S.W., Washington, DC
20009.
SUPPLEMENTARY INFORMATION:
Background
Part 1 has historically prescribed the limitations and restrictions
on a national bank's purchase of investment securities for its own
account. Part 1 also addresses a national bank's ability to purchase
and sell, deal in, and underwrite certain investment securities. The
part 1 limitations on these activities are based on the Banking Act of
1933, section 16, Pub. L. 73-66, 48 Stat. 184 (codified as amended at
12 U.S.C. 24(Seventh)), and vary according to the characteristics of
the security.
In the past, part 1 grouped the securities identified in 12 U.S.C.
24(Seventh) into three categories, Types I, II, and III securities.
More recently, the Secondary Mortgage Market Enhancement Act of 1984,
(SMMEA) \1\ and the Riegle Community Development and Regulatory
Improvement Act of 1994 (CDRI) \2\ amended 12 U.S.C. 24(Seventh) and
removed quantitative limits on national banks'' purchases of certain
types of mortgage- and small business-related securities, subject to
regulations prescribed by the OCC.
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\1\ Sec. 105(c), Pub. L. 98-440, Title I, 98 Stat. 1691
(codified as amended at 12 U.S.C. 24(Seventh) (1984)).
\2\ Pub. L. 103-325, 108 Stat. 2160 (1994).
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On December 21, 1995, the OCC published a notice of proposed
rulemaking (60 FR 66152) (proposal) to revise part 1 and implement the
changes required by CDRI and SMMEA. The proposal sought to implement
the goals of the OCC's Regulation Review Program by updating and
streamlining the regulation and eliminating requirements that imposed
inefficient and costly regulatory burdens on national banks. The
proposal also sought to implement the amendments made by SMMEA and CDRI
and to update various provisions to address market developments and to
incorporate significant OCC interpretations and judicial decisions.
In the proposal, the OCC added two new classifications of
securities to characterize the changes made by SMMEA and CDRI and to
reflect developments in national banks'' treatment of their assets.
Specifically, the proposal added a new category of securities, Type IV
securities, that are defined as certain types of asset-backed
securities identified in SMMEA and CDRI, which are exempt from the 10
percent investment limitation of 12 U.S.C. 24(Seventh). Type IV
securities are: (1) residential and commercial mortgage-related
securities offered and sold pursuant to section 4(5) of the Securities
Act of 1933 (Securities Act), 15 U.S.C. 77d(5); (2) residential and
commercial mortgage-related securities described in section 3(a)(41) of
the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C.
78c(a)(41); and (3) small business-related securities as defined in
section 3(a)(53)(A) of the Exchange Act, 15 U.S.C. 78c(a)(53)(A).
The proposal also added Type V securities, which are investment
grade securities that are backed by pools of assets composed of
obligations in which a national bank may invest directly.
In addition to adding Type IV and Type V securities, the proposal
refined the definitions and limitations imposed on the three existing
types of securities. Finally, the proposal restructured part 1 to make
it easier to read and apply.
Comments and OCC Action
The OCC received 19 comment letters in response to the proposal.
The commenters included eight trade associations, one professional
association, six banks, two law firms, one private business, and one
unaffiliated individual. The commenters generally supported the
proposal but also recommended a number of specific modifications. Many
of the commenters offered reasons why the OCC should remove or lessen
structural limitations on investment in Type IV and Type V securities,
particularly aspects of the proposed diversification requirements.
In the final rule, the OCC has addressed many of the concerns of
the commenters and, in particular, has concluded that some of the
proposal's definitional restrictions on Type IV and Type V securities
are not necessary.
The final rule's structure is based on three core sections. Section
1.2 defines the five types of securities as well as other significant
terms such as ``investment grade,'' ``investment security,'' and
``marketable.'' Section 1.3 prescribes limitations on dealing in,
underwriting, purchasing, and selling each of the five types of
securities defined in Sec. 1.2, investment company shares, and
securities held based on estimates of an obligor's performance. Section
1.3 prescribes special provisions on aggregation of securities with a
common issuer and calculation of investment company holdings. Section
1.4 prescribes how a national bank must calculate the limits imposed by
Sec. 1.3.
The final rule also makes minor clarifying and technical changes.
The following section-by-section analysis discusses the comments and
substantive changes made by the final rule:
Authority, Purpose, and Scope (Sec. 1.1)
The proposal consolidated the former ``Scope and application''
section (Sec. 1.2) with the ``Authority'' section (Sec. 1.1). The
proposal also clarified that the limitations set forth in part 1 apply
to national banks, federal branches of foreign banks, District of
Columbia banks, and state banks that are members of the Federal Reserve
System.
The OCC received no comments on this section, which is adopted as
proposed with minor clarifying changes.
Definitions (Sec. 1.2)
The proposal substantially revised the definitions section to add
several new definitions and to update others. The proposal revised the
definitions of Type I, II, and III securities to define the securities
by their characteristics rather than by the statutory limitations on
the
[[Page 63973]]
extent to which national banks may deal in, underwrite, purchase, or
sell them. The proposal also defined two new types of securities, Type
IV and Type V securities, and added a definition of ``investment
company.''
The final rule adds a new defined term, ``NRSRO.'' The final rule
changes the paragraph letter designations for each definition
accordingly. Of particular note, the final rule makes the following
substantive changes:
Capital and Surplus (Sec. 1.2(a))
The proposal defined ``capital and surplus'' as the sum of Tier 1
and Tier 2 capital includable in risk-based capital under the Minimum
Capital Ratios in 12 CFR part 3 appendix A, plus the balance of a
bank's allowance for loan and lease losses that is not included in Tier
2 capital.
The OCC received three comments on this definition. The commenters
noted that, because part 1 applies to state banks that are members of
the Federal Reserve System, the OCC should adopt a definition of
``capital and surplus'' that applies the Board of Governors of the
Federal Reserve System's (FRB's) definition of ``capital and surplus''
to state member banks. The OCC agrees with these commenters and has,
therefore, changed the final rule to incorporate technical changes and
to provide that banks must use the appropriate Federal banking
agencies'' guidelines defining ``capital and surplus.''
Investment Grade (Sec. 1.2(d))
In many instances in the final rule, a security must be
``investment grade'' to be a permissible investment for a national
bank. The proposal defined a security as ``investment grade'' when each
nationally recognized statistical rating organization (NRSRO) that has
rated the security has given it a rating in one of the top four rating
categories. Thus, for purposes of this definition, if a security were
given different ratings by different NRSROs, the lowest rating would
govern. For example, if two NRSROs rated a security in one of their top
four categories, but a third NRSRO did not give the security a top four
rating (a so-called ``split- rated'' security), the security would not
qualify as ``investment grade.''
The OCC received ten comments on this section. Seven commenters
recommended that the OCC change the proposed definition to recognize a
security as ``investment grade'' if only one NRSRO rates the security
in one of the top four categories. These commenters asserted that
otherwise any one NRSRO could render a particular security non-
investment grade and, therefore, not permissible for a national bank to
purchase. One commenter recommended that, at a minimum, the OCC should
deem a security ``investment grade'' if a majority of the NRSROs that
rate the security rate it in one of the top four categories.
The OCC agrees that giving a single NRSRO the ability to deem an
investment impermissible for a national bank may be unnecessarily
restrictive. Thus, the final rule defines the term ``investment grade''
to mean a security that receives a top four rating from either: (a) Two
or more NRSROs; or (b) one NRSRO if the security has been rated by only
one NRSRO. This approach assures that a security is sufficiently
creditworthy while also allowing for some diversity in the evaluations
produced by different NRSROs.
Some commenters requested that the OCC exclude unsolicited ratings
from the definition. Under the proposal, an unsolicited non-investment
grade rating would have rendered the security an impermissible
investment for a national bank. However, the final rule recognizes
unsolicited ratings, but no longer will permit a single unsolicited
rating to render a security automatically ineligible for national bank
investment.
Investment Security (Sec. 1.2(e))
The proposal defined ``investment security'' as a security that is:
(1) An investment grade marketable debt obligation; or (2) the credit
equivalent of an investment grade marketable debt obligation if the
security is not rated. The OCC requested comment on whether to describe
more specifically the characteristics of securities that are the credit
equivalent of investment grade. The OCC also asked commenters to
address whether other securities with characteristics functionally
equivalent to a debt obligation might be classified as ``investment
securities.''
The OCC received four comments on this section. The commenters
generally supported the definition of ``investment security.'' Most
commenters felt that defining ``credit equivalency'' by identifying
specific characteristics would sacrifice flexibility.
The OCC agrees with the commenters and believes that to adopt
specific identifiable characteristics of credit equivalency would
unduly restrict flexibility in this area. Therefore, the OCC adopts the
final rule as proposed.
Marketable (Sec. 1.2(f))
At Sec. 1.5(a), the former rule defined a ``marketable'' security
as one that may be sold with reasonable promptness at a price that
corresponds reasonably to its fair value. The proposal replaced this
definition with a more objective test that lists particular indicators
of a ready market for a security. The proposal defined marketable as:
(1) Securities registered under the Securities Act; (2) certain
government securities exempt from Securities Act registration; (3)
municipal revenue bonds exempt from Securities Act registration; and
(4) securities that are investment grade and sold pursuant to
Securities Exchange Commission (SEC) Rule 144A (17 CFR 230.144A), which
exempts certain private resales of securities to institutional
investors from Securities Act registration.
The OCC requested comment on whether the proposed definition of
``marketable'' is sufficiently inclusive, particularly regarding other
exemptions under the Securities Act and whether the definition is
appropriately inclusive of foreign sovereign debt. The OCC also asked
commenters to suggest alternative definitions of marketable that would
address the OCC's concerns about liquidity.
The OCC received 12 comments on this issue. A majority of the
commenters recommended that the OCC expand the proposed definition or
retain the former definition of marketable. These commenters asserted
that the proposed definition was too restrictive and did not include
certain securities that are included within the definition in the
former regulation. For example, the commenters noted that foreign
sovereign debt, bank and savings and loan debt securities (which are
exempt from registration under the Securities Act), and commercial
paper were not identified in the proposed definition even though they
may have been included within the former marketability test.
The OCC did not intend to prescribe a marketability test that,
through its objectivity, eliminates flexibility available under the
former rule and unnecessarily excludes a broad range of securities.
Therefore, the final rule retains the list of marketable securities
contained in the proposal and adds to that list the definition of
marketable contained in the former regulation, i.e., a security that
may be sold with reasonable promptness at a price that corresponds
reasonably to its fair value. Thus, certain foreign sovereign debt and
other securities may qualify under the revised definition of
marketable. This approach also provides additional flexibility for the
OCC to review the permissibility of national bank investment in
particular securities on a case-by-case basis.
[[Page 63974]]
Several commenters also asked the OCC to remove the requirement
that Securities Exchange Commission Rule 144A, 17 CFR 230.144A (Rule
144A) securities be rated investment grade in order to fall within the
definition of ``marketable.'' These commenters stated that many
privately-placed securities are not rated. One commenter advocated that
the OCC should not adopt the proposal, because Rule 144A provides no
assurance of marketability.
The OCC agrees that a Rule 144A security need not be rated
investment grade to be marketable; but, if it is not rated investment
grade, it must be the credit equivalent of investment grade. The final
rule therefore does not adopt the proposed requirement that an NRSRO
rate a Rule 144A security investment grade in order for the security to
be marketable. Instead, consistent with other investment securities
under this part, a Rule 144A security may qualify as investment grade,
when not rated, and therefore qualify as marketable, if the bank
determines that it is the credit equivalent of an investment grade
security. The OCC expects that, as a matter of safe and sound banking
practices, a bank will conduct a thorough analysis of a security's
creditworthiness in order to satisfy itself that a particular security
is the credit equivalent of investment grade.
The OCC has also determined that proposed Sec. 1.2(f)(2) is
unnecessary. That provision listed as one component of the definition
of marketability each of the securities that is included in the
definition of a Type I security. Because Type I securities are not
required to satisfy a marketability test under section 24(Seventh), it
is unnecessary for the rule to include these Type I securities in the
definition of marketable. Therefore, the final rule is adopted without
proposed Sec. 1.2(f)(2). The remainder of paragraph Sec. 1.2(f) is
renumbered accordingly.
NRSRO (Sec. 1.2(g))
The OCC did not use the term ``NRSRO'' in the proposal. In making
changes to the final rule's definition of, and limitations on, Type IV
securities, the OCC found that referring to nationally recognized
statistical rating organizations (NRSROs) was the most direct and clear
means of drafting the rule. The final rule, therefore, adds ``NRSRO''
as a defined term.
The OCC has not listed the rating organizations that qualify as
NRSROs in this definition. The OCC generally follows the assessment of
the SEC in acknowledging the organizations that are currently NRSROs.
The SEC recognizes NRSROs through no-action letters. The most recent
SEC no action letter in which the SEC expressed no opposition to the
recognition of an NRSRO is Thomson Bankwatch, Inc., SEC No-Action
Letter, [1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) paragraph 79,800
(August 6, 1991). See also 59 FR 46314 (September 7, 1994) (publishing
an SEC ``Concept release'' on NRSROs).3
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3 Currently, the NRSROs recognized by the SEC are: Duff and
Phelps, Inc.; Fitch Investors Service, Inc.; IBCA Limited (and its
subsidiary, IBCA Inc.); Moody's Investors Services Incorporated;
Standard and Poor's Corporation; and Thomson Bankwatch, Inc.
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Several commenters suggested that the OCC recognize foreign rating
organizations. The OCC finds that most significant foreign debt
securities are rated by the NRSROs to which the SEC has expressed no
objection and, at this time, sees no need to depart from the SEC's
assessment of the rating organizations that are nationally recognized.
Type I Security (Sec. 1.2(i))
The proposal used language similar to that in the former rule to
define ``Type I security'' to mean any one of specified government
securities. The former rule and the proposal also incorporated key
elements of an OCC interpretation regarding securities backed by the
full faith and credit of the U.S. Government.
The OCC received four comments on this definition. Three commenters
recommended that, consistent with 12 U.S.C. 24(Seventh), the OCC should
add qualified Canadian government obligations to the definition of a
Type I security. The OCC received one comment recommending that the OCC
add the debt securities of certain developed foreign sovereigns to the
list of Type I securities.
In accordance with 12 U.S.C. 24(Seventh), the final rule adds
qualified Canadian government obligations to the list of Type I
securities. The OCC acknowledges that, in the future, other securities
may fulfill the definitional requirements of a Type I security, and the
OCC will review securities, as appropriate, to determine if they meet
the statutory requirements.
Type II Security (Sec. 1.2(j))
The proposal redefined a ``Type II security'' to mean an investment
security that is issued by certain state, international, or
multilateral organizations or that is otherwise listed or described in
12 U.S.C. 24(Seventh). In contrast, the former rule defined a Type II
security by identifying the investment limits that apply to it and by
listing examples of qualifying types of issuers.
The OCC received no comments on this definition, which is adopted
as proposed. The OCC notes that the definition of Type II security also
includes other securities that the OCC deems eligible as Type II
securities in accordance with 12 U.S.C. 24(Seventh). This provision
gives the OCC flexibility, consistent with the authorizing statute, to
review securities that may fulfill the definitional requirements of a
Type II security but are not listed in the definition.
Type III Security (Sec. 1.2(k))
The former rule defined a Type III security as a security that a
bank may purchase and sell for its own account, subject to the 10
percent limitation in 12 U.S.C. 24(Seventh). The proposal redefined a
Type III security as an investment security that does not qualify as a
Type I, II, IV, or V security. The proposal listed corporate bonds and
municipal revenue bonds as examples of Type III securities.
The OCC requested comment on whether to reference specifically
other examples of Type III securities in addition to corporate bonds
and municipal revenue bonds. In particular, the OCC requested comment
on whether to include as Type III securities foreign securities that
are eligible for investment by foreign branches of U.S. banks.
The OCC received seven comments on the definition of a Type III
security. The majority of these commenters recommended that the OCC
include in the list of examples that qualify as Type III securities
foreign securities that are eligible for investment by foreign branches
of national banks and mortgage backed securities (MBSs) that do not
qualify as Type IV or Type V securities. One commenter also recommended
that the OCC permit national banks to underwrite and deal in municipal
revenue bonds.
The OCC has determined that the proposed definition of a Type III
security provides appropriate examples of the scope of qualifying Type
III securities. While certain mortgage backed securities and foreign
securities eligible for investment by foreign branches of national
banks will qualify as investment securities and are, therefore, Type
III securities, others may not. The OCC has not concluded that all
foreign securities eligible for investment by foreign branches of
national banks qualify as a Type III investment security. Nor does the
OCC want to imply that banks are precluded from purchasing other
classes of securities,
[[Page 63975]]
which may meet the definition of ``investment security'' but are not
specifically listed as a Type III security. This may be the case if,
for example, the OCC were to add further to the list of examples,
thereby appearing to create an exhaustive list of Type III securities.
The OCC does not intend to create an exclusive list of Type III
securities.
Type IV Security (Sec. 1.2(l))
The proposal added a new category of securities, Type IV
securities, which SMMEA and CDRI made eligible for purchase by national
banks in unlimited amounts. In 1984, the SMMEA amended 12 U.S.C.
24(Seventh) to permit national banks to purchase residential and
commercial mortgage-related securities offered and sold pursuant to
section 4(5) of the Securities Act of 1933 Act (Securities Act), 15
U.S.C. 77d(5), or residential mortgage-related securities as defined in
section 3(a)(41) of the Exchange Act, 15 U.S.C. 78c(a)(41). The final
rule incorporates the SMMEA amendments.
CDRI defined a new type of small business-related security in
section 3(a)(53)(A) of the Exchange Act, 15 U.S.C. 78c(a)(53)(A), and
added a class of commercial mortgage-related securities to section
3(a)(41) of the Exchange Act, 15 U.S.C. 78c(a)(41). CDRI's amendments
to 12 U.S.C. 24(Seventh) removed limitations on purchases by national
banks of certain small business-related and commercial mortgage-related
securities. However, CDRI requires that certain residential and
commercial mortgage-related securities must receive a rating from an
NRSRO in one of the top two rating categories. Small business-related
securities must receive a rating in one of the top four rating
categories.
CDRI also authorized the OCC to prescribe regulations to ensure
that acquisitions of statutorily defined residential and commercial
mortgage-related securities and small business-related securities are
conducted in a manner consistent with safe and sound banking practices.
In its proposed definition of a Type IV security, the OCC sought to
guard against undue concentration of risk that could arise were a bank
to invest in a security backed by a small number of loans or if a small
number of loans represents a large percentage of the assets in the
pool. Therefore, the proposal required Type IV securities that are
small business- or commercial mortgage-related securities to be fully
secured by interests in a pool of homogeneous loans of numerous
obligors.
To assure diversification, the proposal also provided that, for
small business-related securities and commercial mortgage-related
securities, the aggregate amount of collateral from loans of any one
obligor could not exceed 5 percent of the total amount of the loans in
the pool collateralizing the security (the ``5 percent collateral
concentration limit'').
The OCC requested specific comment on whether to define the term
``homogeneous loans'' and whether the 5 percent collateral
concentration limit was appropriate to assure adequate diversification
of the collateral.
The OCC received 17 comments on the proposed definition of a Type
IV security, particularly on the 5 percent collateral concentration
limit and the homogeneity and numerous obligor requirements. Most
commenters opposed the ``homogenous,'' ``numerous,'' and 5 percent
collateral concentration restrictions, stating that they were
impractical. Commenters opposing both the ``homogeneous'' and
``numerous obligor'' requirements asserted that those terms are vague
and difficult to apply because they are not defined. In particular, the
commenters asserted that the homogeneity requirement conflicts with the
diversification objective of pooling commercial loans. These commenters
stated that commercial loans, by their nature, are seldom homogeneous.
Most commenters also recommended that the OCC eliminate the 5
percent collateral concentration limit on loans of any one obligor in
Type IV security loan pools. The commenters emphasized that the plain
language of CDRI permits unlimited investment in commercial mortgage-
related and small business-related securities. These commenters
asserted that NRSROs consider concentration risk when they rate a
particular security, thereby making the 5 percent collateral
concentration limit unnecessary. They also asserted that the limit
fails to consider compensating factors such as credit enhancements,
stable cash flow, prime location of mortgage properties, construction
quality of mortgaged property, and barriers to competition, which are
all considered by rating agencies.
The commenters also cited the following reasons for their
opposition to the 5 percent collateral concentration limit: (1) The 5
percent collateral concentration limit mistakenly focuses solely on the
obligor, does not focus on the collateral for the security, and
therefore fails to ensure diversification of collateral. A collateral
pool that satisfies the 5 percent collateral concentration limit will
not necessarily contain diverse collateral; however, a single borrower/
obligor can produce a commercial mortgage-backed security pool that has
diverse collateral. (2) The majority of commercial mortgage loans are
nonrecourse to the borrower and, therefore, borrower diversity is less
relevant than tenant creditworthiness. (3) The 5 percent collateral
concentration limit will be unnecessarily burdensome and costly
relative to any benefits it provides because it will require a
transaction-by-transaction analysis and the production and maintenance
of voluminous reports regarding the make-up of each commercial
mortgage-related security pool.
Some commenters recommended raising the 5 percent collateral
concentration limit to a 20 percent limit. One commenter recommended
that the OCC use existing authority to assess a risk-based capital
surcharge when holdings of a Type IV security exceed the aggregate
amount of the appropriate percentage of capital and surplus.
The OCC agrees with many of the reasons cited by the commenters and
has not adopted the homogeneity and 5 percent collateral concentration
limit. In particular, the OCC believes that the statutory requirements
for residential and commercial mortgage-related securities defined in
3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(41),
to have an NRSRO rating in one of the top two categories and for small
business-related securities to receive a rating in one of the top four
rating categories provide sufficient safeguards against investment
risks. NRSRO ratings reduce the risk of investment posed to banks
because of the NRSROs' resources and ability to analyze such factors as
cash flow treatments, credit facilities, and collateral
diversification. To ensure that banks do not purchase, in unlimited
amounts, commercial and residential mortgage-related securities that
are offered or sold pursuant to section 4(5) of the Securities Act of
1933, 15 U.S.C. 77d(5), that are predominantly speculative in nature,
the final rule requires that these securities at least be investment
grade.
In addition, the final retains the requirement that the securities
be composed of interests in a pool of loans to ``numerous'' obligors.
The OCC believes that this requirement reflects an essential
diversified risk characteristic of a mortgage-related or small
business- related security and does not unduly limit a national bank's
ability to invest in these asset-backed securities.
[[Page 63976]]
Type V Security (Sec. 1.2(m))
The proposal created a new category of securities, Type V, that are
investment grade securities composed of loans in which a bank may
invest directly. This definition reflected the OCC's long-standing
interpretations that, in addition to the investments described in 12
U.S.C. 24(Seventh), a national bank may hold securitized forms of
assets in which it may invest directly.4
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\4\ Securities Industry Ass'n v. Clarke, 885 F.2d 1034 (2d Cir.
1989), cert. denied, 493 U.S. 1070 (1990) (national bank authority
to securitize assets); Interpretive Letter No. 540 (December 12,
1990), reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 83,252 (securitized credit card receivables);
Interpretive Letter No. 514 (May 5, 1990), reprinted in [1990-1991
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218
(securitized mortgages); Investment Securities Letter No. 29 (August
3, 1988), reprinted in [1988-1989 Transfer Binder] Fed. Banking L.
Rep. (CCH) para. 85,899 (investment limits for asset-backed
securities consisting of GMAC receivables); Interpretive Letter No.
416 (February 16, 1988), reprinted in [1988-1989 Transfer Binder]
Fed. Banking L. Rep. (CCH) para. 85,640 (securitized automobile
loans); No Objection Letter No. 87-9 (December 16, 1987), reprinted
in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) para.
84,038 (securitization of commercial loans originated by the bank);
Interpretive Letter No. 388 (June 16, 1987), reprinted in [1988-1989
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,612 (mortgage-
backed pass-through certificates); Interpretive Letter No. 362 (May
22, 1986), reprinted in [1985-1987 Transfer Binder] Fed. Banking L.
Rep. (CCH) para. 85,532 (bonds collateralized by mortgages).
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Under the proposal, the definition of a Type V security included
the same limitations that were included in the definition of a Type IV
security (i.e., ``homogeneous loans'' from ``numerous obligors'' with
the obligations of any one obligor composing no more than 5 percent of
the pool). In order to assure the high quality of this type of asset-
backed security, the proposal also required that a Type V security be
rated investment grade.
The commenters recommended that the OCC eliminate these
requirements, citing many of the same reasons stated in their comments
on the definition of a Type IV security. For the same reasons discussed
in relation to Type IV securities previously, the OCC agrees with the
commenters. Thus, the final rule does not include the proposed
``homogeneity'' and 5 percent collateral concentration limits but does
retain the requirement that the securities be composed of a pool of
loans to ``numerous'' obligors.
In addition, in order to ensure safe and sound investment in these
securities, the final rule requires a Type V security to be
``marketable'' as defined in Sec. 1.2(f). The marketability requirement
is in addition to the investment grade requirement for a Type V
security and further ensures that national banks do not acquire asset-
backed securities that have speculative characteristics.
Limitations on Dealing in, Underwriting, and Purchasing and Selling
Securities (Sec. 1.3)
The proposal consolidated the part 1 provisions that limit dealing
in, underwriting, purchasing, and selling different types of
securities. The proposal limited ``the aggregate par value of the
obligations of any one obligor'' of a Type II, III, or V security that
a bank may hold to a specific percentage limit. For example, the
proposal restricted the aggregate par value of the obligations of any
one Type II obligor held by the bank to no more than 10 percent of the
bank's capital and surplus. The proposal also imposed a 10 percent
limit on Type III securities and a 15 percent limit on Type V
securities.
The OCC requested specific comment on whether using the aggregate
par value of obligations of any one obligor is an appropriate measure
of value.
Four commenters recommended that the OCC replace ``par value'' with
``market value,'' asserting that par value does not account for
obligations acquired either at a discount or premium.
The OCC has determined, however, that par value is the practical
and objective gauge by which to measure value in this context, and the
final rule therefore uses par value.
Some commenters also recommended that the OCC permit banks to use a
netting approach in calculating limitations by which a bank could
reduce its ownership exposure (long position) in a security by taking a
short position in that same security. The commenters suggested that the
OCC authorize banks to net their long and short positions in a security
because the investment limitations in part 1 apply not only to amounts
held by a bank but also to obligations that a bank is ``legally
committed to purchase and sell.'' These commenters assert that banks
should be able to exclude from their investment limit calculations any
securities for which there is both a commitment by a bank to sell and
by a third party to buy.
The OCC agrees that a netting of long and short position in a
particular security may be appropriate for purposes of calculations
under part 1, and the language of the final rule, noted above, will
accommodate this approach. However, the OCC's responses on this issue
are likely to be more detailed than is appropriate for a regulation,
and will be based on the transaction at issue. Therefore, specific
issues on this point will be addressed by the OCC on a case-by-case
basis.
The final rule also makes several minor clarifying changes to
Sec. 1.3.
Type II and III Securities; Other Investment Securities Limitations
(Sec. 1.3(d))
The proposal provided that a national bank may not hold Type II and
Type III securities of any one obligor that have a combined aggregate
par value exceeding 10 percent of the bank's capital and surplus.
However, the proposal did not require aggregation with respect to
industrial development bonds. Instead, the proposal applied the 10
percent limitation separately to each security issue of a single
obligor when the proceeds of that issuance are to be used to acquire
and lease real estate and related facilities to economically and
legally separate industrial tenants, and the issuance is payable solely
from and secured by a first lien on the revenues to be derived from
rentals paid by the lessee under net noncancellable leases.
The OCC received no comments on this section, which is adopted as
proposed.
Type IV Securities (Sec. 1.3(e))
The proposal provided that national banks could purchase, without
limitation, securities that meet the definition of a Type IV security.
This proposal relied on the authority granted to national banks by
SMMEA and CDRI to purchase and sell certain mortgage- and small
business-related securities in unlimited amounts.
The proposal also incorporated OCC interpretations concerning the
authority of a national bank to deal in obligations that are fully
secured by Type I securities.5 These interpretations reflect the
OCC's consistent approach of looking to the underlying substance of an
instrument to determine whether a bank may deal in, underwrite,
purchase, or sell the instrument. In the case of a Type IV security
that is fully secured by Type I securities, the ultimate source of
repayment is Type I securities. The proposal did not limit the
categories of Type IV securities in which banks may deal, if the
securities are fully collateralized by Type I securities. Thus, under
the proposal, a bank's authority to deal in these securities would be
determined with reference to the standards that apply to Type I
securities. (The ability of a bank to
[[Page 63977]]
securitize and sell loans and other obligations it holds, including
loans that qualify as collateral for Type IV securities, is addressed
in Sec. 1.3(g).)
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\5\ See Interpretive Letter No. 514 (May 5, 1990), reprinted in
[1990-1991 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218;
Interpretive Letter No. 362 (May 22, 1986), reprinted in [1985-1987
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,532.
---------------------------------------------------------------------------
Congress made clear that it intended the OCC and other bank
regulatory agencies to have authority to limit or restrict bank
purchases of securities in order to ensure the safety and soundness of
insured depository institutions. See H.R. Conf. Rep. No. 652, 103rd
Cong., 2nd Sess. sec. 347, at 184 (1994). The OCC believes that it can
ensure safe and sound investments involving purchases of small
business-related securities, as defined in section 3(a)(53)(A) of the
Exchange Act, 15 U.S.C. 78c(a)(53)(A), if the OCC permits purchases in
unlimited amounts only if the small business-related securities are
rated in one of the top two rating categories by an NRSRO. In addition,
however, the final rule permits a national bank to purchase small
business-related securities that an NRSRO has rated in the top third or
fourth rating category, provided the bank may not hold small business-
related securities from a single issuer if the aggregate par value of
the security exceeds 25 percent of the bank's capital and surplus. The
OCC has imposed this 25 percent limit as a safety and soundness-based
prudential limit.
Type V Securities (Sec. 1.3(f))
The proposal limited a national bank's holding of Type V securities
from any one obligor (or certain related issuers) to 15 percent of the
bank's capital and surplus. The OCC requested specific comment on
whether a higher limit, such as 25 percent, would be sufficient to
prevent excess concentration.
Four commenters questioned whether the OCC intended the term
``obligor,'' in this context, to mean the underlying borrowers whose
notes comprise a security. The OCC did not intend that result. The 15
percent limit applied to the entity that was issuer of the security,
not to each obligor on the loans that back a particular security. The
final rule clarifies this point by substituting the word ``issuer'' for
``obligor.''
One of these commenters noted that the OCC used the terms obligor
and issuer interchangeably in other sections of the rule and
recommended that the OCC clarify the terms. To address this concern,
the text of the final rule has been revised to use the two terms in a
more precise fashion and rephrase certain sections to enhance clarity.
Many commenters recommended that the OCC raise the capital
limitation for Type V securities from 15 percent to 25 percent. These
commenters asserted that Type V securities are analogous to secured
loans and therefore should be eligible for the 25 percent limit of 12
U.S.C. 84.
The OCC has carefully considered these comments, and the final rule
replaces the proposed 15 percent limitation with a 25 percent of
capital limitation. The OCC believes the 25 percent of capital limit is
a prudential limit that provides sufficient protection against undue
risk concentrations. This limit parallels the 25 percent credit
concentration benchmark in the Comptroller's Handbook for National Bank
Examiners. The Handbook identifies credit concentrations in excess of
25 percent of a bank's capital as raising potential safety and
soundness concerns. For this purpose, the Handbook guidance aggregates
direct and indirect obligations of an obligor or issuer and also
specifically contemplates application of the 25 percent benchmark to
concentrations that may result from an acquisition of a volume of loans
from a single source, regardless of the diversity of the individual
borrowers. See Comptroller's Handbook Sec. 215. Accordingly, national
banks are urged to monitor carefully their aggregate credit exposure to
any single obligor or issuer in order to avoid imprudent concentrations
of credit.
This provision is otherwise adopted as proposed.
Securitization (Sec. 1.3(g))
The proposal added this section to incorporate the OCC's long-
standing position that a national bank may securitize and sell loan
assets that it holds. The ability of a bank to sell loans and other
obligations through the issuance and sale of certificates evidencing
interests in pools of the assets provides flexibility that can enhance
bank safety and soundness.6 The provision is adopted substantially
as proposed and reflects the OCC's long-standing treatment of national
banks' securitization activities as affirmed by case law.7
National banks engaging in securitization activities should consult OCC
Bulletin 96-52 (September 25, 1996), which provides guidelines for
national banks on their securitization activities.
---------------------------------------------------------------------------
\6\ See, e.g., Remarks by Alan Greenspan, Chairman, Board of
Governors of the Federal Reserve System before the American Bankers
Association (October 8, 1994). See also Statement by Donald G.
Coonley, Chief National Bank Examiner, OCC, Asset Securitization and
Secondary Markets: Hearings Before the Subcomm. on Policy, Research,
and Insurance of the Comm. on Banking, Finance and Urban Affairs,
102d Cong., 1st Sess. 2-4 (1991), reprinted in OCC Quarterly Journal
(December 1991); and Joint Statement by Richard Spillenkothen,
Director, Division of Banking Supervision and Regulation, Board of
Governors of the Federal Reserve System, and Donald H. Wilson,
Financial Markets Officer, Federal Reserve Bank of Chicago,
Secondary Market for Commercial Real Estate Loans: Hearings Before
the Subcomm. on Policy, Research, and Insurance of the Comm. on
Banking, Finance and Urban Affairs, 102d Cong., 2d Sess. 16-19
(1992), reprinted in 78 Fed. Res. Bull. 492 (1992).
\7\ See, e.g., Interpretive Letter No. 585 (June 8, 1992),
reprinted in [1992-1993 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 83,406 (securitized motor vehicle retail installment sales
contracts purchased from automobile dealers); Interpretive Letter
No. 540 (December 12, 1990), reprinted in [1990-1991 Transfer
Binder] Fed. Banking L. Rep. (CCH) para. 83,252 (securitized credit
card receivables originated by bank or purchased from others);
Interpretive Letter No. 514 (May 5, 1990), reprinted in [1990-1991
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,218
(securitized mortgages); Interpretive Letter No. 416 (February 16,
1988), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 85,640 (securitized automobile loans); Interpretive
Letter No. 388 (June 16, 1987), reprinted in [1988-1989 Transfer
Binder] Fed. Banking L. Rep. (CCH) para. 85,612 (sale of mortgage-
backed pass-through certificates); No Objection Letter No. 87-9
(December 16, 1987), reprinted in [1988-1989 Transfer Binder] Fed.
Banking L. Rep. (CCH) para. 84,038 (securitization of commercial
loans originated by the bank); Interpretive Letter No. 362 (May 22,
1986), reprinted in [1985-1987 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 85,532 (sales of bonds collateralized by mortgages).
Regarding sales of participations in pools of loans, see Letter from
Billy C. Wood, Deputy Comptroller, Multinational Banking (May 29,
1981), reprinted in [1981-82 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 85,275; Letter from Paul M. Homan, Senior Deputy
Comptroller for Bank Supervision (February 1, 1980), reprinted in
[1981-82 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,213;
Letter from John M. Miller, Deputy Chief Counsel (July 31, 1979),
reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 85,182; Letter from Paul M. Homan, Senior Deputy Comptroller
for Bank Supervision (April 20, 1979), reprinted in [1978-79
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,167; Letter
from H. Joe Selby, Deputy Comptroller for Operations (October 17,
1978), reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 85,144; Letter from John G. Heimann, Comptroller of the
Currency (May 18, 1978), reprinted in [1978-79 Transfer Binder] Fed.
Banking L. Rep. (CCH) para. 85,116; Letter from Charles B. Hall,
Deputy Comptroller for Banking Operations (February 14, 1978),
reprinted in [1978-79 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 85,100; Letter from Robert Bloom, Acting Comptroller of the
Currency (March 30, 1977), reprinted in [1973-78 Transfer Binder]
Fed. Banking L. Rep. (CCH) para. 97,093. Regarding national bank
authority to securitize assets, see Security Pacific v. Clarke, 885
F.2d 1034 (2d Cir. 1989), cert. denied, 493 U.S. 1070 (1990).
---------------------------------------------------------------------------
Investment Company Shares (Sec. 1.3(h))
The proposal incorporated OCC interpretations concerning the
authority of a national bank to hold instruments representing indirect
interests in assets in which the bank could invest directly.8
Former part 1 did not address a national bank's investment in an
investment company. The proposal permitted a national bank to purchase
and sell for its own account shares of a
[[Page 63978]]
registered investment company, subject to two requirements: First, the
investment company's portfolio must be composed entirely of assets in
which the bank could invest directly. Second, the amount of the bank's
investment in shares of any one investment company is subject to the
most stringent investment limitations applicable to the underlying
securities and loans that compose that investment company's portfolio.
---------------------------------------------------------------------------
\8\ Banking Circular 220 (November 21, 1986); An Examiner's
Guide to Investment Products and Practices at 23 (December 1992).
---------------------------------------------------------------------------
The proposal permitted banks to purchase shares in investment
companies, including mutual funds, that are registered under section 8
of the Investment Company Act of 1940 ('40 Act), 15 U.S.C. 80a-8. See
Sec. 1.2(c) (defining ``investment company''). The OCC requested
comment on whether the OCC should permit banks to purchase shares of
limited partnerships with fewer than 100 investors, i.e., a partnership
that would not qualify as an investment company within the meaning of
section 3(c)(1) of the '40 Act, if the partnerships' portfolios consist
solely of Type I securities that the bank may purchase and sell for its
own account. The '40 Act's definition of ``investment company''
excludes issuers whose outstanding securities are beneficially owned by
100 or fewer persons and who are not making, or do not presently
propose to make, a public offering of their securities.
Several commenters recommended that the OCC permit banks to
purchase shares in entities with 100 or fewer investors, although these
entities would not be subject to '40 Act regulation. The commenters
asserted that so long as the pass-through entity allows a bank to
invest solely in investments that the bank could purchase directly for
its own account, the number of investors should not matter.
One commenter opposed expanding the proposed definition asserting
that the '40 Act establishes a regulatory framework for investment
companies that addresses the unique risks posed by pooled investment
vehicles. The commenter asserted that to allow national banks to invest
in entities not subject to the '40 Act, for their own accounts, could
leave bank capital open to substantial risk.
The OCC agrees with this commenter that the absence of a regulatory
scheme, such as the '40 Act, could pose additional risk for national
banks. Therefore, the final rule adopts the definition of ``investment
company'' as proposed in Sec. 1.2(c). Further, the final rule does not
expressly permit banks to purchase shares from entities with 100 or
fewer investors that are exempt from '40 Act registration.
However, the OCC recognizes that there may be circumstances in
which a bank's purchase of interests in a certain exempt investment
fund would be acceptable. Therefore, the final rule provides that, on a
case-by-case basis, the OCC may determine that interests in other
entities, the portfolios of which consist exclusively of investments
eligible for national banks to hold directly, also are permissible for
national banks.
The final rule also relocates the provision that limited the amount
of the bank's investment in shares of any one investment company to the
most stringent investment limitations applicable to the underlying
securities that compose that investment company's portfolio. The OCC
has determined that, for clarity, this limitation belongs in Sec. 1.4,
which governs the calculation of limits. As discussed later, the final
rule also changes this limitation.
Securities Held Based on Estimates of Obligor's Performance
(Sec. 1.3(i))
The proposal retained the flexibility contained in the former rule
that permitted a bank, notwithstanding the general definition of an
investment security in Sec. 1.2(e), to treat certain debt securities,
(such as pools of mortgage or business loans in moderate and low-
income areas or community development loans), as investment securities
when the bank concludes, on the basis of estimates that the bank
reasonably believes are reliable, that the obligor will be able to meet
its obligations under that security.
The OCC requested comment on whether it should provide further
clarification of the standards applicable to securities held based on
estimates of obligor's performance and, if so, what clarification is
needed.
The majority of the commenters on this section asserted that it
would not be helpful for the OCC to provide further clarification of
the standards applicable to securities held based on estimates of an
obligor's performance. Therefore, the OCC adopts the final rule as
proposed.
Calculation of Limits (Sec. 1.4)
The proposal added a section that consolidated the calculation of
limits requirements of part 1.
Proposed paragraphs (a) and (b) Sec. 1.4 prescribed the dates for
calculating capital and surplus and stated the OCC's authority to
require more frequent calculations. The proposal required a bank to
calculate its investment limitations as of the most recent of: (1) The
date on which the bank's Consolidated Report of Condition and Income
(call report) is properly signed and submitted; (2) the date on which
the bank's call report is required to be submitted; or (3) the date on
which there is a change in the bank's capital category for purposes of
12 U.S.C. 1831o and 12 CFR 6.3.
The OCC received no significant comments on these paragraphs. The
final rule makes the following changes to the proposal to conform to
the OCC's recently proposed changes to its lending limit regulation, 12
CFR part 32. See 61 FR 37227 (July 17, 1996). The final rule requires a
bank to determine its investment limitations as of the most recent of:
(1) The last day of the preceding calendar quarter; or (2) the date on
which there is a change in the bank's capital category for purposes of
12 U.S.C. 1831o and 12 CFR 6.3.
The final rule prescribes an effective date for a bank's investment
limit. The final rule provides that an investment limit that is
calculated as of the last day of the preceding calendar quarter becomes
effective on the earlier of the date on which the bank's call report is
submitted or the date on which the bank's call report is required to be
submitted. An investment limit calculated as of the date on which there
is a change in the bank's capital category becomes effective on that
day.
The effective date requirements are added in a new paragraph
Sec. 1.4(b). The final rule moves proposed paragraph Sec. 1.4(b), which
stated the OCC's authority to require more frequent calculations, to
Sec. 1.4(c), to accommodate the insertion of new paragraph Sec. 1.4(b)
and otherwise adopts that paragraph Sec. 1.4(c) as it was proposed.
Calculation of Type III and Type V Securities Holdings (Sec. 1.4(d))
Proposed Sec. 1.4(c) limited a national bank's holdings of Type III
investment securities of any one issuer/obligor (or certain related
issuer/obligors) to 10 percent of the bank's capital and surplus. The
proposal limited a national bank's holdings of Type V securities of any
one issuer/obligor to 15 percent of the bank's capital and surplus. In
calculating these capital limits, the proposal required a bank to
combine: (1) Obligations of issuer/obligors that are related directly
or indirectly through common control; and (2) securities of issuer/
obligors that are credit-enhanced by the same entity.
The OCC requested comment on other bases upon which a bank should
combine its holdings when calculating its investment in Type III or
Type V securities of any one issuer/obligor. Specifically, the OCC
asked whether a bank should combine obligations that
[[Page 63979]]
are predominately collateralized by loans made by the same originator
or by originators that are related directly or indirectly through
common control. In addition, commenters were asked to address whether
and under what circumstances an issuer or affiliate of the issuer would
provide a guarantee or other form of credit enhancement for Type V
securities that could be a source of credit exposure of the investing
bank to the issuer or its affiliate. Comment was also invited on
whether the 15 percent investment limitation or a lower limitation is
appropriate under these circumstances.
Five commenters stated that the OCC should not require banks to
combine obligations of issuer/obligors of Type V securities that are
related through common control. These commenters asserted that the risk
assessment for the securities is based on the creditworthiness of the
underlying borrowers whose loans collateralize the issuance, and on the
credit enhancement rather than on the creditworthiness of the Type V
issuer/obligor. They stated that, if the parent company provides no
guarantee, there is no common source of risk and that applying a
limitation on common sources of credit enhancement is sufficient to
safeguard against risk concentrations. Similarly, a few commenters also
recommended that the OCC remove the requirement to aggregate holdings
of entities under direct or indirect common control for Type III
securities. They asserted that the requirement would be unduly
burdensome for banks.
The OCC continues to believe that combining obligations of issuer/
obligors that are related through common control represents a prudent
supervisory response, given the effect of common control on
underwriting standards and servicing effectiveness, and especially in
light of other burden reducing changes the OCC has made to the final
rule. Thus, the final rule retains the requirement that banks aggregate
issuer/obligors of Type III and Type V securities, respectively, that
are under common ownership or control.
The comments demonstrate that the proposal left unclear whether it
required banks to aggregate Type III and Type V securities issued by
the same issuer/obligor. The final rule adds a new provision to clarify
that the aggregation requirement applies separately to Type III and
Type V securities. The OCC emphasizes, however, that the Comptroller's
Handbook for National Bank Examiners identifies credit concentrations
in excess of 25 percent of a bank's capital as raising potential safety
and soundness concerns. For this purpose, the Handbook guidance does
aggregate direct and indirect obligations of an issuer/obligor. Thus,
if a bank's aggregate holdings of Type III and Type V securities issued
by the same issuer/obligor exceed 25 percent of the bank's capital, the
bank, as a matter of safety and soundness, should have carefully
considered whether, and be able to demonstrate why, the characteristics
of the Type III and Type V securities it holds do not entail an undue
concentration.9
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\9\ Similarly, a bank may acquire debt obligations of an issuer/
obligor pursuant to the bank's authority to make loans, (provided
appropriate underwriting standards are met) rather than under its
authority to hold investment securities. See OCC Interpretive Letter
No. 663, reprinted in [1994-1995 Transfer Binder] Fed. Banking L.
Rep. (CCH) para. 83,611 (June 8, 1995); OCC Interpretive Letter No.
600, reprinted in [1992-1993 Transfer Binder] Fed. Banking L. Rep.
(CCH) para. 83,427 (July 31, 1992); OCC Banking Circular 181 (Rev)
(Purchase of loans in whole or in part-participations) (August 2,
1984). In such a case, the holding would be permissible under a
separate authority of the bank, but the credit concentration
standards described in the Comptroller's Handbook would still be
applicable and could curtail the amount of the bank's holdings under
the two different sources of authority.
---------------------------------------------------------------------------
As noted in the earlier discussion of Sec. 1.3(f), the final rule
changes the Type V limitation from 15 percent to 25 percent of capital
and surplus. The final rule also changes proposed paragraph Sec. 1.3(c)
to paragraph Sec. 1.3(d) to accommodate the insertion of new paragraph
Sec. 1.3(b).
Calculation of Investment Company Holdings (Sec. 1.4(e))
In Sec. 1.4(d), the proposal required a bank to use reasonable
efforts to calculate and combine its pro rata share of a particular
security in the portfolio of each investment company with the bank's
direct holdings of securities of that issuer. In Sec. 1.3(h), the
proposal required the bank to apply the most stringent investment limit
that would apply to the underlying securities in the investment
company's portfolio.
For example, if the investment company holds a Type III security,
the proposal limited the bank's holdings of shares of that investment
company to 10 percent of the bank's capital and surplus. The proposal
would thereby have codified Banking Circular 220 (BC 220) (Nov. 21,
1986), which authorizes national banks to purchase the shares of
investment companies whose portfolios are comprised entirely of bank-
eligible securities.
One commenter asserted that application of the most restrictive
limit at the investment company level unnecessarily constrains a
national bank's ability to buy investment company shares, especially
when the company's portfolio contains only a proportionately small
amount of securities subject to an investment limit. As the commenter
noted, the treatment prescribed by the proposal would restrict the
bank's purchase of the shares of the hypothetical mutual fund described
above to 10 percent of capital and surplus even if the fund's portfolio
was not evenly divided between Type I and Type III securities but
contained 95 percent Type I and 5 percent Type III securities.
The commenter recommended that the OCC permit banks to use a
``pass-through'' analysis instead, that is, that the OCC permit banks
to disregard the investment company level for purposes of applying the
investment limits and allow banks to apply the applicable limit only to
the pro rata portion of the underlying securities. This commenter also
noted that allowing pass-through treatment is more consistent with the
requirement in proposed Sec. 1.4(d), by which banks must make
``reasonable efforts'' to aggregate their direct and indirect holdings
of a security.
The final rule consolidates the two investment limit requirements
set forth in Secs. 1.3(h) and 1.4(d) into a single investment limit
calculation provision, paragraph Sec. 1.4(e). The final rule also
modifies these provisions significantly in consideration of the comment
received.
The OCC agrees that the OCC should give banks the flexibility to
apply a pass-through analysis to determine the applicable investment
limit if the bank aggregates its pro rata holdings of a security in an
investment company with the bank's direct and other indirect holdings
of that security. Therefore, the final rule permits banks to look
through to the securities in the portfolio of an investment company and
apply the appropriate limitation to the aggregate of the bank's pro
rata interest in securities of a particular issuer that are held in an
investment company's portfolio and the bank's direct holdings of the
same securities.
The OCC recognizes that some institutions may prefer the method set
forth in proposed Sec. 1.3(h), which implemented BC 220 and required
banks to apply the most stringent applicable investment limit to the
bank's entire holdings of a particular investment company. Because
calculating pro rata holdings of securities that the bank holds through
an investment company may be burdensome for some institutions, the
final rule gives a bank the option to apply the most stringent
investment limit to the bank's entire holdings of a
[[Page 63980]]
particular investment company if the investment company is diversified.
An investment company is diversified if its holdings of the securities
of any one issuer do not exceed 5 percent of the investment company's
total portfolio.
For institutions that choose to calculate an investment limit using
the most stringent applicable limit, the final rule does not require a
bank to aggregate the investment company's holdings of a security with
the bank's direct holdings of the security. The OCC believes that the 5
percent diversification requirement applicable to diversified
investment companies provides sufficient protection against risk
concentrations when a bank elects to apply the most stringent
investment limit to the bank's investment in the investment company.
Safe and Sound Banking Practices; Credit Information Required
(Sec. 1.5)
The proposal changed the requirement that, in addition to the
specific requirements of part 1, a bank must exercise ``prudent banking
judgment'' to a requirement that a bank must adhere to ``safe and sound
banking practices,'' and identified certain risks that a bank should
consider as part of safe and sound banking. The proposal also required
each bank to obtain credit information that demonstrates the ability of
issuer/obligors to satisfy their obligations and to maintain records
that document the bank's compliance with this section.
The OCC received no comments on this section. The proposal required
banks to consider market, interest rate, liquidity, legal, and
operations and systems risks, as well as credit risk. The final rule
conforms the list of risks identified by the proposal to the risks that
are now specified in the OCC's risk-based supervision approach. The
final rule requires banks to consider interest rate, credit, liquidity,
price, foreign exchange, transaction, compliance, strategic, and
reputation risks. The final rule also makes minor stylistic changes to
this section.
Convertible Securities (Sec. 1.6)
The proposal set forth the restrictions on investment in certain
convertible securities. The proposal required a bank to write down the
carrying value of a convertible security to an amount that represents
the value of the security considered independently of the conversion
feature or attached stock purchase warrant. The proposal also
prohibited a bank from purchasing securities convertible into stock at
the option of the issuer.
The OCC received no comments on this section. However, the OCC has
determined that requiring a bank to write down the carrying value of a
security independently of the conversion feature is not consistent with
generally accepted accounting principles (GAAP). Therefore, the final
rule eliminates this requirement. While the final rule does not
specifically state that a bank must account for convertible securities
in accordance with GAAP, it is the OCC's policy that if the OCC is
silent on accounting treatment, the OCC requires banks to conform with
GAAP.
The final rule adopts as proposed the provision prohibiting
national banks from purchasing securities convertible into stock at the
option of the issuer.
Securities Held in Satisfaction of Debts Previously Contracted; Holding
Period; Disposal; Accounting Treatment; Non-Speculative Purpose
(Sec. 1.7)
The proposal added new provisions to clarify how a bank must treat
securities held in satisfaction of debts previously contracted (DPC).
These provisions embodied standards prescribed in the OCC's regulation
on other real estate owned (OREO), 12 CFR part 34, and the OCC's
related interpretation, see Interpretive Letter No. 604 (October 8,
1992). The proposal provided that a national bank holding securities in
satisfaction of DPC may do so for a period of five years from the date
that ownership of the securities was originally transferred to the
bank, plus, if permitted by the OCC, an additional five years. The
proposal also required a bank to mark-to-market securities held in
satisfaction of DPC.
The OCC received one comment on this section. The commenter
suggested that the OCC should avoid specifying an accounting treatment
in the rule. Instead, the commenter recommended that a reference be
made to the call report instructions.
The OCC agrees that it is unnecessary to specify the accounting
treatment for DPC securities in the regulation. Accordingly, the final
rule removes the reference to mark-to-market accounting and simply says
that banks should account for DPC securities consistent with GAAP. In
addition, the OCC emphasizes that extensions of the five-year holding
period for shares acquired DPC are not automatic. While the five year
holding period, plus extensions up to an additional five years, is
based on the OCC's OREO standards, the OCC expects that a bank should,
in general, be able to dispose of DPC securities more quickly than real
estate. Accordingly, the OCC will require a clearly convincing
demonstration of why any additional holding period is needed for
securities acquired DPC.
Nonconforming Investments (Sec. 1.8)
The proposal clarified that a bank does not violate an applicable
investment limitation when an investment in securities that was legal
when made becomes nonconforming as a result of certain enumerated
events, if the bank exercises reasonable efforts to bring the
investment into conformity with applicable limitations.
The OCC asked commenters to address whether: (1) the phrase
``reasonable efforts'' needs additional clarification; (2) the OCC
should require a bank to make ``reasonable efforts'' to bring into
conformity an investment where the quality of a security deteriorates
so that the security is no longer an investment security; and (3) any
other events should be added to the list of circumstances that may
cause an investment in securities to become nonconforming.
Two commenters recommended that the OCC eliminate the requirement
that a bank must make reasonable efforts to conform an asset to the
appropriate investment limit. The commenters stated that the
requirement should not apply because the factor that caused
nonconformity is beyond the bank's ability to control. One commenter
noted that the reasonable efforts language might require a bank to sell
securities at an exaggerated loss. Similarly, two commenters asked the
OCC to clarify that a bank will have a substantial period of time
before it is required to sell a non-conforming investment if the sale
would result in a loss to the bank.
The OCC does not intend ``reasonable efforts'' to mean that a bank
should sell a nonconforming investment at an exaggerated or unnecessary
loss. The OCC intends a bank to use sound banking judgment to determine
when it would be inappropriate to sell or reduce its holdings of a
nonconforming investment. In the final rule, the OCC adopts the
requirement that a bank must use reasonable efforts to bring an
investment into conformity with the understanding that ``reasonable
efforts'' should not pose significant harm to the bank if a reasonable
probability exists that a loss can be avoided in the foreseeable
future. The final rule makes minor clarifying changes to this section.
Amortization of Premiums (Former Sec. 1.10)
The proposal removed former Sec. 1.10 because the OCC believes that
GAAP appropriately governs the treatment of premiums. GAAP requires
that a bank defer recognition of a premium paid for
[[Page 63981]]
an investment security and amortize the premium over the period to
maturity of the security. In contrast, former Sec. 1.10 permitted a
bank to charge off the entire premium at the time of purchase or to
amortize the premium in any manner the bank considers appropriate as
long as the premium is extinguished entirely at or before the maturity
of the security.
The OCC received no comments on the removal of this section, which
is therefore removed in the final rule.
Interpretations
Indirect General Obligations (Sec. 1.100)
The proposal clarified and shortened former Sec. 1.120 and
renumbered it Sec. 1.100. The proposal removed former paragraphs (f)
``Tax anticipation notes,'' and (g) ``Bond anticipation notes'' as
unnecessary.
The OCC received no significant comments on this section, which is
adopted as proposed.
Eligibility of Securities for Purchase, Dealing in, and Underwriting by
National Banks; General Guidelines (Former Sec. 1.100)
The proposal removed former Sec. 1.100, which contained
introductory and explanatory comments that the OCC believes are
unnecessary in light of other proposed changes to part 1.
The OCC received no comments on the proposal's removal of this
section.
Taxing Powers of a State or a Political Subdivision (Sec. 1.110)
The proposal shortened former Sec. 1.130, removed portions that are
no longer necessary, and renumbered it Sec. 1.110. The proposal added
new text to provide standards for determining when obligations that are
expressly or implicitly dependent upon voter or legislative
authorization of appropriations are considered supported by the full
faith and credit of a State or political subdivision.
The OCC received no significant comments on this section, which is
adopted as proposed.
Prerefunded or Escrowed Bonds and Obligations Secured by Type I
Securities (Sec. 1.120)
The proposal made former Sec. 1.120(e) proposed Sec. 1.120. The OCC
proposed no substantive changes to this provision.
The OCC received no comments on this section, which is adopted as
proposed.
Type II Securities; Guidelines for Obligations Issued for University
and Housing Purposes (Sec. 1.130)
The proposal streamlined former Sec. 1.140, clarified the types of
issuers whose obligations qualify as Type II securities, and renumbered
the section Sec. 1.130.
The OCC received no comments on this section, which is adopted as
proposed.
Effective Date
The final rule takes effect on December 31, 1996. The OCC finds
good cause for prescribing this year-end effective date in that it will
enable national banks to adjust their practices to conform with the
regulation at the beginning of a calendar quarter, which also marks the
beginning of a reporting period for purposes of the Consolidated Report
of Condition and Income (Call Report). 5 U.S.C. 553(d)(3).
Derivation Table
[Only substantive modifications, additions and changes are indicated]
----------------------------------------------------------------------------------------------------------------
Revised provision Original provision Comments
----------------------------------------------------------------------------------------------------------------
Sec. 1.1............................ Secs. 1.1, 1.2.............. Modified.
Sec. 1.2(a)......................... ............................. Added.
Sec. 1.2(b)......................... Sec. 1.3(g)................. Modified.
Sec. 1.2(c)......................... --........................... Added.
Sec. 1.2(d)......................... --........................... Added.
Sec. 1.2(e)......................... Sec. 1.3(b)................. Modified.
Sec. 1.2(f)......................... Sec. 1.5(a)................. Significant change.
Sec. 1.2(g)......................... --........................... Added.
Sec. 1.2(h)......................... Sec. 1.3(f)................. ..........................................
Sec. 1.2(i)......................... Secs. 1.3(c), 1.110......... Modified.
Sec. 1.2(j)......................... Sec. 1.3(d)................. Modified.
Sec. 1.2(k)......................... Sec. 1.3(e)................. Modified.
Sec. 1.2(l)......................... --........................... Added.
Sec. 1.2(m)......................... --........................... Added.
Sec. 1.3(a)................. Removed.
Sec. 1.3(a)......................... Sec. 1.4.................... Modified.
Sec. 1.3(b)......................... Secs. 1.3(d), 1.6, 1.7(a)... Modified.
Sec. 1.3(c)......................... Secs. 1.3(e), 1.7(a)........ Modified.
Sec. 1.3(d)......................... Sec. 1.7(a), 12 CFR 7.1021.. Modified.
Sec. 1.3(e)......................... --........................... Added.
Sec. 1.3(f)......................... --........................... Added.
Sec. 1.3(g)......................... --........................... Added.
Sec. 1.3(h)......................... --........................... Added.
Sec. 1.3(i)......................... Secs. 1.5(b), 1.7(b)........ Modified.
Sec. 1.4............................ --........................... Added.
Sec. 1.5............................ Sec. 1.8.................... Significant change.
Sec. 1.6............................ Sec. 1.9.................... Modified.
Sec. 1.7(a)......................... Sec. 1.11................... ..........................................
Sec. 1.7(b)......................... --........................... Added.
Sec. 1.7(c)................. Removed.
Sec. 1.7(d)................. Added.
Sec. 1.7(c)......................... --........................... Added.
Sec. 1.8............................ --........................... Added.
Sec. 1.10................... Removed.
Sec. 1.100.................. Removed.
Sec. 1.100(a)....................... Sec. 1.120.................. ..........................................
[[Page 63982]]
Sec. 1.100(b)(1).................... Sec. 1.120(a)............... ..........................................
Sec. 1.100(b)(2).................... Sec. 1.120(b)............... ..........................................
Sec. 1.100(b)(3).................... Sec. 1.120(c)............... ..........................................
Sec. 1.100(b)(4).................... Sec. 1.120(d)............... ..........................................
Sec. 1.110.......................... Sec. 1.130.................. Modified.
Sec. 1.120(f)............... Removed.
Sec. 1.120(g)............... Removed.
Sec. 1.120.......................... Sec. 1.120(e)............... ..........................................
Sec. 1.130(a)....................... Sec. 1.140(a)............... Modified.
Sec. 1.130(b)....................... Sec. 1.140(b)............... ..........................................
Sec. 1.130(c)....................... Sec. 1.140(c)............... Modified.
----------------------------------------------------------------------------------------------------------------
Regulatory Flexibility Act
It is hereby certified that this regulation will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required. This
regulation will reduce the regulatory burden on national banks,
regardless of size, by simplifying and clarifying existing regulatory
requirements.
Paperwork Reduction Act of 1995
The OCC invites comments on:
(1) Whether the collections of information contained in this notice
of final rule are necessary for the proper performance of OCC
functions, including whether the information has practical utility;
(2) The accuracy of the estimate of the burden of the information
collections;
(3) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(4) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(5) Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
Respondents/recordkeepers are not required to respond to these
collections of information unless this displays a currently valid OMB
control number.
The collection of information requirements contained in this final
rule have been approved by the Office of Management and Budget under
OMB control number 1557-0205 in accordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of
information should be sent to the Office of Management and Budget,
Paperwork Reduction Project (1557-0205), Washington, DC 20503, with
copies to the Legislative and Regulatory Activities Division, Office of
the Comptroller of the Currency, 250 E Street, SW, Washington, DC
20219.
The collection of information requirements in this final rule are
found in 12 CFR 1.3 and 1.7. This information is required to enable the
OCC to make determinations as to the safety and soundness of
activities. The likely respondents/recordkeepers are national banks.
Estimated average annual burden hours per respondent/recordkeeper:
18.4 hours.
Estimated number of respondents and/or recordkeepers: 25.
Estimated total annual reporting and recordkeeping burden: 460
hours.
Start-up costs to respondents: None.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action.
Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded
Mandates Act) (signed into law on March 22, 1995) requires that an
agency prepare a budgetary impact statement before promulgating a rule
that includes a Federal mandate that may result in the 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. Because the OCC has
determined that this final rule will not result in expenditures by
State, local, and tribal governments or by the private sector of $100
million or more in any one year, the OCC has not prepared a budgetary
impact statement or specifically addressed the regulatory alternatives
considered. Nevertheless, as discussed in the preamble, the final rule
has the effect of reducing burden and increasing the discretion of
national banks regarding their sound investment activities.
List of Subjects
12 CFR Part 1
Banks, banking, National banks, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 7
Credit, Insurance, Investments, National banks, Reporting and
recordkeeping requirements, Securities, Surety bonds.
Authority and Issuance
For the reasons set out in the preamble, chapter I of title 12 of
the Code of Federal Regulations is amended as set forth below:
1. Part 1 is revised to read as follows:
PART 1--INVESTMENT SECURITIES
Sec.
1.1 Authority, purpose, and scope.
1.2 Definitions.
1.3 Limitations on dealing in, underwriting, and purchase and sale
of securities.
1.4 Calculation of limits.
1.5 Safe and sound banking practices; credit information required.
1.6 Convertible securities.
1.7 Securities held in satisfaction of debts previously contracted;
holding period; disposal; accounting treatment; non-speculative
purpose.
1.8 Nonconforming investments.
Interpretations
1.100 Indirect general obligations.
1.110 Taxing powers of a State or political subdivision.
1.120 Prerefunded or escrowed bonds and obligations secured by Type
I securities.
1.130 Type II securities; guidelines for obligations issued for
university and housing purposes.
Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.
[[Page 63983]]
Sec. 1.1 Authority, purpose, and scope.
(a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq.,
12 U.S.C. 24 (Seventh), and 12 U.S.C. 93a.
(b) Purpose This part prescribes standards under which national
banks may purchase, sell, deal in, underwrite, and hold securities,
consistent with the authority contained in 12 U.S.C. 24 (Seventh) and
safe and sound banking practices.
(c) Scope. The standards set forth in this part apply to national
banks, District of Columbia banks, and federal branches of foreign
banks. Further, pursuant to 12 U.S.C. 335, State banks that are members
of the Federal Reserve System are subject to the same limitations and
conditions that apply to national banks in connection with purchasing,
selling, dealing in, and underwriting securities and stock. In addition
to activities authorized under this part, foreign branches of national
banks are authorized to conduct international activities and invest in
securities pursuant to 12 CFR part 211.
Sec. 1.2 Definitions.
(a) Capital and surplus means:
(1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's
risk-based capital standards set forth in appendix A to 12 CFR part 3
(or comparable capital guidelines of the appropriate Federal banking
agency) as reported in the bank's Consolidated Report of Condition and
Income filed under 12 U.S.C. 161 (or under 12 U.S.C. 1817 in the case
of a state member bank); plus
(2) The balance of a bank's allowance for loan and lease losses not
included in the bank's Tier 2 capital, for purposes of the calculation
of risk-based capital described in paragraph (a)(1) of this section, as
reported in the bank's Consolidated Report of Condition and Income
filed under 12 U.S.C. 161 (or under 12 U.S.C. 1817 in the case of a
state member bank).
(b) General obligation of a State or political subdivision means:
(1) An obligation supported by the full faith and credit of an
obligor possessing general powers of taxation, including property
taxation; or
(2) An obligation payable from a special fund or by an obligor not
possessing general powers of taxation, when an obligor possessing
general powers of taxation, including property taxation, has
unconditionally promised to make payments into the fund or otherwise
provide funds to cover all required payments on the obligation.
(c) Investment company means an investment company, including a
mutual fund, registered under section 8 of the Investment Company Act
of 1940, 15 U.S.C. 80a-8.
(d) Investment grade means a security that is rated in one of the
four highest rating categories by:
(1) Two or more NRSROs; or
(2) One NRSRO if the security has been rated by only one NRSRO.
(e) Investment security means a marketable debt obligation that is
not predominantly speculative in nature. A security is not
predominantly speculative in nature if it is rated investment grade.
When a security is not rated, the security must be the credit
equivalent of a security rated investment grade.
(f) Marketable means that the security:
(1) Is registered under the Securities Act of 1933, 15 U.S.C. 77a
et seq.;
(2) Is a municipal revenue bond exempt from registration under the
Securities Act of 1933, 15 U.S.C. 77c(a)(2);
(3) Is offered and sold pursuant to Securities and Exchange
Commission Rule 144A, 17 CFR 230.144A, and rated investment grade or is
the credit equivalent of investment grade; or
(4) Can be sold with reasonable promptness at a price that
corresponds reasonably to its fair value.
(g) NRSRO means a nationally recognized statistical rating
organization.
(h) Political subdivision means a county, city, town, or other
municipal corporation, a public authority, and generally any publicly-
owned entity that is an instrumentality of a State or of a municipal
corporation.
(i) Type I security means:
(1) Obligations of the United States;
(2) Obligations issued, insured, or guaranteed by a department or
an agency of the United States Government, if the obligation,
insurance, or guarantee commits the full faith and credit of the United
States for the repayment of the obligation;
(3) Obligations issued by a department or agency of the United
States, or an agency or political subdivision of a State of the United
States, that represent an interest in a loan or a pool of loans made to
third parties, if the full faith and credit of the United States has
been validly pledged for the full and timely payment of interest on,
and principal of, the loans in the event of non-payment by the third
party obligor(s);
(4) General obligations of a State of the United States or any
political subdivision;
(5) Obligations authorized under 12 U.S.C. 24 (Seventh) as
permissible for a national bank to deal in, underwrite, purchase, and
sell for the bank's own account, including qualified Canadian
government obligations; and
(6) Other securities the OCC determines to be eligible as Type I
securities under 12 U.S.C. 24 (Seventh).
(j) Type II security means an investment security that represents:
(1) Obligations issued by a State, or a political subdivision or
agency of a State, for housing, university, or dormitory purposes;
(2) Obligations of international and multilateral development banks
and organizations listed in 12 U.S.C. 24 (Seventh);
(3) Other obligations listed in 12 U.S.C. 24 (Seventh) as
permissible for a bank to deal in, underwrite, purchase, and sell for
the bank's own account, subject to a limitation per obligor of 10
percent of the bank's capital and surplus; and
(4) Other securities the OCC determines to be eligible as Type II
securities under 12 U.S.C. 24 (Seventh).
(k) Type III security means an investment security that does not
qualify as a Type I, II, IV, or V security, such as corporate bonds and
municipal revenue bonds.
(l) Type IV security means:
(1) A small business-related security as defined in section
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C.
78c(a)(53)(A), that is rated investment grade or is the credit
equivalent thereof, that is fully secured by interests in a pool of
loans to numerous obligors.
(2) A commercial mortgage-related security that is offered or sold
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5), that is rated investment grade or is the credit equivalent
thereof, or a commercial mortgage-related security as described in
section 3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C.
78c(a)(41), that is rated investment grade in one of the two highest
investment grade rating categories, and that represents ownership of a
promissory note or certificate of interest or participation that is
directly secured by a first lien on one or more parcels of real estate
upon which one or more commercial structures are located and that is
fully secured by interests in a pool of loans to numerous obligors.
(3) A residential mortgage-related security that is offered and
sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5), that is rated investment grade or is the credit equivalent
thereof, or a residential mortgage-related security as described in
section 3(a)(41) of the Securities Exchange Act of 1934, 15 U.S.C.
78c(a)(41)), that is rated investment
[[Page 63984]]
grade in one of the two highest investment grade rating categories, and
that does not otherwise qualify as a Type I security.
(m) Type V security means a security that is:
(1) Rated investment grade;
(2) Marketable;
(3) Not a Type IV security; and
(4) Fully secured by interests in a pool of loans to numerous
obligors and in which a national bank could invest directly.
Sec. 1.3 Limitations on dealing in, underwriting, and purchase and
sale of securities.
(a) Type I securities. A national bank may deal in, underwrite,
purchase, and sell Type I securities for its own account. The amount of
Type I securities that the bank may deal in, underwrite, purchase, and
sell is not limited to a specified percentage of the bank's capital and
surplus.
(b) Type II securities. A national bank may deal in, underwrite,
purchase, and sell Type II securities for its own account, provided the
aggregate par value of Type II securities issued by any one obligor
held by the bank does not exceed 10 percent of the bank's capital and
surplus. In applying this limitation, a national bank shall take
account of Type II securities that the bank is legally committed to
purchase or to sell in addition to the bank's existing holdings.
(c) Type III securities. A national bank may purchase and sell Type
III securities for its own account, provided the aggregate par value of
Type III securities issued by any one obligor held by the bank does not
exceed 10 percent of the bank's capital and surplus. In applying this
limitation, a national bank shall take account of Type III securities
that the bank is legally committed to purchase or to sell in addition
to the bank's existing holdings.
(d) Type II and III securities; other investment securities
limitations. A national bank may not hold Type II and III securities
issued by any one obligor with an aggregate par value exceeding 10
percent of the bank's capital and surplus. However, if the proceeds of
each issue are to be used to acquire and lease real estate and related
facilities to economically and legally separate industrial tenants, and
if each issue is payable solely from and secured by a first lien on the
revenues to be derived from rentals paid by the lessee under net
noncancellable leases, the bank may apply the 10 percent investment
limitation separately to each issue of a single obligor.
(e) Type IV securities--(1) General. A national bank may purchase
and sell Type IV securities for its own account. A national bank may
deal in Type IV securities that are fully secured by Type I securities.
Except as described in paragraph (e)(2) of this section, the amount of
the Type IV securities that a bank may purchase and sell is not limited
to a specified percentage of the bank's capital and surplus.
(2) Limitation on small business-related securities rated in the
third and fourth highest rating categories by an NRSRO. A national bank
may hold small business-related securities, as defined in section
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C.
78c(a)(53)(A), of any one issuer with an aggregate par value not
exceeding 25 percent of the bank's capital and surplus if those
securities are rated investment grade in the third or fourth highest
investment grade rating categories. In applying this limitation, a
national bank shall take account of securities that the bank is legally
committed to purchase or to sell in addition to the bank's existing
holdings. No percentage of capital and surplus limit applies to small
business related securities rated investment grade in the highest two
investment grade rating categories.
(f) Type V securities. A national bank may purchase and sell Type V
securities for its own account provided that the aggregate par value of
Type V securities issued by any one issuer held by the bank does not
exceed 25 percent of the bank's capital and surplus. In applying this
limitation, a national bank shall take account of Type V securities
that the bank is legally committed to purchase or to sell in addition
to the bank's existing holdings.
(g) Securitization. A national bank may securitize and sell assets
that it holds, as a part of its banking business. The amount of
securitized loans and obligations that a bank may sell is not limited
to a specified percentage of the bank's capital and surplus.
(h) Investment company shares--(1) General. A national bank may
purchase and sell for its own account investment company shares
provided that:
(i) The portfolio of the investment company consists exclusively of
assets that the national bank may purchase and sell for its own account
under this part; and
(ii) The bank's holdings of investment company shares do not exceed
the limitations in Sec. 1.4(e).
(2) Other issuers. The OCC may determine that a national bank may
invest in an entity that is exempt from registration as an investment
company under section 3(c)(1) of the Investment Company Act of 1940,
provided that the portfolio of the entity consists exclusively of
assets that a national bank may purchase and sell for its own account
under this part.
(i) Securities held based on estimates of obligor's performance.
(1) Notwithstanding Secs. 1.2(d) and (e), a national bank may treat a
debt security as an investment security for purposes of this part if
the bank concludes, on the basis of estimates that the bank reasonably
believes are reliable, that the obligor will be able to satisfy its
obligations under that security, and the bank believes that the
security may be sold with reasonable promptness at a price that
corresponds reasonably to its fair value.
(2) The aggregate par value of securities treated as investment
securities under paragraph (i)(1) of this section may not exceed 5
percent of the bank's capital and surplus.
Sec. 1.4 Calculation of limits.
(a) Calculation date. For purposes of determining compliance with
12 U.S.C. 24 (Seventh) and this part, a bank shall determine its
investment limitations as of the most recent of the following dates:
(1) The last day of the preceding calendar quarter; or
(2) The date on which there is a change in the bank's capital
category for purposes of 12 U.S.C. 1831o and 12 CFR 6.3.
(b) Effective date. (1) A bank's investment limit calculated in
accordance with paragraph (a)(1) of this section will be effective on
the earlier of the following dates:
(i) The date on which the bank's Consolidated Report of Condition
and Income (Call Report) is submitted; or
(ii) The date on which the bank's Consolidated Report of Condition
and Income is required to be submitted.
(2) A bank's investment limit calculated in accordance with
paragraph (a)(2) of this section will be effective on the date that the
limit is to be calculated.
(c) Authority of OCC to require more frequent calculations. If the
OCC determines for safety and soundness reasons that a bank should
calculate its investment limits more frequently than required by
paragraph (a) of this section, the OCC may provide written notice to
the bank directing the bank to calculate its investment limitations at
a more frequent interval. The bank shall thereafter calculate its
investment limits at that interval until further notice.
(d) Calculation of Type III and Type V securities holdings--(1)
General. In calculating the amount of its investment in Type III or
Type V securities issued
[[Page 63985]]
by any one obligor, a bank shall aggregate:
(i) Obligations issued by obligors that are related directly or
indirectly through common control; and
(ii) Securities that are credit enhanced by the same entity.
(2) Aggregation by type. The aggregation requirement in paragraph
(d)(1) of this section applies separately to the Type III and Type V
securities held by a bank.
(e) Limit on investment company holdings--(1) General. In
calculating the amount of its investment in investment company shares
under this part, a bank shall use reasonable efforts to calculate and
combine its pro rata share of a particular security in the portfolio of
each investment company with the bank's direct holdings of that
security. The bank's direct holdings of the particular security and the
bank's pro rata interest in the same security in the investment
company's portfolio may not, in the aggregate, exceed the investment
limitation that would apply to that security.
(2) Alternate limit for diversified investment companies. A
national bank may elect not to combine its pro rata interest in a
particular security in an investment company with the bank's direct
holdings of that security if:
(i) The investment company's holdings of the securities of any one
issuer do not exceed 5 percent of its total portfolio; and
(ii) The bank's total holdings of the investment company's shares
do not exceed the most stringent investment limitation that would apply
to any of the securities in the company's portfolio if those securities
were purchased directly by the bank.
Sec. 1.5 Safe and sound banking practices; credit information
required.
(a) A national bank shall adhere to safe and sound banking
practices and the specific requirements of this part in conducting the
activities described in Sec. 1.3. The bank shall consider, as
appropriate, the interest rate, credit, liquidity, price, foreign
exchange, transaction, compliance, strategic, and reputation risks
presented by a proposed activity, and the particular activities
undertaken by the bank must be appropriate for that bank.
(b) In conducting these activities, the bank shall determine that
there is adequate evidence that an obligor possesses resources
sufficient to provide for all required payments on its obligations, or,
in the case of securities deemed to be investment securities on the
basis of reliable estimates of an obligor's performance, that the bank
reasonably believes that the obligor will be able to satisfy the
obligation.
(c) Each bank shall maintain records available for examination
purposes adequate to demonstrate that it meets the requirements of this
part. The bank may store the information in any manner that can be
readily retrieved and reproduced in a readable form.
Sec. 1.6 Convertible securities.
A national bank may not purchase securities convertible into stock
at the option of the issuer.
Sec. 1.7 Securities held in satisfaction of debts previously
contracted; holding period; disposal; accounting treatment; non-
speculative purpose.
(a) Securities held in satisfaction of debts previously contracted.
The restrictions and limitations of this part, other than those set
forth in paragraphs (b),(c), and (d) of this section, do not apply to
securities acquired:
(1) Through foreclosure on collateral;
(2) In good faith by way of compromise of a doubtful claim; or
(3) To avoid loss in connection with a debt previously contracted.
(b) Holding period. A national bank holding securities pursuant to
paragraph (a) of this section may do so for a period not to exceed five
years from the date that ownership of the securities was originally
transferred to the bank. The OCC may extend the holding period for up
to an additional five years if a bank provides a clearly convincing
demonstration as to why an additional holding period is needed.
(c) Accounting treatment. A bank shall account for securities held
pursuant to paragraph (a) of this section in accordance with Generally
Accepted Accounting Principles.
(d) Non-speculative purpose. A bank may not hold securities
pursuant to paragraph (a) of this section for speculative purposes.
Sec. 1.8 Nonconforming investments.
(a) A national bank's investment in securities that no longer
conform to this part but conformed when made will not be deemed in
violation but instead will be treated as nonconforming if the reason
why the investment no longer conforms to this part is because:
(1) The bank's capital declines;
(2) Issuers, obligors, or credit-enhancers merge;
(3) Issuers become related directly or indirectly through common
control;
(4) The investment securities rules change;
(5) The security no longer qualifies as an investment security; or
(6) Other events identified by the OCC occur.
(b) A bank shall exercise reasonable efforts to bring an investment
that is nonconforming as a result of events described in paragraph (a)
of this section into conformity with this part unless to do so would be
inconsistent with safe and sound banking practices.
Interpretations
Sec. 1.100 Indirect general obligations.
(a) Obligation issued by an obligor not possessing general powers
of taxation. Pursuant to Sec. 1.2(b), an obligation issued by an
obligor not possessing general powers of taxation qualifies as a
general obligation of a State or political subdivision for the purposes
of 12 U.S.C. 24 (Seventh), if a party possessing general powers of
taxation unconditionally promises to make sufficient funds available
for all required payments in connection with the obligation.
(b) Indirect commitment of full faith and credit. The indirect
commitment of the full faith and credit of a State or political
subdivision (that possesses general powers of taxation) in support of
an obligation may be demonstrated by any of the following methods,
alone or in combination, when the State or political subdivision
pledges its full faith and credit in support of the obligation.
(1) Lease/rental agreement. The lease agreement must be valid and
binding on the State or the political subdivision, and the State or
political subdivision must unconditionally promise to pay rentals that,
together with any other available funds, are sufficient for the timely
payment of interest on, and principal of, the obligation. These lease/
rental agreement may, for instance, provide support for obligations
financing the acquisition or operation of public projects in the areas
of education, medical care, transportation, recreation, public
buildings, and facilities.
(2) Service/purchase agreement. The agreement must be valid and
binding on the State or the political subdivision, and the State or
political subdivision must unconditionally promise in the agreement to
make payments for services or resources provided through or by the
issuer of the obligation. These payments, together with any other
available funds, must be sufficient for the timely payment of interest
on, and principal of, the obligation. An agreement to purchase
municipal sewer, water, waste disposal, or electric services may, for
instance, provide support for obligations financing the construction or
acquisition of facilities supplying those services.
[[Page 63986]]
(3) Refillable debt service reserve fund. The reserve fund must at
least equal the amount necessary to meet the annual payment of interest
on, and principal of, the obligation as required by applicable law. The
maintenance of a refillable reserve fund may be provided, for instance,
by statutory direction for an appropriation, or by statutory automatic
apportionment and payment from the State funds of amounts necessary to
restore the fund to the required level.
(4) Other grants or support. A statutory provision or agreement
must unconditionally commit the State or the political subdivision to
provide funds which, together with other available funds, are
sufficient for the timely payment of interest on, and principal of, the
obligation. Those funds may, for instance, be supplied in the form of
annual grants or may be advanced whenever the other available revenues
are not sufficient for the payment of principal and interest.
Sec. 1.110 Taxing powers of a State or political subdivision.
(a) An obligation is considered supported by the full faith and
credit of a State or political subdivision possessing general powers of
taxation when the promise or other commitment of the State or the
political subdivision will produce funds, which (together with any
other funds available for the purpose) will be sufficient to provide
for all required payments on the obligation. In order to evaluate
whether a commitment of a State or political subdivision is likely to
generate sufficient funds, a bank shall consider the impact of any
possible limitations regarding the State's or political subdivision's
taxing powers, as well as the availability of funds in view of the
projected revenues and expenditures. Quantitative restrictions on the
general powers of taxation of the State or political subdivision do not
necessarily mean that an obligation is not supported by the full faith
and credit of the State or political subdivision. In such case, the
bank shall determine the eligibility of obligations by reviewing, on a
case-by-case basis, whether tax revenues available under the limited
taxing powers are sufficient for the full and timely payment of
interest on, and principal of, the obligation. The bank shall use
current and reasonable financial projections in calculating the
availability of the revenues. An obligation expressly or implicitly
dependent upon voter or legislative authorization of appropriations may
be considered supported by the full faith and credit of a State or
political subdivision if the bank determines, on the basis of past
actions by the voters or legislative body in similar situations
involving similar types of projects, that it is reasonably probable
that the obligor will obtain all necessary appropriations.
(b) An obligation supported exclusively by excise taxes or license
fees is not a general obligation for the purposes of 12 U.S.C. 24
(Seventh). Nevertheless, an obligation that is primarily payable from a
fund consisting of excise taxes or other pledged revenues qualifies as
a ``general obligation,'' if, in the event of a deficiency of those
revenues, the obligation is also supported by the general revenues of a
State or a political subdivision possessing general powers of taxation.
Sec. 1.120 Prerefunded or escrowed bonds and obligations secured by
Type I securities.
(a) An obligation qualifies as a Type I security if it is secured
by an escrow fund consisting of obligations of the United States or
general obligations of a State or a political subdivision, and the
escrowed obligations produce interest earnings sufficient for the full
and timely payment of interest on, and principal of, the obligation.
(b) If the interest earnings from the escrowed Type I securities
alone are not sufficient to guarantee the full repayment of an
obligation, a promise of a State or a political subdivision possessing
general powers of taxation to maintain a reserve fund for the timely
payment of interest on, and principal of, the obligation may further
support a guarantee of the full repayment of an obligation.
(c) An obligation issued to refund an indirect general obligation
may be supported in a number of ways that, in combination, are
sufficient at all times to support the obligation with the full faith
and credit of the United States or a State or a political subdivision
possessing general powers of taxation. During the period following its
issuance, the proceeds of the refunding obligation may be invested in
U.S. obligations or municipal general obligations that will produce
sufficient interest income for payment of principal and interest. Upon
the retirement of the outstanding indirect general obligation bonds,
the same indirect commitment, such as a lease agreement or a reserve
fund, that supported the prior issue, may support the refunding
obligation.
Sec. 1.130 Type II securities; guidelines for obligations issued for
university and housing purposes.
(a) Investment quality. An obligation issued for housing,
university, or dormitory purposes is a Type II security only if it:
(1) Qualifies as an investment security, as defined in Sec. 1.2(e);
and
(2) Is issued for the appropriate purpose and by a qualifying
issuer.
(b) Obligation issued for university purposes. (1) An obligation
issued by a State or political subdivision or agency of a State or
political subdivision for the purpose of financing the construction or
improvement of facilities at or used by a university or a degree-
granting college-level institution, or financing loans for studies at
such institutions, qualifies as a Type II security. Facilities financed
in this manner may include student buildings, classrooms, university
utility buildings, cafeterias, stadiums, and university parking lots.
(2) An obligation that finances the construction or improvement of
facilities used by a hospital may be eligible as a Type II security, if
the hospital is a department or a division of a university, or
otherwise provides a nexus with university purposes, such as an
affiliation agreement between the university and the hospital, faculty
positions of the hospital staff, and training of medical students,
interns, residents, and nurses (e.g., a ``teaching hospital'').
(c) Obligation issued for housing purposes. An obligation issued
for housing purposes may qualify as a Type II security if the security
otherwise meets the criteria for a Type II security.
PART 7--INTERPRETIVE RULINGS
2. The authority citation for part 7 continues to read as follows:
Authority: 12 U.S.C. 1 et seq. and 93a.
Sec. 7.1021 [Removed]
3. Section 7.1021 is removed.
Dated: November 22, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-30779 Filed 11-29-96; 8:45 am]
BILLING CODE 4810-33-P
