[Federal Register Volume 61, Number 115 (Thursday, June 13, 1996)]
[Proposed Rules]
[Pages 29976-29992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13828]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 115 / Thursday, June 13, 1996 /
Proposed Rules
[[Page 29976]]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 545, 559, 560, 563, 567, 571
[No. 96-47]
RIN 1550-AA88
Subsidiaries and Equity Investments
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to update,
reorganize, and streamline its subsidiaries and equity investment
regulations and policy statements. This proposal follows a detailed
review of each pertinent regulation and policy statement to determine
whether it is necessary, imposes the least possible burden consistent
with safety and soundness, and is written in a clear, straightforward
manner. Today's proposal is being made pursuant to the Regulatory
Reinvention Initiative of the Vice President's National Performance
Review and section 303 of the Community Development and Regulatory
Improvement Act of 1994.
DATES: Comments must be received on or before August 12, 1996.
ADDRESSES: Send comments to Manager, Dissemination Branch, Records
Management and Information Policy, Office of Thrift Supervision, 1700 G
Street, NW., Washington, D.C. 20552, Attention Docket No. 96-47. These
submissions may also be hand-delivered to 1700 G Street, NW., from 9:00
A.M. to 5:00 P.M. on business days or may be sent by facsimile
transmission to FAX Number (202) 906-7755. Comments will be available
for inspection at 1700 G Street, NW., from 9:00 A.M. until 4:00 P.M. on
business days.
FOR FURTHER INFORMATION CONTACT: Debra Merkle, Project Manager,
Supervision Policy, (202) 906-5688; Donna Miller, Senior Program
Manager, Supervision Policy, (202) 906-7488; Susan Miles, Senior
Attorney, Regulations and Legislation Division, (202) 906-6798; Dean
Shahinian, Senior Counsel for Corporate Activities, Business
Transactions Division, (202) 906-7289; or Deborah Dakin, Assistant
Chief Counsel, (202) 906-6445, Regulations and Legislation Division,
Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street,
NW., Washington, D.C. 20552.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background of the Proposal
II. Objectives
A. Create More User-Friendly Subsidiary and Equity Investment
Regulations
B. Codify Pass-through Investment Authority
C. Update the List of Preapproved Activities for Service
Corporations
D. Streamline Subsidiary Notice and Application Procedures
E. Clarify and Simplify Computation of the Service Corporation
Investment Limit
F. Clarify What Constitutes a ``Subsidiary'' Under Various
Regulatory Provisions and, in so Doing, Simplify Calculations of
Capital
III. Historical Overview
A. Service Corporations
B. Finance Subsidiaries
C. Operating Subsidiaries
D. Pass-Through Investments
IV. Section-by-Section Analysis
A. New Part 559--Subsidiaries
B. Amendments to Proposed New Part 560--Lending and Investment
C. Disposition of Existing Regulations
V. Chart Showing the Proposed Disposition of Regulations
VI. Request for Comment
VII. Paperwork Reduction Act of 1995
VIII. Executive Order 12866
IX. Regulatory Flexibility Act Analysis
X. Unfunded Mandates Act of 1995
I. Background of the Proposal
In a comprehensive review of the agency's regulations in the spring
of 1995, OTS identified numerous provisions for immediate repeal, plus
several key regulatory areas for further intensive, systematic
regulatory burden analysis. These areas--lending and investment
authority, subsidiaries and equity investments, insurance referrals and
loan-related fees, and charter and bylaws--were selected because they
are vital to thrift operations, and have not been developed on an
interagency basis or been comprehensively reviewed for many years.
Today's proposal presents the results of an intensive review of OTS's
subsidiary and equity investments regulations and related policy
statements.
Since commencing its reinvention initiative in the spring of 1995,
OTS has already repealed eight percent of its regulations. In addition,
in January of 1996, OTS issued a comprehensive proposal on its lending
and investment regulations.1 That proposal, once adopted in final
form, will reduce the number of lending and investment regulations from
43 to 23. Burden reduction proposals regarding charter and bylaws and
insurance referrals and loan-related fees will be issued in the near
future.
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\1\ 61 FR 1162 (January 17, 1996).
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Today's proposal regarding subsidiaries and equity investments is
also expected to result in significant regulatory burden reduction. In
developing this proposal, OTS considered the relevant regulations,
guidance, legal interpretations, and reporting requirements of the
other federal banking agencies. In addition, as with our other
regulatory reinvention efforts, this proposal was prepared in
consultation with those who use the regulations on a daily basis,
including the agency's regional examination staff and a focus group
composed of representatives of the thrift industry.
The consensus that emerged from this process is that the primary
need in the subsidiaries and equity investment area is to enhance
flexibility and clarify available investment options, as opposed to
simply eliminating large portions of regulatory text. Thus, although
today's proposal does call for the elimination of 12 paragraphs of
regulatory text, the most significant burden reduction is expected to
result from clarifying investment options and streamlining procedural
requirements.
II. Objectives
The overarching goal of OTS's reinvention initiative is to reduce
regulatory burden on savings associations to the greatest extent
possible consistent with statutory requirements and safety and
soundness. In the context of the subsidiary and equity investment
regulations, we believe that maximum burden reduction can be achieved
by pursuing the following six specific objectives:
[[Page 29977]]
A. Create More User-Friendly Subsidiary and Equity Investment
Regulations
Our first objective is to make it easier for savings associations
to find and understand the regulations governing subsidiaries and
equity investments. Industry representatives and other reviewers
expressed concern that the current subsidiary and equity investment
regulations are scattered throughout the regulations and are worded in
a confusing manner. Accordingly, this proposal:
Reorganizes the regulations for easier reference. New part
559 consolidates all of the regulations that apply directly to
subsidiaries. It features a chart to allow ready comparisons of the
requirements applicable to operating subsidiaries and service
corporations. This should make it easier for savings associations to
determine which structure will best meet their needs. The lending and
investment chart and regulations in proposed part 560 are also being
expanded to include permissible equity investments.
Employs plain language drafting. Proposed part 559
utilizes plain language drafting techniques that have been pioneered by
the Department of the Interior and promoted by the Vice President's
Regulatory Reinvention Initiative. If thrifts find this approach
helpful, OTS will expand the use of plain language drafting to
encompass other regulatory projects. The goal of plain language
drafting is to decrease industry frustration, inadvertent errors, the
need to seek clarification in correspondence and phone calls, and the
amount of staff time institutions must devote to understanding the
regulations. Plain language drafting emphasizes the use of informative
headings, lists and charts where appropriate, short sentences, sections
and paragraphs, non-technical language (including the use of ``you''),
and sentences in the active voice.
B. Codify Pass-Through Investment Authority
Institutions and examiners have also expressed concern that OTS's
subsidiary and equity investment regulations do not reflect all
significant investment options. As a result, some institutions may not
be aware of options that have been recognized in various OTS opinions
and policy statements.
The most significant gap in the current regulations concerns pass-
through investment authority. As is explained more fully below, federal
savings associations have long been permitted to exercise pass-through
investment authority, that is, to invest in companies that engage
exclusively in activities that federal savings associations may conduct
directly. These companies generally are organized as mutual funds or
limited partnerships. Indirect investments of this type often offer
important benefits--such as risk spreading, enhanced liquidity, and
greater investment security (due to any overcollateralization or
recourse commitment offered by the organizer of the pass-through
entity).
Because pass-through investment authority has been discussed in OTS
opinions and policy statements (rather than the regulations), some
institutions may be unaware of this investment option and applicable
restrictions. Even institutions that are aware of the option frequently
feel the need to write to OTS seeking confirmation or clarification of
the circumstances under which they may exercise this authority. To
resolve this uncertainty, OTS proposes to codify pass-through
investment authority in proposed part 560.
C. Update the List of Preapproved Activities for Service Corporations
OTS's service corporation regulation contains a list of preapproved
activities that service corporations of most federal savings
associations may conduct after notifying OTS. Service corporations
wanting to engage in activities not on the preapproved list must submit
a formal application to OTS demonstrating, among other things, that the
proposed activity is reasonably related to the business of a federal
thrift.
The list of pre-approved service corporation activities has not
been updated for many years. As a result, institutions are often
required to file applications for activities that are clearly
reasonably related, but have not yet been added to the preapproved
list.
The proposal updates the preapproved list in several respects.
First, the list is being amended to confirm that all activities that
federal savings associations may conduct directly are preapproved. This
general authorization is substituted for the current detailed (but
incomplete) listing of specific activities that thrifts may conduct
directly. Second, the proposal broadens the universe of customers for
whom certain services that are already preapproved may be provided.
Third, the proposal adds activities that OTS has routinely approved on
a case-by-case basis and other specific finance-related activities that
have been authorized for bank service corporations and bank operating
subsidiaries. Each of these changes is described in more detail below.
The proposal also reemphasizes OTS's longstanding position that
federal thrifts may, on a case-by-case basis, apply for approval for
their service corporations to engage in any activity not on the
preapproved list that is reasonably related to the operation of a
thrift. The preapproved list reflects the most common service
corporation activities and is not intended to be a comprehensive
statement of every conceivable reasonably related activity.
D. Streamline Subsidiary Notice and Application Procedures
The industry focus group made the agency aware of confusion over
subsidiary notice and application requirements, including what
procedures apply when converting a subsidiary from a service
corporation to an operating subsidiary or the reverse. Regulations
governing service corporations were first promulgated in 1965, finance
subsidiaries in 1984, and operating subsidiaries in 1992. The
procedures for establishing and operating each type of entity have
never been thoroughly harmonized.
Thus, OTS has reviewed these procedural requirements with a view
toward enhancing consistency and clarity and substituting notices for
more burdensome applications (or recordkeeping for notices) wherever
feasible. As a result, the proposal:
Allows all savings associations to establish or acquire
operating subsidiaries upon 30 days notice to OTS. Under current
regulations, all but the strongest institutions must submit an
application for prior OTS approval to establish an operating
subsidiary. As part of this application, institutions must
affirmatively demonstrate that the proposed operating subsidiary will
improve the institution's financial and managerial condition. By
contrast, the strongest institutions (i.e., those eligible for
expedited treatment under 12 CFR 516.3(a)) need only notify OTS 30 days
before establishing an operating subsidiary and, unless OTS objects,
can establish their subsidiaries at the end of that period. Based on
the agency's experience with operating subsidiaries, we have concluded
that the 30-day notice procedure provides adequate information and
opportunity to object whenever an operating subsidiary is proposed by
any federal thrift--especially since operating subsidiaries can only
engage in activities that federal thrifts may conduct directly.
Accordingly, OTS is proposing to apply the notice procedure to all
federal thrifts who wish to form operating subsidiaries.
[[Page 29978]]
Clarifies the procedures for redesignating a subsidiary as
an operating subsidiary or a service corporation. The current
regulations are unclear about how and when a service corporation may be
converted into an operating subsidiary, or an operating subsidiary into
a service corporation, and whether a notice or application must be
filed with OTS. Both operating subsidiaries and service corporations
are incorporated under state law. The distinctions based on ownership,
control, and activities that separate an operating subsidiary from a
service corporation for OTS regulatory purposes do not affect this
underlying corporate form. OTS, therefore, has taken the position that
merely redesignating a service corporation as an operating subsidiary
or vice versa, without adding new activities, does not constitute an
event requiring notice or application to OTS. The proposal makes this
position clear by establishing explicit, streamlined recordkeeping
provisions to document all such redesignations.
Streamlines salvage power procedures affecting service
corporations. Under the current regulations, a savings association must
file an application and obtain formal OTS approval before using its
salvage powers to make an additional investment to protect its interest
in a troubled service corporation. The proposal allows a savings
association to file a notice in lieu of a formal application. Under the
proposal, institutions will be permitted to proceed with salvage
investments in service corporations within 30 days of filing notice,
unless the OTS raises objection.
E. Clarify and Simplify Computation of the Service Corporation
Investment Limit
Section 5(c)(4)(B) of the Home Owners' Loan Act (HOLA) limits a
federal savings association's aggregate investment in service
corporations to 3% of total assets. The implementing regulations have
long provided that all loans to service corporations count toward this
investment limit, except for ``conforming loans.'' The amount of
conforming loans that qualify for exclusion from the 3% limit varies on
the basis of whether the lending institution owns more than 10% of the
stock of the borrowing service corporation.
Institutions have expressed frustration at the complexity and
ambiguity of these service corporation investment rules. Accordingly,
today's proposal clarifies which loans to service corporations may be
considered separately from the general statutory service corporation
investment limit of 3% of assets (see the discussion of proposed
Sec. 559.4 below for details). The proposal also removes the confusing
distinctions tied to a thrift's percentage ownership of the service
corporation. A single rule regarding the amount of qualifying loans to
service corporations that will be exempt from the 3% investment cap
will be applied to all federal thrifts regardless of percentage of
ownership of the service corporation.
F. Clarify What Constitutes a ``Subsidiary'' Under Various Regulatory
Provisions and, in so Doing, Simplify Calculations of Capital
Another concern expressed by the industry focus group was the
complexity of determining the appropriate amount of capital to be held
against service corporation investments, especially when the service
corporation itself has investments in lower-tier entities. A further
complication is that the HOLA ties OTS regulations in the areas of
transactions with affiliates, lending limits, and capital to a variety
of banking statutes and regulations that in turn define ``subsidiary''
differently and not entirely consistently.
Defines ``subsidiary'' in a manner that is more consistent
with the other banking agencies. The proposal adopts the same
definition of ``subsidiary'' used by the other banking agencies for
purposes of transactions with affiliates, lending limits, and notices
regarding subsidiaries. The proposal also modifies the capital
definition of ``subsidiary'' to follow Generally Accepted Accounting
Principles (GAAP) and to be more consistent with the other federal
banking agencies. Currently, the OTS employs a definition of
``subsidiary'' for capital purposes that is far more encompassing than
the definitions used by the other banking agencies and GAAP. This
sometimes results in higher capital requirements for thrifts.
Defines ``includable subsidiary'' in a manner that
eliminates overstatement of the risk presented by lower-tier
nonincludable subsidiaries. Under the current capital regulations (as
interpreted by instructions in the Thrift Financial Report), a savings
association's investment in a first-tier subsidiary engaged exclusively
in activities permissible for national banks must be completely
deducted from capital if a lower-tier subsidiary engages in any
activity impermissible for a national bank. Deduction is required even
when the first-tier subsidiary's investment in the lower-tier
subsidiary constitutes a tiny portion of its total assets. Under the
proposal, savings associations will only be required to deduct the
actual amount of their indirect investment in the lower-tier
nonincludable subsidiary.
The OTS is hopeful that the foregoing reforms, taken as a whole,
will result in a significant decrease in the regulatory burden
associated with establishing and operating thrift subsidiaries and
making pass-through equity investments. The remainder of this preamble
provides a historical overview of the regulation of thrift subsidiaries
and a detailed section-by-section description of the proposed
amendments.
III. Historical Overview
Regulations affecting the ability of savings associations to invest
in service corporations and other subsidiaries and to make limited
equity investments have evolved over the past 30 years in response to
changes in statutes, competition, and the financial markets. The result
has been increased flexibility in service corporation activities and in
the permissible form of corporate structures (e.g., finance
subsidiaries and operating subsidiaries). With this increased
flexibility, however, has come added complexity and elements of
inconsistency.
In order to provide a context for OTS's current proposal, a brief
history of key developments in the subsidiary and equity investment
authority of federal thrifts is provided.
A. Service Corporations
In 1964, Congress authorized federal savings associations to invest
up to one percent of their assets in service corporations.2 The
statute did not limit the types of activities in which such service
corporations could engage. The accompanying legislative history noted,
however, that such investments were expected to be reasonably related
in purpose to the savings and loan business.3 This standard was
incorporated into the implementing regulations of the Federal Home Loan
Bank Board (FHLBB), the predecessor regulatory agency to the OTS. The
FHLBB regulations expressly indicated that certain service corporation
activities met the reasonably related standard and established an
application process for considering other proposed activities. This
allowed federal savings associations and the agency to gain experience
in identifying appropriate service corporation activities.
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\2\ Pub. L. 88-560, section 905, amending 12 U.S.C. 1464.
\3\ H. Rep. 1703, 1964 U.S. Code Congressional and
Administrative News 3444.
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The HOLA was amended in 1980 to expand the authority of federal
savings
[[Page 29979]]
associations ``to act as one-stop family financial centers'' 4 and
to increase the amount a federal savings association could invest in
its service corporations from one percent to a maximum of three percent
of its assets.5
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\4\ S. Rep. 96-368 at 13, 1980 U.S. Code Congressional and
Administrative News 248. See also 45 FR 85049 (Dec. 24, 1980).
\5\ Depository Institutions Deregulation and Monetary Control
Act of 1980, Pub. L. 96-221, 94 Stat. 132, section 401, amending 12
U.S.C. 1464(c)(4)(B).
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In December 1980, the FHLBB proposed to update the list of
preapproved activities for service corporations.6 In determining
which activities were appropriate for preapproval, the FHLBB ``examined
activities that have been approved consistently for service
corporations upon application to the Board, newly authorized activities
for Federal associations, and the present needs of the residential
mortgage market.'' 7 This list of preapproved activities remains
in effect today,8 with only a few additions and modifications,
such as securities brokerage services (added in 1989).9
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\6\ 45 FR 85048 (Dec. 24, 1980) (proposed rule); 46 FR 24526
(May 1, 1981) (final rule).
\7\ 45 FR at 85049.
\8\ In 1982, the FHLBB proposed a much broader list of potential
preapproved activities, 47 FR 9855 (March 8, 1982), but did not
adopt the proposal in the wake of the Garn-St Germain Depository
Institutions Act of 1982 (DIA), which significantly expanded federal
savings association activities. The FHLBB did add personal property
leasing and commercial lending (activities that the DIA had
authorized for federal savings associations) and rearranged the list
for ease of reference, 48 FR 23032 (May 23, 1983).
\9\ 54 FR 32954 (Aug. 11, 1989).
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In 1989, the Financial Institutions Reform, Recovery, and
Enforcement Act (FIRREA) mandated that OTS adopt capital regulations
requiring substantial amounts of additional capital to be held against
thrifts' investments in subsidiaries, such as service corporations,
that engaged as principal in activities not permissible for national
banks. The OTS adopted these regulations in November, 1989.
No new activities have been added to the preapproved list since
1989, although the OTS has continued to receive, review, and process
applications to engage in new activities on a case-by-case basis.
Thus, the same basic regulatory structure for service corporations
first established in 1964--a list of preapproved activities, coupled
with authorization to apply to engage in any other reasonably related
activities--has continued until the present. Nothing in today's
proposal would alter this basic structure. Instead, OTS is proposing to
update the preapproved list, clarify how to compute the service
corporation investment limit, and simplify the capital treatment of
investments in subsidiaries.
B. Finance Subsidiaries
In 1984, the FHLBB recognized a federal savings association's
incidental authority to establish finance subsidiaries.10 These
entities are dedicated financing vehicles created to issue securities
that the parent association is authorized to issue and to remit the
proceeds to the parent. The securities issued via finance subsidiaries
have typically been collateralized mortgage obligations, mortgage-
backed bonds or Eurobonds backed by mortgages or mortgage-related
securities. The finance subsidiary regulation has fallen into disuse
since OTS promulgated the operating subsidiary regulation. Operating
subsidiaries can do all that finance subsidiaries can do and more.
Thus, we are proposing to repeal the finance subsidiary rule.
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\10\ 49 FR 29357 (July 20, 1984).
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C. Operating Subsidiaries
In October, 1992, the OTS authorized federal savings associations
to establish operating subsidiaries.11 Thrift operating
subsidiaries were modeled on national bank operating subsidiaries.
Under the OTS operating subsidiary regulation, a federal thrift may
make unlimited investments in an operating subsidiary, provided the
thrift is the majority owner and has effective operating control and
the subsidiary engages only in activities that the thrift could conduct
directly. Unlike service corporations, operating subsidiaries can issue
minority ownership interests to investors that are not savings
associations. Thus, operating subsidiaries offer federal thrifts
greater structural flexibility. Unlike service corporations, however,
operating subsidiaries can only do what a federal thrift could do
directly.
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\11\ 57 FR 48942 (Oct. 29, 1992).
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D. Pass-Through Investments
Finance subsidiaries and operating subsidiaries are examples of
pass-through investments. In both instances, a savings association
acquires an interest in a company that in turn engages exclusively in
activities that the savings association can perform directly. However,
pass-through investment options have not been restricted to operating
subsidiaries and finance subsidiaries.
In 1982, the FHLBB issued a legal opinion, which was followed by a
policy statement in 1986, recognizing that federal thrifts have
incidental authority to invest indirectly in permissible
investments.12 In other words, federal thrifts can purchase shares
of a mutual fund, a partnership interest in a limited partnership, or
interests in a similar investment vehicle, provided the pass-through
entity's activities are limited to those a federal thrift could conduct
directly. At about the same time, the OCC, through legal opinions and
guidance, authorized similar investments for national banks.
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\12\ Memorandum T-79a, issued on June 10, 1986, memorialized
this authority. T-memoranda issued by the FHLBB were the
counterparts of OTS Thrift Bulletins. Memorandum T-79a has not been
superseded by a later Thrift Bulletin.
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These types of pass-through investments do not count against
service corporation limits, nor are they deemed to be operating
subsidiaries. The pass-through entity must comply with the same
restrictions that would apply if the thrift engaged in the activity or
held the asset directly. Additional restrictions have been imposed on a
case-by-case basis. These include limiting the amount of investment
that a thrift can make in any one pass-through entity to the amount
that would be permitted under the loans to one borrower (LTOB) rule.
(Pass-through investment authority has recently proven to be an
important vehicle for authorizing several community development
investments, such as purchasing limited partnership interests in Low
Income Housing Tax Credit partnerships.)
Several other legal opinions have authorized federal savings
associations (like national banks) to invest, with certain
restrictions, in certain ``special purpose corporations'' that engage
exclusively in activities federal savings associations may conduct
directly. To date, such corporations have been used to enable thrifts
to pool resources with others to obtain basic support services (such as
data processing and ATM operations) free from the operating subsidiary
control requirement and the service corporation investment limits.
One of the key objectives of today's proposal is to rationalize and
harmonize these various pass-through investment options. Codification
of these options will ensure industry awareness, reduce confusion, and
facilitate consistent application of relevant safety and soundness
standards.
IV. Section-by-Section Analysis
A. New Part 559--Subsidiaries
OTS proposes to adopt a new part 559, Subsidiaries, that will
include all of the agency's regulations affecting
[[Page 29980]]
federal thrift subsidiaries, that is, operating subsidiaries and
service corporations. The agency believes this action will make it much
easier for savings associations to find and use these regulations. This
new part will utilize techniques of ``plain language'' drafting,
employing simple expression and short sentences to the full extent
possible.
Section 559.1 What Does This Part Cover? (Proposed)
This proposed section explains the scope of new part 559 and sets
forth OTS's basic statutory authority over operating subsidiaries and
service corporations. The section first explains which regulations in
part 559 apply only to federal savings associations and which apply to
all savings associations. It then incorporates into one place language
from current Secs. 545.74(b)(5) and 545.81(h) regarding limits that OTS
may impose on subsidiary activities for supervisory, safety or
soundness, or legal reasons.
Proposed Sec. 559.1 also incorporates language from current
Sec. 545.81(i). That paragraph provides that the OTS may impose
conditions in writing when authorizing a federal thrift to acquire or
establish an operating subsidiary or to engage in new activities in an
existing operating subsidiary and that such conditions are enforceable.
This statement is true for conditions OTS imposes in all of its
approvals and authorizations, not just those involving operating
subsidiaries. The regulation merely makes explicit what is already
implicit in OTS's safety and soundness jurisdiction.
Subpart A--Regulations Applicable to Federal Savings Associations
(Proposed)
This subpart will contain regulations directly applicable only to
operating subsidiaries and service corporations of federal savings
associations. The subpart may indirectly apply to operating
subsidiaries and service corporations of state-chartered savings
associations by virtue of various statutory and regulatory provisions
that tie state savings associations to certain requirements applicable
to federal thrifts.13
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\13\ See 12 U.S.C. 1828(m) and 1831e, and 12 CFR 303.13.
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Section 559.2 What Are the Characteristics of, and What Requirements
Apply to, Operating Subsidiaries and Service Corporations of Federal
Savings Associations? (Proposed)
Proposed Sec. 559.2 authorizes federal savings associations to
establish or acquire operating subsidiaries and service corporations.
The introductory text explains that OTS may limit this authority for
supervisory, legal, or safety and soundness reasons.
The majority of proposed Sec. 559.2 takes the form of a chart that
lists, in a side-by-side format, the different characteristics of, and
requirements that apply to, operating subsidiaries and service
corporations. These include ownership, activities, investment limits,
the applicability of other federal statutes and regulations, and
notices. The chart reiterates that in addition to preapproved service
corporation activities, a federal thrift may continue to apply to the
OTS for case-by-case approval to engage in any activity that is
reasonably related to the operation of a thrift.The regulation also
confirms that state law is preempted for operating subsidiaries to the
same extent as it is for the parent federal savings association, as has
been the case since operating subsidiaries were first authorized.
However, state law is not preempted for service corporations.
Where appropriate, and for ease of reference, the subsidiaries
chart cross-references other applicable OTS regulations that have been
the subject of frequent questions to the agency. The chart is derived
in large part from the current regulations at 12 CFR 545.74 and 12 CFR
545.81. OTS expects that this format will make it easier for a federal
savings association to compare these two structures and determine which
best fits the association's needs.
Section 559.3 What Activities Are Permissible for Service
Corporations? (Proposed)
This section replaces the list of preapproved activities found in
current Sec. 545.74(c). OTS proposes to revise the list of preapproved
activities to:
Specifically affirm that any activity a federal thrift may
conduct directly, except deposit-taking, is preapproved for a service
corporation, when conducted in the same manner as allowed at the
federal savings association level. This includes all activities listed
in the HOLA and proposed part 560, as well as other incidental powers
addressed in OTS legal opinions and guidance. As a result, OTS proposes
to delete various activities from the preapproved list that federal
thrifts are obviously permitted to conduct (e.g., lending) and to
reiterate only those activities the service corporation may conduct
without being subject to the same limitations that would apply to the
federal savings association (e.g., data processing services and
leasing). As set forth in the subsidiaries chart at Sec. 559.2(i),
investments made by service corporations are not aggregated with the
parent thrift for purposes of determining the parent thrift's
compliance with any investment limits, such as those that appear in
section 5(c) of the HOLA. For example, the educational loans made by a
service corporation do not count against the parent thrift's
educational lending cap (5% of assets).
Include certain activities that the OTS already routinely
approves on a case-by-case basis (i.e., foreign currency exchange,
operating a collection agency, and distributing welfare benefits).
Specifically include community development and charitable
activities, including investing in community development financial
institutions.
Allow business and professional activities that involve
financial documents, financial clients, or are generally finance-
related to be performed for any person. These activities--clerical,
accounting, and internal auditing services, advertising, liquidity
management and credit analysis, developing personnel benefit plans,
establishing and maintaining remote service units, and purchasing
office supplies and equipment--currently have been preapproved only
when performed for other financial institutions.
Expand the list to include a limited number of services
that have not been previously authorized, but are reasonably related to
the operation of a federal savings association and have been permitted
for bank operating subsidiaries and bank service corporations. These
include financial courier services and check and credit card guaranty
and verification services.
OTS seeks comment on whether certain other activities that have
been permitted only upon application, such as acting as an insurance
agent for private mortgage insurance, or underwriting insurance or
reinsurance, should be preapproved activities for service corporations.
Section 559.4 How Much May a Savings Association Invest in Service
Corporations? (Proposed)
This proposed section replaces current Sec. 545.74(d). It
reiterates that a savings association may invest in the
[[Page 29981]]
aggregate 3% of its assets in one or more service corporations as long
as the excess investment over 2% serves primarily community, inner
city, or community development purposes. In addition, the proposal
revises and significantly simplifies the rules governing when a federal
savings association may make loans to service corporations separate
from the 3% of assets limit. Such loans are only permitted when:
(1) The federal savings association has the authority elsewhere
under the HOLA to make the loan;
(2) The thrift has adequate capacity under any applicable
percentage of assets limit to make the loan (e.g., 10% of assets for
commercial loans); and
(3) The loan complies with the loans-to-one borrower
regulation.14
---------------------------------------------------------------------------
\14\ The LTOB regulation is also being amended to clarify that
it does apply to service corporations. It will remain inapplicable
to a savings association's loans to its operating subsidiaries.
---------------------------------------------------------------------------
This proposed treatment is more consistent with the OCC's treatment
of loans to bank service corporations. It would remove the current
aggregate regulatory limit of 50% of capital on loans to multiple
service corporations, but subjects loans to any one service corporation
to the LTOB requirements. A thrift (like a bank) would be able to
exceed this limit only when making loans to a service corporation that
are secured with exceptionally high quality collateral.
Subpart B--Regulations Applicable to All Savings Associations
(Proposed)
Section 559.10 What Must a Savings Association and Its Subsidiary Do
To Maintain Separate Corporate Identities?
This section describes what a savings association and its
subsidiaries must do to establish that they have separate identities.
The purpose for these requirements is to reduce the potential for
customer confusion or for a court to hold the parent liable for the
subsidiary's conduct or obligations. The requirements are derived from
current Secs. 545.81(f), 563.37, and 571.21.
Section 559.11 What Notices Are Required To Establish or Acquire a New
Subsidiary or Engage in New Activities Through an Existing Subsidiary?
This section combines and streamlines the overlapping notice
requirements currently contained in Secs. 545.74(b)(2), 545.81(c), and
563.37(c).
Section 559.12 How May a Subsidiary of a Savings Association Issue
Securities?
This section replaces current Sec. 563.132 and reiterates its basic
requirement: a savings association must notify OTS before a subsidiary
issues securities. The section also incorporates requirements from
existing Sec. 545.82, requiring that securities issued by all
subsidiaries indicate that they are not covered by federal deposit
insurance and may not be called or accelerated in the event of the
savings association's insolvency.
Section 559.13 How May a Savings Association Exercise Its Salvage
Power in Connection With Its Service Corporation?
This section replaces the application procedure of current
Sec. 563.38 with a 30-day notice requirement. In its notice, an
institution must fully document its additional investment in a manner
that demonstrates how its action is consistent with safety and
soundness and document other salvage alternatives considered. The
agency may take objection to, or grant conditional approval of, a
notice to exercise salvage power to assist a troubled service
corporation.
B. Amendments to Proposed New Part 560--Lending and Investment
OTS is also proposing to add provisions dealing with subsidiary and
equity-related investments to proposed new part 560--Lending and
Investments.
Section 560.30 General Lending and Investment Powers for Federal
Savings Associations
In the interest of completeness, OTS proposes to add several
equity- and subsidiary-related investments to the lending and
investment powers chart contained in this regulation. The chart will
now include investments in small business investment corporations
chartered pursuant to section 301(d) of the Small Business Act, open-
end management investment companies, and service corporations.
Section 560.32 Pass-Through Investments
This new section will codify federal savings associations'
authority to invest in entities, such as limited partnerships and
mutual funds, that hold only assets, and engage only in activities,
permissible for federal savings associations. Unlike an operating
subsidiary, a thrift does not have effective operating control over
such investments. To allow thrifts flexibility while maintaining
effective OTS supervision of such investments, OTS proposes to
establish a safe harbor. Investments made in accordance with the safe
harbor standards will not require advance notice to OTS. Under the safe
harbor, a federal savings association may invest up to 15% of its
capital without prior OTS approval in:
(1) A limited partnership;
(2) An open-end management investment company (mutual fund);
(3) A closed-end investment trust; or
(4) An entity in which the federal savings association invests
primarily to use the services provided (e.g., data processing);
so long as the entity in which the investment is made:
(1) Is engaged solely in activities in which the federal savings
association itself may engage directly; and
(2) Would not be controlled by the savings association;
and the thrift:
(1) Has liability limited to the amount of its investment;
(2) Has adequate capacity within the relevant HOLA investment
category (e.g., 10% of assets for commercial loans);
(3) Is able to monitor internal managerial controls to ensure they
are equivalent to those the thrift would be required to have in place
if engaging in the activity directly; and
(4) Does not, after making the investment, have more than 50% of
its capital invested in pass-through investments.
A savings association must provide written notice to OTS before
making any pass-through investment that does not meet the foregoing
standards. OTS will review these notices and may object or impose
conditions for supervisory, legal, or safety and soundness reasons.
This structure will clarify the rules applicable to pass-through
investments, thereby enhancing savings association access to this
investment option and establishing uniform safety and soundness
constraints. This structure will ensure that the OTS is aware of, and
has opportunity to object, to any move by a thrift to place significant
amounts of its assets under the operating control of third parties.
OTS solicits comments on whether other structures, such as limited
liability companies, should be preapproved.
Section 560.33 De Minimis Investments
OTS and its predecessor have long recognized that a federal savings
association's incidental powers include the ability to make charitable
contributions that assist its community. In the past, thrifts have
sometimes requested permission to make (and book) de minimis equity
investments in community organizations in an amount
[[Page 29982]]
equal to what they could otherwise directly contribute. To further
thrifts' community development activities, OTS proposes to add a
section specifically confirming that a federal savings association may
make these types of de minimis investments. The proposed regulation
provides that the investments must be of a type that would be
permissible for a national bank under 12 CFR Part 24 and in the
aggregate may not exceed the greater of $100,000 or one-fourth of 1% of
a thrift's total capital.
C. Disposition of Existing Regulations
Part 545 Operations (Federal Savings Associations)
Section 545.74 Service Corporations
Paragraph (a) of Sec. 545.74 defines terms specific to the service
corporation section. The OTS is proposing to remove this paragraph. The
operative provisions of new part 559 will cover the matters now
addressed by the definitions.
Paragraph (b) begins by restating the broad statutory authority of
federal savings associations under section 5(c)(4)(B) of the HOLA to
invest in service corporations that are organized under the laws of the
state in which the association's home office is located. This authority
will be incorporated into the proposed lending/investment chart in part
560, with a cross-reference to the more extensive provisions contained
in proposed part 559.
Paragraphs (b)(1)-(5) set forth general notice, application,
examination, and activities provisos. The proposed subsidiaries chart
at Sec. 559.2(e)(2) incorporates the requirement in paragraph (b)(1)
that a service corporation's activities be either pre-approved by
regulation or specifically approved by application. The OTS proposes to
move the notice requirements contained in paragraph (b)(2) into new
Sec. 559.11. Paragraph (b)(3) requires weaker savings associations to
apply to OTS for permission to engage in any activities beyond what a
federal savings association may conduct directly. This requirement has
been incorporated into proposed Sec. 559.2(e)(2)(ii). The examination
requirement currently found in paragraph (b)(4) will be included in the
subsidiaries chart at Sec. 559.2(o)(2). The restriction on activities
where OTS has supervisory objections contained in paragraph (b)(5) has
been incorporated into the introductory text of Sec. 559.1.
Paragraph (c) of Sec. 545.74 first sets forth the OTS's general
rule that federal savings associations may invest in service
corporations that can engage in such activities reasonably related to
the activities of federal associations as the OTS may approve. The OTS
proposes to retain this general rule and move it to the new
subsidiaries chart at Sec. 559.2(e)(2). Paragraph (c) next explains how
to apply for approval to engage in such activities. OTS proposes to
incorporate this requirement into the chart at Sec. 559.2(e)(2)(iii).
The next sentence in paragraph (c) authorizes service corporations
of most savings associations to engage in the listed preapproved
activities upon satisfying a notice requirement. This requirement has
been moved to Sec. 559.2(e)(2)(i).
Finally, paragraph (c) lists the preapproved activities. The
proposal would replace this list with a revised, updated compilation of
new preapproved activities. For example, currently, a variety of
activities that a federal savings association itself may conduct are
scattered throughout the list as preapproved for service corporations.
Instead of individually listing these activities, the proposal simply
preapproves for service corporations all activities that a thrift may
conduct directly, other than taking deposits. The list would be
reorganized by grouping related activities and moving the list to
proposed Sec. 559.3, as discussed more fully in section IV.A. of this
preamble.
Paragraph (c)(4) contains safeguards that apply to securities
brokerage activities of service corporations. These safeguards will
remain in that paragraph, with one exception, while OTS considers
whether to incorporate them into new part 559, or modify the safeguards
and apply them to all securities sales programs taking place on thrift
premises by subsidiaries, affiliates, and broker dealers. OTS is
proposing to remove paragraph (c)(4)(ii)(F), which has barred savings
associations (not their service corporations) from contracting with
third parties for securities brokerage activities. This restriction
predates the 1994 Interagency Guidelines on Retail Sales of Nondeposit
Investment Products. The Guidelines now contain safeguards to ensure
that any contractual relationship with a third-party broker-dealer will
be conducted in a proper manner. Thus, paragraph (c)(4)(ii)(F) has
become unnecessary. Removing this restriction will provide thrifts with
greater flexibility in structuring operations involving the sale of
nondeposit investment products.
Paragraph (d) addresses the permissible aggregate amount of
investments in, or loans to, service corporations by a federal thrift.
The HOLA specifically authorizes thrifts to invest up to 3% of their
assets in the stock and obligations of service corporations (generally,
2% undesignated authority plus an additional 1% for community-
development). Since 1970, the regulations have allowed a federal thrift
to make additional loans to its service corporations if the thrift has
the authority under the HOLA to make the same loan to a third party.
This lending authority has been subject to limitations that changed
over time, but has always been separate and apart from the 3% of assets
limitation.
For example, the current regulatory provisions allow a federal
thrift to make ``conforming loans'' of up to 100% of its capital to any
service corporation in which the thrift has an ownership interest of
less than 10%, with no aggregate limit. A separate aggregate limit of
50% of capital applies to loans made to all other service corporations.
``Conforming loans'' is broadly defined at Sec. 545.74(a)(2) as any
type of loan a federal savings association may make except for
nonconforming real estate loans and unsecured construction loans. Thus,
if a thrift currently has only one wholly-owned service corporation, it
may, to the extent it has commercial loan authority available under the
statutory 10% of assets limit, make commercial loans to its service
corporation of up to 50% of its capital.
When these provisions were last substantively amended in 1985, the
100% of capital limit paralleled the then-existing LTOB limit. The
percentage limits in the regulation do not reflect the new lower LTOB
limit of 12 CFR 563.93, although paragraph (d) does state that these
loans are subject to any applicable LTOB requirements. The LTOB
regulation itself, however, states that it does not apply to loans made
to subsidiaries.
As the foregoing overview indicates, the rules governing service
corporation investment limits and conforming loans are needlessly
complex and confusing, and in some respects inconsistent. The OTS
proposes to substantially revise and simplify these rules and
incorporate them into new Sec. 559.4, as discussed more fully in
Section IV.A. of this preamble.
Paragraph (e) describes the circumstances under which a federal
savings association must dispose of its investment in a service
corporation. The OTS proposes to retain this paragraph in the new
subsidiaries chart as Sec. 559.2(q)(2).
[[Page 29983]]
Section 545.76 Investment in Open-End Management Investment Companies
Paragraph (a) reiterates the HOLA's statutory grant of authority to
federal savings associations to buy, sell or otherwise deal in
registered securities of any open-end management investment company
that restricts its portfolio to investments that federal savings
associations may buy, sell or otherwise deal in without limitation as
to percentage of assets.15 The OTS proposes to incorporate this
provision into the lending and investment chart in proposed
Sec. 560.30. An endnote to that chart will indicate that federal
thrifts may be able to invest limited amounts in a broader range of
pass-through investments under proposed new Sec. 560.32.
---------------------------------------------------------------------------
\15\ 12 U.S.C. 1464(c)(1)(Q).
---------------------------------------------------------------------------
Paragraph (b) provides that the maximum investment a federal thrift
may make in any one open-end management investment company is limited
to 5% of total assets. Paragraph (b) also applies the regulatory
limitations imposed on a federal thrift's investments in commercial
paper and corporate debt securities to the commercial paper and
corporate debt securities investments of open-end management investment
companies in which thrifts invest. The OTS proposes to remove paragraph
(b) because its subject matter will be covered by the pass-through
investment provisions of proposed new Sec. 560.32.
Section 545.80 Small Business Investment Corporations
Section 545.80 reiterates section 5(c)(4)(D) of the HOLA's grant of
statutory authority for federal savings associations to invest in small
business investment corporations pursuant to section 301(d) of the
Small Business Investment Company Act of 1958. The proposal moves this
section into the proposed lending and investment powers chart in
Sec. 560.30.
Section 545.81 Operating Subsidiaries
Paragraph (a) sets forth federal savings associations' authority to
establish or acquire operating subsidiaries subject to certain
requirements. The OTS proposes to incorporate this paragraph into the
introductory text of Sec. 559.2.
Paragraph (b) defines the term ``operating subsidiary.'' The
substance of this definition would be covered in the proposed
subsidiaries chart as Sec. 559.2 (c)(1) and (e)(1).
Paragraph (c) spells out the notice and application requirements
that a federal savings association must meet to acquire or establish an
operating subsidiary. Paragraph (c)(1) contains requirements for
federal savings associations that are eligible for ``expedited
treatment'' in the processing of applications as defined in Sec. 516.3.
Paragraph (c)(2) covers requirements for all other federal savings
associations. In general, institutions that qualify for expedited
treatment need only give 30 days notice to OTS before establishing an
operating subsidiary, whereas other institutions must file an
application and obtain advance approval. OTS proposes to apply the
notice procedure to all institutions. Because operating subsidiaries
can only engage in activities that are permissible for federal thrifts
themselves, requiring a formal application and advance approval seems
unduly burdensome. OTS can always object during the 30-day notice
period in the unlikely event that an operating subsidiary proposal
raises concerns.
Paragraph (c)(3) addresses the additional notice requirements of
section 18(m) of the FDIA, the regulations associated with section
18(m) and all applicable clearances under those requirements. The
notice requirements will be consolidated with similar requirements for
all subsidiaries and moved into the new notice Sec. 559.11.
Paragraph (d) details the conditions under which a federal savings
association may convert its service corporation to an operating
subsidiary. The OTS proposes to substantially simplify this paragraph
and incorporate the conditions in new Sec. 559.2(p).
Paragraph (e) indicates that all federal laws, regulations and
policies of the OTS covering the operations of federal thrifts apply to
the operations of operating subsidiaries. The paragraph also requires
consolidation of the parent association and its operating subsidiary
for application of statutory and regulatory requirements and
limitations, unless otherwise provided by statute, regulation or OTS
policy. OTS proposes to incorporate the substance of this paragraph
into the subsidiaries chart at Sec. 559.2(h)(1).
Paragraph (f) subjects operating subsidiaries and their parent
federal savings associations to the same separate corporate existence
requirements as apply to service corporations of savings associations
under 12 CFR 571.21 and 563.37. As discussed below, OTS proposes to
consolidate these overlapping sections into a new Sec. 559.10.
Paragraph (g) subjects each operating subsidiary to the same
examination and supervision authority as its parent federal savings
association. This requirement will be included in the subsidiaries
chart at Sec. 559.2(o)(1).
Paragraph (h) provides that OTS may limit, at any time, the
activities of an operating subsidiary for supervisory or legal reasons.
OTS proposes to place this provision in Sec. 559.1(a).
Paragraph (i) sets forth OTS's authority to impose conditions on an
operating subsidiary for supervisory, legal or safety and soundness
reasons. This authority has also been inherent in the review of the
establishment of, or commencement of new activities by, service
corporations, but has not been specifically set forth in regulation.
The OTS proposes to move this paragraph to Sec. 559.1(b), where it will
explicitly apply to all conditions contained in all approvals affecting
subsidiaries.
Paragraph (j) authorizes parent savings associations to own a
deposit-taking operating subsidiary under certain conditions. This
authority would be retained and included in the proposed subsidiaries
chart at Sec. 559.2(e)(1)(ii).
Paragraph (k) addresses changing from an operating subsidiary to a
service corporation. The OTS proposes to incorporate this provision
into the subsidiaries chart at Sec. 559.2(p), where the rules governing
changes from a service corporation to an operating subsidiary will also
be stated.
Section 545.82 Finance Subsidiaries
Section 545.82 authorizes federal savings associations to establish
subsidiaries solely for the purpose of issuing securities that the
thrift may issue directly. Thrifts were authorized to establish finance
subsidiaries before being authorized to establish operating
subsidiaries. Because operating subsidiaries may perform the same
activities as finance subsidiaries without as many restrictions, the
OTS proposes to delete this section as redundant and obsolete, except
for paragraphs (d)(2) and (d)(3). Paragraph (d)(2) of current
Sec. 545.82 prohibits a finance subsidiary from issuing or dealing in
the deposits or savings accounts of its parent federal savings
association and from representing in any way that securities issued by
it are insured by the Federal Deposit Insurance Corporation. Paragraph
(d)(3) prohibits a finance subsidiary from issuing any security that
would permit accelerated payment, maturity or redemption upon the
condition that its parent federal savings association was insolvent or
had been placed in receivership. The agency believes both of these
restrictions should apply to the issuance of securities by any
subsidiary of a federal savings association.
[[Page 29984]]
Therefore, it proposes to incorporate them into proposed Sec. 559.12,
which will replace current Sec. 563.132 and cover those issuances, as
discussed below.
Because the requirements for finance subsidiaries go beyond those
applicable to operating subsidiaries, OTS proposes to deem all existing
finance subsidiaries to be operating subsidiaries for all purposes.
Part 563--Operations
Section 563.37 Operation of Service Corporation, Liability of Savings
Association for Debt of Service Corporation
Paragraphs (a) and (b) of section 563.37 require savings
associations and their service corporations to maintain a separate
corporate existence and insulate the thrift from liability for debt of
its service corporation. The OTS proposes to combine these requirements
with those of 12 CFR 571.21, the policy statement regarding separate
corporate existence of a service corporation, and move them into a new
Sec. 559.10.
Paragraph (c), which sets forth notice requirements for all savings
association service corporations (not just service corporations of
federal thrifts), would be incorporated in the new notice section,
Sec. 559.11, where the notice requirements applicable to federal thrift
service corporations will also appear.
Section 563.38 Salvage Power of Savings Association To Assist Service
Corporation
Section 563.38 addresses a savings association's use of its salvage
power to assist a troubled service corporation. The salvage power
doctrine permits a thrift to exceed applicable investment limitations
where an infusion of additional capital is necessary to preserve the
existing investment.
Paragraph (a) prohibits a savings association from exercising its
salvage power to assist a troubled service corporation without prior
OTS approval. Paragraph (b) conditions such approval on the OTS
receiving an application demonstrating that the proposed action ``is
for the protection of the savings association's investment and is
consistent with safe, sound, and economical home financing.'' The
application must also address alternative solutions, including those
not involving financial assistance, to the service corporation's
financial problem, and contain other information as the OTS deems
necessary.
While it is important for the OTS to have advance knowledge of
proposed salvage investments in service corporations, the OTS proposes
to reduce burden by substituting a notice for the current application.
While the notice would still contain much of the current information,
the change would allow the savings association to make the salvage
investment if OTS had not objected to the notice or imposed conditions
within 30 days. The notice requirement will appear as new Sec. 559.13.
Section 563.41 Loans and Other Transactions With Affiliates and
Subsidiaries.
OTS proposes to modify the definition of ``subsidiary'' in this
regulation to mirror the statutory definition of section 23A of the
Federal Reserve Act, 12 U.S.C. 371c, rather than the OTS capital
regulation. This will make it clear that the scope of the subsidiaries
covered by the regulation is the same for thrifts as for banks.
Section 563.93 Lending Limitations
Similarly, the OTS proposes to amend the scope of its loans-to-one-
borrower regulation to better conform with the scope of the OCC's
lending limits regulation. This section will not apply to loans to a
thrift's operating subsidiaries, but will apply to loans to its service
corporations.
Section 563.132 Securities Issued Through Subsidiaries
This section requires savings associations to notify OTS when
issuing securities through a subsidiary. OTS proposes to remove
outdated provisions from this section and transfer the remaining notice
requirements to new Sec. 559.12.
Paragraph (a), which defines terms for this section, is being
deleted as those terms are no longer necessary. Paragraph (b), which
excludes certain securities in addressing the amount of securities
issued by a subsidiary, is being removed as obsolete. The proposed
regulation does not limit the amount of securities a subsidiary may
issue.
Paragraph (c) sets forth the notice and application requirements
that a parent savings association must satisfy prior to establishing a
finance subsidiary, transferring additional assets to an existing
finance subsidiary, or issuing securities through a subsidiary defined
in paragraph (a)(1)(ii) of the section. The OTS proposes to modify the
notice requirements of paragraph (c) by removing the references and
requirements pertaining to finance subsidiaries and by reducing the
application requirements to uniform notice requirements.
Part 567--Capital
Section 567.1 Definitions
OTS proposes to amend two definitions in its capital regulation.
First, Sec. 567.1(dd), which defines subsidiary, is being amended to
mirror the OCC's definition of a subsidiary in its risk-based capital
regulation, 12 CFR Part 3, Appendix A. This definition is more
consistent with GAAP, defining a subsidiary as a company where the
institution owns a majority of the stock. Currently, OTS employs a much
broader definition of subsidiary, which can sometimes result in higher
capital requirements. Proposed Sec. 567.1(dd) includes language from
the footnote currently located in Sec. 567.1(dd), which provides that
OTS reserves the right to review investments on a case-by-case basis to
determine whether the investment is more appropriately treated as a
subsidiary or as an equity investment.
Second, Sec. 567.1(l), which defines ``includable subsidiary,''
currently encompasses subsidiaries that ``directly or indirectly''
engage in any activity not permissible for a national bank. The
regulatory reference to ``indirect'' activities, which does not appear
in the statutory provision upon which the regulation is based,16
has been interpreted (in the Thrift Financial Report) as requiring a
savings association's entire investment in a subsidiary engaged
exclusively in activities permissible for national banks to be deducted
from capital if a lower-tier subsidiary engages in any activity
impermissible for a national bank. Deduction is required even when the
first-tier subsidiary's investment in the lower-tier subsidiary
constitutes a minute portion of its total assets. Eliminating the
regulatory reference to ``indirect'' activities will enable OTS to
revise the instruction in the Thrift Financial Report. Thereafter,
savings associations will only be required to deduct the actual amount
of their indirect investment in the lower-tier nonincludable
subsidiary.
---------------------------------------------------------------------------
\16\ 12 U.S.C. 1464(t)(5)
---------------------------------------------------------------------------
Part 571--Statements of Policy
Section 571.21 Separate Corporate Existence of a Service Corporation
Paragraph (a) sets forth the attributes of corporate separateness
that should be maintained by a savings association and its service
corporation. Maintaining this separate corporate identity is important
to minimize the risks that a court, for equitable reasons, might pierce
the corporate veil of a service corporation and hold the parent savings
association
[[Page 29985]]
liable for the obligations or conduct of its service corporation.
Paragraph (b), in addressing operation of service corporations and
monitoring their compliance with paragraph (a), references
Sec. 563.37(a) and reiterates the potential for serious risk to the
savings association from failure to maintain corporate separateness.
The proposal would incorporate the substantive requirements of
Sec. 571.21 and Sec. 563.37 into new Sec. 559.10, which will apply to
all subsidiaries.
V.--Chart Showing the Proposed Disposition of Regulations
----------------------------------------------------------------------------------------------------------------
Original provision New provision Comment
----------------------------------------------------------------------------------------------------------------
545.74(a)........................ ...................................... Removed
545.74(b) introductory text...... 560.30................................ Incorporated into lending and
investment powers chart.
545.74(b)(1)..................... 559.2(e)(2) .....................................
545.74(b)(2)..................... 559.11 .....................................
545.74(b)(3)..................... 559.2(e)(2)(ii) .....................................
545.74(b)(4)..................... 559.2(o)(2) .....................................
545.74(b)(5)..................... 559.1(a) .....................................
545.74(c) introductory text...... 559.2(e)(2) .....................................
545.74(c)(1)-(7)................. 559.3 .....................................
545.74(d)........................ 559.4................................. Substantially revised.
545.74(e)........................ 559.2(q)(2) .....................................
545.76(a)........................ 560.30 .....................................
545.76(b)........................ ...................................... Removed.
545.80........................... 560.30 .....................................
545.81(a)........................ 559.2 .....................................
545.81(b)........................ 559.2(c)(1), (e)(1) .....................................
545.81(c)(1),(2)................. 559.2(a)(1) .....................................
545.81(c)(3)..................... 559.11 .....................................
545.81(d)........................ 559.2(p) .....................................
545.81(e)........................ 559.2(h)(1) .....................................
545.81(f)........................ 559.10 .....................................
545.81(g)........................ 559.2(o)(1) .....................................
545.81(h)........................ 559.1(a) .....................................
545.81(i)........................ 559.1(b).............................. Modified.
545.81(j)........................ 559.2(e)(1)(ii) .....................................
545.81(k)........................ 559.2(p) .....................................
545.82........................... ...................................... Removed.
563.37(a), (b)................... 559.10................................ Modified.
563.37(c)........................ 559.11 .....................................
563.38........................... 559.13................................ Modified.
563.41(b)(4)..................... ...................................... Modified.
563.93(a)........................ ...................................... Modified.
563.132(a),(b)................... ...................................... Removed.
563.132(c)....................... 559.12................................ Modified.
567.1(l)......................... ...................................... Modified.
567.1(dd)........................ ...................................... Modified.
571.21........................... 559.10................................ Modified.
----------------------------------------------------------------------------------------------------------------
VI. Request for Comment
The OTS requests comments on all aspects of this proposal.
VII. Paperwork Reduction Act
The reporting requirements contained in this proposed rule have
been submitted to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act of 1995. Comments on the
collection of information should be sent to the Office of Management
and Budget, Paperwork Reduction Project (1550), Washington, DC 20503,
with copies to the Office of Thrift Supervision, 1700 G Street, NW.,
Washington, DC 20552.
Comments are invited on (i) whether the collection of information
is necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility, (ii)
the accuracy of the estimate of the burden of the collection of
information, (iii) ways to enhance the quality of the information
collected, and (iv) ways to minimize the burden of the collection of
information on respondents, including the use of automated collection
techniques or other forms of information technology.
The reporting requirements in this proposed rule are currently
found in 12 CFR 545.74, 545.81, 563.38, and 563.132. These requirements
will be now be found in Secs. 559.2, 559.3, 559.11, 559.12, and 559.13.
These requirements are currently addressed in the following OMB
approved packages: Control Nos. 1550-0013; 1550-0077; and 1550-0065.
We are proposing to repeal Sec. 545.82 (finance subsidiaries) and
the related OMB package (Control No. 1550-0033).
The requirements in new Sec. 560.32 will be reflected in the OMB
approved package No. 1550-0078. The package has been amended to reflect
the following data for the requirements in new Sec. 560.32.
The information is needed by the OTS to assist in regulating
savings associations and their subsidiaries.
Estimated number of respondents: 1,460.
Estimated average burden per respondent: 8 hours.
Estimated annual frequency of responses: 1.
Estimated total annual reporting burden: 11,680.
[[Page 29986]]
Under the Paperwork Reduction Act of 1995, no persons are required
to respond to a collection of information unless it displays a valid
OMB control number. The valid OMB control number assigned to the
collection of information in these proposed regulations will be
displayed in the table at 12 CFR 506.1(b).
VIII. Executive Order 12866
The Director of the OTS has determined that this proposed rule does
not constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
IX. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
OTS certifies that this proposed rule will not have a significant
economic impact on a substantial number of small entities. The proposal
reorganizes the regulation to make it easier for small savings
associations to locate applicable rules. It streamlines requirements
for all savings associations. It simplifies the applicable requirements
when savings associations create, invest in, or conduct new activities
through subsidiaries and clarifies the statutorily required notices for
such actions.
X. Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
federal mandate that may result in expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, Section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
this proposed rule streamlines and reduces requirements on savings
associations. The OTS has therefore determined that the proposed rule
will not result in expenditures by state, local, or tribal governments
or by the private sector of $100 million or more. Accordingly, sections
202 and 205 do not require a budgetary impact statement or discussion
of regulatory alternatives to this proposal.
List of Subjects
12 CFR Part 545
Accounting, Consumer protection, Credit, Electronic funds
transfers, Investments, Manufactured homes, Mortgages, Reporting and
recordkeeping requirements, Savings associations.
12 CFR Part 559
Savings associations, Subsidiaries.
12 CFR Part 560
Consumer protection, Investments, Manufactured homes, Mortgages,
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 563
Accounting, Advertising, Crime, Currency, Flood insurance,
Investments, Morgages, Reporting and recordkeeping requirements,
Savings associations, Securities, Surety bonds.
12 CFR Part 567
Capital, Savings associations.
12 CFR Part 571
Accounting, Conflict of interests, Investments, Reporting and
recordkeeping requirements, Savings associations.
Accordingly, and for the reasons set forth in the preamble, the
Office of Thrift Supervision proposes to amend chapter V, title 12,
Code of Federal Regulations, as set forth below.
PART 545--OPERATIONS
1. The authority citation for part 545 continues to read as
follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.
Sec. 545.74 [Amended]
2. Section 545.74 is amended by removing and reserving paragraphs
(a), (b), (d) and (e), by amending paragraph (c) by removing and
reserving the introductory text and paragraphs (c)(1) through (c)(3)
and (c)(5) through (c)(7), by removing and reserving paragraph
(c)(4)(ii)(F), and by amending the introductory text to paragraph
(c)(4)(i) by removing the words ``Execution of'' and adding in their
place ``A service corporation may execute''.
Secs. 545.76, 545.80 through 545.82 [Removed]
3. Sections 545.76, 545.80, 545.81, and 545.82 are removed.
4. Part 559 is added to read as follows:
PART 559--SUBSIDIARIES
Sec.
559.1 What does this part cover?
Subpart A--Regulations Applicable to Federal Savings Associations
559.2 What are the characteristics of, and what requirements apply
to, operating subsidiaries and service corporations of federal
savings associations?
559.3 What activities are preapproved for service corporations?
559.4 How much may a savings association invest in service
corporations?
Subpart B--Regulations Applicable to All Savings Associations
559.10 What must a savings association and its subsidiary do to
maintain separate corporate identities?
559.11 What notices are required to establish or acquire a new
subsidiary or engage in new activities through a subsidiary?
559.12 How may a subsidiary of a savings association issue
securities?
559.13 How may a savings association exercise its salvage power in
connection with its service corporation?
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828.
Sec. 559.1 What does this part cover?
(a) Subpart A of this part 559 contains requirements applicable to
operating subsidiaries and service corporations of federal savings
associations. Subpart B of this part 559 applies to subsidiaries of all
savings associations. OTS is issuing this part 559 pursuant to its
general rulemaking and supervisory authority under the Home Owners'
Loan Act, 12 U.S.C. 1462 et seq., and its specific authority under
section 18(m) of the Federal Deposit Insurance Act, 12 U.S.C. 1828(m).
OTS may at any time limit a savings association's investment in a
subsidiary or service corporation, or may limit or refuse to permit any
activities of a subsidiary or service corporation for supervisory,
legal, or safety and soundness reasons.
(b) Notices under this part are deemed to be applications for
purposes of statutory and regulatory references to ``applications.''
Any conditions that OTS imposes for supervisory, legal, or safety and
soundness reasons in approving any application shall be enforceable as
a condition imposed in writing by the OTS in connection with the
granting of a request by a savings association within the meaning of 12
U.S.C. 1818(b) or 1818(i).
Subpart A--Regulations Applicable to Federal Savings Associations
Sec. 559.2 What are the characteristics of, and what requirements
apply to, operating subsidiaries and service corporations of federal
savings associations?
A federal savings association (``you'') that meets the requirements
of this section, as detailed in the following chart, may establish,
acquire, or acquire
[[Page 29987]]
in an interest in an operating subsidiary or a service corporation. For
ease of reference, this section cross-references other regulations in
this chapter affecting subsidiaries. You should refer to those
regulations for the details of how they apply to an operating
subsidiary or a service corporation. The chart follows:
------------------------------------------------------------------------
Operating
subsidiaries Service corporations
------------------------------------------------------------------------
(a) How may a savings (1) To establish an (2) To establish a
association establish an operating service
operating subsidiary or a subsidiary, you corporation, you
service corporation? must file a notice must file a notice
satisfying Sec. satisfying Sec.
559.11 559.11. Depending
upon your condition
and the activities
in which the
service corporation
will engage, you
may have to submit
an application
under Sec.
559.2(e)(2).
(b) Who may own stock? (1) Anyone may own (2) Only savings
stock in an associations with
operating home offices in the
subsidiary state where you
have your home
office may own
stock in any
service corporation
in which you
invest.
(c) What are the ownership (1) You must hold at (2) You are not
requirements? least 50% of the required to hold a
voting stock of the particular amount
operating of stock and need
subsidiary. No one not have control of
else may exercise the service
effective operating corporation.
control
(d) Where may the subsidiary (1) There are no (2) A service
be incorporated? geographic corporation must be
restrictions on incorporated in the
where an operating state where your
subsidiary may be home office is
incorporated. located.
(e) What activities are (1)(i) After you (2) (i) If you are
permissible? have notified OTS eligible for
in accordance with expedited treatment
Sec. 559.11, an under Sec.
operating 516.3(a) of this
subsidiary may chapter, and notify
engage in any OTS as required by
activity that you Sec. 559.11, your
may conduct service corporation
directly. may engage in
activities listed
in Sec. 559.3.
(ii) You may hold (ii) If you are
another insured subject to standard
depository treatment under
institution as an Sec. 516.3(b) of
operating this chapter, you
subsidiary. must apply and
receive OTS
approval for your
service corporation
to engage in any
activities except
those authorized by
Sec. 559.3(a).
(iii) Any finance (iii) A service
subsidiary that corporation may
existed on [insert also engage in any
effective date of activity reasonably
final rule] shall related to the
be deemed an activities of
operating financial
subsidiary. institutions, but
not preapproved
under Sec. 559.3,
after applying to
OTS in accordance
with Sec. 516.1 of
this chapter and
receiving OTS's
prior written
approval.
(f) May the subsidiary (1)(i) An operating (2) A service
invest in other entities? subsidiary may corporation may
itself hold an invest in other
operating entities, including
subsidiary. All of corporations,
the requirements of partnerships, and
this part 559 apply other joint
equally to such a ventures. All of
lower tier the requirements of
operating this part apply
subsidiary. In equally to such
applying the entities except for
regulations in this paragraphs (b)(2),
part, operating (d)(2), and (g)(2)
subsidiaries should of this section.
substitute
``operating
subsidiary''
wherever this part
refers to ``you''
or ``savings
association.''
(ii) An operating
subsidiary may
invest in a service
corporation. Such a
service corporation
is subject to all
of the requirements
of this part.
(g) Are there any limits on (1) There are no (2) You may invest
how much a savings limits on the up to the amounts
association may invest? amount you may set forth in Sec.
invest in your 559.4 in service
operating corporations.
subsidiaries,
either separately
or in the
aggregate..
(h) Do federal statutes and (1) Unless otherwise (2) (i) If the
regulations that apply to specifically federal statute or
the savings association provided by regulation
also apply to its statute, specifically refers
subsidiaries? regulation, or OTS to ``service
policy, all federal corporation,'' it
statutes and applies to all
regulations apply service
to operating corporations,
subsidiaries in the regardless of
same manner as they whether you control
apply to you. You the service
and your operating corporation or
subsidiary are whether it would be
generally a subsidiary under
consolidated and GAAP.
treated as a unit
for statutory and
regulatory purposes.
(ii) If the federal
statute or
regulation refers
to ``subsidiary,''
it applies only to
service
corporations that
you control.
(i) Do the investment limits (1) Your assets and (2) Your service
that apply to federal those of your corporation's
savings associations (HOLA operating assets are not
section 5(c) and part 560 subsidiary are subject to the same
of this chapter) apply to aggregated when investment
subsidiaries? calculating limitations that
investment apply to you.
limitations.
(j) How does the capital (1) Your assets and (2) The capital
regulation (part 567 of those of your treatment of a
this chapter) apply? operating service corporation
subsidiary are depends upon
consolidated for whether it is an
all capital includable
purposes. subsidiary. That
determination is
based upon factors
set forth in part
567 of this
chapter, including
your percentage
ownership of the
service corporation
and the activities
in which the
service corporation
engages.
[[Page 29988]]
(k) How does the loans-to- (1) The LTOB (2) The LTOB
one-borrower (LTOB) regulation does not regulation applies
regulation (Sec. 563.93 of apply to loans from to loans from you
this chapter) apply? you to your to your service
operating corporation, but
subsidiary or loans does not apply to
from your operating loans from your
subsidiary to you. service corporation
Other loans made by to you. Other loans
your operating made by your
subsidiary are service corporation
aggregated with are aggregated with
your loans for LTOB your loans for LTOB
purposes. purposes.
(l) How does transactions (1) Section 563.41 (2) Section 563.41
with affiliates (TWA) apply of this chapter of this chapter
to subsidiaries? explains how TWA explains how TWA
applies to applies to
subsidiaries. subsidiaries.
(m) How does the Qualified (1) Under 12 U.S.C. (2) Under 12 U.S.C.
Thrift Lender (QTL) test 1467a(m)(5), you 1467a(m)(5), you
apply to subsidiaries? may determine may determine
whether you wish to whether you wish to
consolidate the consolidate the
assets of a assets of a
particular particular
subsidiary for subsidiary for
purposes of purposes of
calculating your calculating your
qualified thrift qualified thrift
investments. investments.
Section 563.51 of Section 563.51 of
this chapter this chapter
contains the contains the
calculations that calculations that
follow from this follow from this
determination. determination.
(n) Does state law apply? (1) State law (2) State law
applies to applies to service
operating corporations
subsidiaries only regardless of
to the extent it whether it applies
applies to you. to you.
(o) Is the subsidiary (1) An operating (2) A service
subject to examination by subsidiary is corporation must
OTS? subject to agree in writing to
examination by OTS. permit and to pay
the cost of such
examinations as OTS
deems necessary.
(p) What must be done to (1) Before (2) Before
redesignate an operating redesignating an redesignating a
subsidiary as a service operating service corporation
corporation or a service subsidiary as a as an operating
corporation as an operating service subsidiary, you
subsidiary. corporation, you should consult with
should consult with the OTS Regional
the OTS Regional Director for the
Director for the Region in which
Region in which your home office is
your home office is located. You must
located. You must also maintain
maintain adequate adequate internal
internal records, records, available
available for for examination by
examination by OTS, OTS, demonstrating
demonstrating that that the
the redesignated redesignated
subsidiary meets subsidiary meets
all of the all of the
applicable applicable
requirements of requirements of
this part and that this part and that
your board of your board of
directors has directors has
approved the approved the
redesignation. redesignation.
(q) What happens if the (1) If an operating (2) If a service
subsidiary fails to comply subsidiary fails to corporation, or any
with the requirements of continue to qualify entity in which the
this part. as an operating service corporation
subsidiary for any invests pursuant to
reason, you must paragraph (f)(2) of
notify OTS. Unless this section, fails
otherwise advised to meet any of the
by OTS, if the requirements of
subsidiary cannot this section, you
comply within 90 must notify OTS.
days with all of Unless otherwise
the requirements advised by OTS, if
for either an the subsidiary
operating cannot comply
subsidiary or a within 90 days with
service corporation all of the
under this section, requirements for
you must promptly either an operating
dispose of your subsidiary or a
investment in the service corporation
subsidiary. under this section,
you must promptly
dispose of your
investment in the
subsidiary.
------------------------------------------------------------------------
Sec. 559.3 What activities are preapproved for service corporations?
To the extent permitted by Sec. 559.2(e)(2), a service corporation
may engage in the following activities:
(a) Any activity that all federal savings associations may conduct
directly, except taking deposits.
(b) Business and professional services. The following services are
preapproved for service corporations only when they are limited to
financial documents or financial clients or are generally finance-
related:
(1) Accounting or internal audit;
(2) Advertising, marketing research and other marketing;
(3) Clerical;
(4) Courier;
(5) Data processing;
(6) Data storage facilities operation and related services;
(7) Office supplies, furniture, and equipment purchasing and
distribution;
(8) Personnel benefit program development or administration;
(9) Relocation of personnel;
(10) Remote service unit operation, leasing, ownership or
establishment;
(11) Research studies and surveys; and
(12) Software development and systems integration.
(c) Credit related activities:
(1) Abstracting;
(2) Appraising;
(3) Collection agency;
(4) Credit analysis;
(5) Check or credit card guaranty and verification;
(6) Escrow agent or trustee (under deeds of trust, including
executing and deliverance of conveyances, reconveyances and transfers
of title);
(7) Leasing; and
(8) Loan inspection.
(d) Consumer services:
(1) Financial advisory or consulting;
(2) Foreign currency exchange;
(3) Home ownership counseling;
(4) Income tax return preparation;
(5) Postal services;
(6) Stored value instrument sales; and
(7) Welfare benefit distribution.
(e) Real estate related services:
(1) Acquiring real estate for prompt development or subdivision,
for construction of improvements, for resale or leasing to others for
such construction, or for use as manufactured home sites, in accordance
with a prudent program of property development;
(2) Acquiring improved real estate or manufactured homes to be held
for rental or resale, for remodeling, renovating, or demolishing and
rebuilding for sale or rental, or to be used for offices and related
facilities of a stockholder of the service corporation;
(3) Maintaining and managing real estate; and
(4) Real estate brokerage for property owned by an association that
owns capital stock of the service corporation, the service corporation,
or a joint venture in which the service corporation participates.
(f) Securities brokerage, insurance and related services:
(1) Nondeposit investment product brokerage. Execution of
transactions in securities or other nondeposit investment products on
an agency or riskless principal basis solely upon the order of and for
the account of customers, provided that the service
[[Page 29989]]
corporation complies with the provisions of Sec. 545.74(c)(4) of this
chapter;
(2) Investment advice, provided that the service corporation
complies with the provisions of Sec. 545.74(c)(4) of this chapter;
(3) Insurance brokerage or agency for liability, casualty,
automobile, life, health, accident or title insurance;
(4) Liquidity management;
(5) Issuing notes, bonds, debentures or other obligations or
securities; and
(6) Purchase or sale of coins issued by the U.S. Treasury.
(g) Investments:
(1) Tax-exempt bonds used to finance residential real property for
family units;
(2) Tax-exempt obligations of public housing agencies used to
finance housing projects with rental assistance subsidies;
(3) Small business investment companies licensed by the U.S. Small
Business Administration to invest in small businesses engaged
exclusively in the activities listed in paragraphs (a) through (i) of
this section; and
(4) Investing in savings accounts of a stockholder thrift.
(h) Community development and charitable activities:
(1) Investments in governmentally insured, guaranteed, subsidized
or otherwise sponsored programs for housing, small farms, or businesses
that are local in character;
(2) Investments that meet the community development needs of, and
primarily benefit, low- and moderate-income communities;
(3) Investments in low-income housing tax credit projects and
entities authorized by statute (e.g., Community Development Financial
Institutions) to promote community, inner city, and community
development purposes; and
(4) Establishing a corporation that is recognized by the Internal
Revenue Service as organized for charitable purposes under Section
501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) and making
a reasonable contribution to capitalize it, provided that the
corporation engages exclusively in activities designed to promote the
well-being of communities in which the shareholders of the service
corporation operate.
(i) Activities reasonably incident to those listed in paragraphs
(a) through (h) of this section for service corporations engaged in
those activities.
Sec. 559.4 How much may a savings association invest in service
corporations?
(a) A federal savings association (``you'') may invest in the
capital stock, obligations, and other securities of a service
corporation. Your aggregate investment in all such service corporations
may not exceed 3% of your assets. If you have an aggregate outstanding
investment in excess of 2% of your assets, that excess investment must
serve primarily community, inner city, or community development
purposes. You must designate the investments serving those purposes,
which include:
(1) Investments in governmentally insured, guaranteed, subsidized
or otherwise sponsored programs for housing, small farms, or businesses
that are local in character;
(2) Investments for the preservation or revitalization of either
urban or rural communities;
(3) Investments designed to meet the community development needs
of, and primarily benefit, low- and moderate-income communities; or
(4) Other community, inner city, or community development-related
investments approved by OTS.
(b) Except as provided in paragraph (c) of this section, your
aggregate investment in service corporations includes all loans (except
accounts payable incurred in the ordinary course of business and paid
within 60 days) and all guarantees or take out commitments of such
loans to a service corporation and to any entity in which the service
corporation invests, whether or not you hold stock in that entity.
(c) In addition to the amounts you may invest under paragraph (a)
of this section, and to the extent you have authority under section
5(c) of the HOLA and part 560 of this chapter, you may make loans to
any service corporation in which you hold stock. Such loans are subject
to the loans-to-one-borrower regulation, Sec. 563.93 of this chapter.
For purposes of the investment limits of section 5(c) of the HOLA and
part 560 of this chapter, loans under this paragraph (c) will be
aggregated with any other loans of that type you make.
Subpart B--Regulations Applicable to All Savings Associations
Sec. 559.10 What must a savings association and its subsidiary do to
maintain separate corporate identities?
(a) Each savings association and subsidiary thereof must be
operated in a manner that demonstrates to the public the separate
corporate existence of the savings association and subsidiary. Each
must operate so that:
(1) Their respective business transactions, accounts, and records
are not intermingled;
(2) Each observes the formalities of their separate corporate
procedures;
(3) Each is adequately financed as a separate unit in the light of
normal obligations reasonably foreseeable in a business of its size and
character;
(4) Each is held out to the public as a separate enterprise; and
(5) Unless the parent savings association has guaranteed a loan by
the subsidiary, all borrowings by the subsidiary indicate that the
parent is not liable.
(b) OTS regulations that apply both to savings associations and
subsidiaries shall not be construed as requiring a savings association
and its subsidiaries to operate as a single entity.
Sec. 559.11 What notices are required to establish or acquire a new
subsidiary or engage in new activities through an existing subsidiary?
When required by section 18(m) of the Federal Deposit Insurance
Act, a savings association (``you'') must file a notice (``Notice'') in
accordance with Sec. 516.1(c) of this chapter at least 30 days before
establishing or acquiring a subsidiary or engaging in new activities in
a subsidiary. The Notice must contain all of the information the FDIC
requires pursuant to 12 CFR 303.13. Providing OTS with a copy of the
notice you file with the FDIC will satisfy this requirement. If OTS
notifies you within 30 days that the Notice presents supervisory
concerns, or raises significant issues of law or policy, you must apply
for and receive OTS's prior written approval in accordance with
Sec. 516.1(c) of this chapter before establishing or acquiring the
subsidiary or engaging in new activities in the subsidiary.
Sec. 559.12 How may a subsidiary of a savings association issue
securities?
(a) A subsidiary may issue, either directly or through a third
party intermediary, any securities that its parent savings association
(``you'') are authorized to issue (or if you are a mutual savings
association, would be authorized to issue if you converted to the stock
form). The subsidiary must not state or imply that the securities it
issues are covered by federal deposit insurance. A subsidiary may not
issue any security the payment, maturity, or redemption of which may be
accelerated upon the condition that you are insolvent or have been
placed into receivership.
(b) You must file a notice with OTS in accordance with Sec. 516.1
of this chapter at least 30 days before issuing any securities through
an existing subsidiary or in conjunction with establishing or acquiring
a new subsidiary. If OTS notifies you within
[[Page 29990]]
30 days that the notice presents supervisory concerns or raises
significant issues of law or policy, you must receive OTS's prior
written approval before issuing securities through your subsidiary. The
notice must contain:
(1) The amount of your assets or liabilities (including any
guarantees you make with respect to the securities issuance) that you
will transfer or make available to the subsidiary; the percentage that
such amount represents of the current book value of your assets on an
unconsolidated basis; and the current book value of all such assets of
the subsidiary;
(2) The terms of any guarantee(s) to be issued by you or any third
party;
(3) A description of the securities the subsidiary will issue;
(4) An estimate of the net proceeds from the issuance of securities
(or the pro rata portion of the net proceeds from securities issued
through a jointly owned subsidiary); the anticipated amount of gross
proceeds of the securities issuance; and the current market value of
assets collateralizing the securities issuance (any assets of the
subsidiary, including any guarantees of its securities issuance you
have made);
(5) The anticipated interest or dividend rates and yields, or the
range thereof, and the frequency of payments on the subsidiary's
securities;
(6) The minimum denomination of the subsidiary's securities;
(7) Where the subsidiary intends to market the securities; and
(8) A statement that within 10 days after the issuance of any
securities through a subsidiary, you will notify the OTS in writing
that you have issued the securities and provide a copy of any
prospectus, offering circular, or similar document concerning such
issuance.
(c) Sales of the subsidiary's securities to retail customers must
comply with Sec. 545.74(c)(4) of this chapter.
Sec. 559.13 How may a savings association exercise its salvage power
in connection with its service corporation?
(a) In accordance with this section, a savings association
(``you'') may exercise your salvage power to make a contribution or a
loan (including a guarantee of a loan made by any other person) to your
service corporation (``salvage investment'') that exceeds the maximum
amount otherwise permitted under law or regulation. You must notify OTS
at least 30 days before making a salvage investment in a service
corporation. This notice must demonstrate that:
(1) The salvage investment protects your interest in the service
corporation;
(2) The salvage investment is consistent with safety and soundness;
and
(3) You considered alternatives to the salvage investment and
determined that such alternatives would not adequately satisfy
paragraphs (a)(1) and (a)(2).
(b) If OTS notifies you within 30 days that the Notice presents
supervisory concerns, or raises significant issues of law or policy,
you must apply for and receive OTS's prior written approval in
accordance with Sec. 516.1(c) of this chapter before making a salvage
investment in a service corporation.
PART 560--LENDING AND INVESTMENT
5. Part 560 as proposed to be added at 61 FR 1177 is amended as
follows:
a. The authority citation for part 560 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828, 1701j-3,
3803, 3806; 42 U.S.C. 4106.
b. Section 560.30 is revised to read as follows:
Sec. 560.30 General lending and investment powers of federal savings
associations.
Pursuant to section 5(c) of the Home Owners Loan Act (HOLA), 12
U.S.C. 1464(c), a federal savings association may make, invest in,
purchase, sell, participate in, or otherwise deal in (including
brokerage or warehousing) all loans and investments allowed under
section 5(c) of the HOLA including, without limitation, the following
loans, extensions of credit, and investments, subject to the
limitations indicated and any such terms, conditions, or limitations as
may be prescribed from time to time by the Office by policy directive,
order, or regulation:
Lending and Investment Powers Chart
----------------------------------------------------------------------------------------------------------------
Statutory percentage of assets limitations (endnotes
Category HOLA authorization contain applicable regulatory limitations)
----------------------------------------------------------------------------------------------------------------
Commercial loans................ 5(c)(2)(A) 10% of total assets.
Commercial paper and corporate 5(c)(2)(D) Up to 30% of total assets.\1\ \2\
debt securities.
Community development........... 5(c)(3)(B) 5% of total assets.
Community development direct 5(c)(3)(B) 2% of total assets.\3\
investments.
Consumer loans.................. 5(c)(2)(D) Up to 35% of total assets.\1\ \4\
Credit cards.................... 5(b)(4) None.\5\
Education loans................. 5(c)(3)(A) 5% of total assets.
Finance leasing................. 5(c)(1)(B) Based on collateral type for property financed.\6\
5(c)(2)(A)
5(c)(2)(D)
Foreign assistance investments.. 5(c)(4)(C) 1% of total assets.\7\
General leasing................. 5(c)(2)(C) 10% of assets.\6\
Home improvement loans.......... 5(c)(1)(J) None.\5\
Home (residential) loans \8\.... 5(c)(1)(B) None.\5\ \9\
Letters of credit............... 5(c)(2)(A) Included in aggregate 10% of assets commercial lending
limitation.\10\
Loans secured by accounts....... 5(c)(1)(A) None.\5\ \11\
Loans to financial institutions, 5(c)(1)(L) None.\5\ \12\
brokers, and dealers.
Manufactured home loans......... 5(c)(1)(J) None.\5\ \13\
Nonresidential real property 5(c)(2)(B) 400% of total capital.\14\
loans.
Open-end management investment 5(c)(1)(Q) None.\5\
companies a.
Service corporations............ 5(c)(4)(B) 3% of total assets, as long as any amount in excess of
2% of total assets furthers community, inner city, or
community development purposes.b
Small business investment 5(c)(4)(D) 1% of total assets.
companies c.
[[Page 29991]]
State and local government 5(c)(1)(H) None.\5\ \15\
obligations.
State housing corporations...... 5(c)(1)(P) None.\5\ \16\
Transaction account loans, 5(c)(1)(A) None.\5\ \17\
including overdrafts.
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Notes:
\1\ For purposes of determining a Federal savings association's percentage assets limitation, investment in
commercial paper and corporate debt securities must be aggregated with the Federal savings association's
investment in consumer loans.
\2\ A Federal savings association may invest in commercial paper and corporate debt securities, which includes
corporate debt securities convertible into stock, subject to the provisions of Sec. 560.40.
\3\ This 2% of assets limitation is a sublimit within the overall 5% of assets limitation on community
development loans and investments.
\4\ Amounts in excess of 30% of assets, in aggregate, may be invested only in loans made by the association
directly to the original obligor and for which no finder's or referral fees have been paid. A Federal savings
association may include loans to dealers in consumer goods to finance inventory and floor planning in the
total investment made under this section.
\5\ While there is no statutory limit on certain categories of loans and investments, including credit card
loans, home improvement loans, and deposit account loans, the OTS may establish an individual limit on such
loans or investments if the association's concentration in such loans or investments presents a safety and
soundness concern.
\6\ A Federal savings association may engage in leasing activities subject to the provisions of Sec. 560.41.
\7\ This 1% of assets limitation applies to the aggregate outstanding investments made under the Foreign
Assistance Act and in the capital of the Inter-American Savings and Loan Bank. Such investments may be made
subject to the provisions of Sec. 560.43.
\8\ A home (or residential) loan includes loans secured by on one-to-four family dwellings, multi-family
residential property and loans secured by a unit or units of a condominium or housing cooperative.
\9\ A Federal savings association may make home loans subject to the provisions of Sec. 560.34.
\10\ A Federal savings association may issue letters of credit subject to the provisions of Sec. 560.120.
\11\ Loans secured by savings accounts and other time deposits may be made without limitation, provided the
Federal savings association obtains a lien on, or a pledge of, such accounts. Such loans may not exceed the
withdrawable amount of the account.
\12\ A Federal savings association may only invest in loans secured by obligations of, or by obligations fully
guaranteed as to principal and interest by, the United States or any of its agencies or instrumentalities
where the borrower is a financial institution insured by the Federal Deposit Insurance Corporation or is a
broker or dealer registered with the Securities and Exchange Commission and the market value of the securities
for each loan at least equals the amount of the loan at the time it is made.
\13\ If the wheels and axles of the manufactured home have been removed and it is permanently affixed to a
foundation, a loan secured by a combination of a manufactured home and developed residential lot on which it
sits may be treated as a home loan.
\14\ Without regard to any limitations of this part, a Federal savings association may make or invest in the
fully insured or guaranteed portion of nonresidential real estate loans insured or guaranteed by the Economic
Development Administration, the Farmers Home Administration, or the Small Business Administration.
Unguaranteed portions of guaranteed loans must be aggregated with uninsured loans when determining an
association's compliance with the 400% of capital limitation for other real estate loans.
a This authority is limited to investments in open-end management investment companies that are registered with
the Securities and Exchange Commission under the Investment Company Act of 1940. The portfolio of the
investment company must be restricted by the company's investment policy (changeable only if authorized by
shareholder vote) solely to investments that a Federal savings association may, without limitation as to
percentage of assets, invest in, sell, redeem, hold, or otherwise deal in. Separate and apart from this
authority, a Federal savings association may make pass-through investments to the extent authorized by Sec.
560.32.
b A Federal savings association may invest in service corporations subject to the provisions of part 559 of this
chapter.
c A Federal savings association may only invest in small business investment companies formed pursuant to
section 301(d) of the Small Business Investment Act of 1958.
\15\ This category includes obligations issued by any state, territory, or possession of the United States or
political subdivision thereof (including any agency, corporation, or instrumentality of a state or political
subdivision), subject to Sec. 560.42.
\16\ A Federal savings association may invest in state housing corporations subject to the provisions of Sec.
560.121.
\17\ Payments on accounts in excess of the account balance (overdrafts) on commercial deposit or transaction
accounts shall be considered commercial loans for purposes of determining the association's percentage of
assets limitation.
C. Sections 560.32 and 560.33 are added to read as follows:
Sec. 560.32 Pass-Through Investments
(a) A federal savings association (``you'') may make pass-through
investments. A pass-through investment is one where you invest in an
entity (``company'') that engages only in activities that you may
conduct directly. You must comply with all the statutes and regulations
that would apply if you were engaging in the activity directly. For
example, your proportionate share of the company's assets will be
aggregated with the assets you hold directly in calculating investment
limits (e.g., 10% of assets for commercial loans).
(b) You may make a pass-through investment without prior notice to
OTS if all of the following conditions are met:
(1) You do not invest more than 15% of your capital in one company;
(2) You have not invested more than 50% of your total capital in
pass-through investments;
(3) Your investment would not give you direct or indirect control
of the company;
(4) Your liability is limited to the amount of your investment;
(5) The company falls into one of the following categories:
(i) A limited partnership;
(ii) An open-end mutual fund;
(iii) A closed-end investment trust; or
(iv) An entity in which you are investing primarily to use the
company's services (e.g., data processing).
(c) If you want to make other pass-through investments, you must
provide OTS with 30 days' advance notice. If within that 30-day period
OTS notifies you that an investment presents supervisory, legal, or
safety and soundness concerns, you must file an application with OTS in
accordance with Sec. 516.1 of this chapter and may not make the
investment without first receiving OTS's prior written approval.
Notices under this section are deemed to be applications for purposes
of statutory and regulatory references to ``applications.'' Any
conditions that OTS imposes for supervisory, legal, or safety and
soundness reasons on any pass-through investment shall be enforceable
as a condition imposed in writing by the OTS in connection with the
granting of a request by a savings association within the meaning of 12
U.S.C. 1818(b) or 1818(i).
[[Page 29992]]
Sec. 560.33 De minimis investments.
A federal savings association may invest in the aggregate up to the
greater of one-fourth of 1% of its capital or $100,000, in community
development investments of the type permitted for a national bank under
12 CFR Part 24.
PART 563--OPERATIONS
6. The authority citation for part 563 continues to read as
follows:
Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,
1817, 1828, 3806; 42 U.S.C. 4106.
Secs. 563.37, 563.38, 563.132 [Removed]
7. Sections 563.37, 563.38, and 563.132 are removed.
8. Section 563.41 is amended by revising paragraph (b)(4) to read
as follows:
Sec. 563.41 Loans and other transactions with affiliates and
subsidiaries.
* * * * *
(b) * * *
(4) The term subsidiary with respect to a specified savings
association means a company that is controlled by such specified
savings association;
* * * * *
9. Section 563.93 is amended by revising paragraph (a) to read as
follows:
Sec. 563.93 Lending limitations.
(a) Scope. This section applies to all loans and extensions of
credit to third parties made by a savings association and its
subsidiaries or service corporations. This section does not apply to
loans made by a savings association to operating subsidiaries or
affiliates of the savings association. The term operating subsidiary
has the same meaning indicated in Sec. 559.2 of this chapter. The terms
subsidiary and affiliate have the same meanings as those terms are
defined in Sec. 563.41.
* * * * *
PART 567--CAPITAL
10. The authority citation for part 567 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).
11. Section 567.1 is amended by removing in paragraph (l)(1) the
phrase ``(either directly or through ownership of a subsidiary)'', and
by revising paragraph (dd) to read as follows:
Sec. 567.1 Definitions.
* * * * *
(dd) Subsidiary. The term subsidiary means any corporation,
partnership, business trust, joint venture, association or similar
organization in which a savings association directly or indirectly
holds more than a 50% ownership interest.1 This definition does
not include ownership interests that were taken in satisfaction of
debts previously contracted, provided that the reporting association
has not held the interest for more than five years or a longer period
approved by the OTS.
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\1\ The Office reserves the right to review a savings
association's investment in a subsidiary on a case-by-case basis. If
the Office determines that such investment is more appropriately
treated as an equity security or an ownership interest in a
subsidiary it will make such determination regardless of the
percentage of ownership held by the savings association.
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* * * * *
PART 571--STATEMENTS OF POLICY
12. The authority citation for part 571 continues to read as
follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.
Sec. 571.21 [Removed]
13. Section 571.21 is removed.
Dated: May 28, 1996.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 96-13828 Filed 6-12-96; 8:45 am]
BILLING CODE 6720-01-P
