[Federal Register Volume 64, Number 113 (Monday, June 14, 1999)]
[Proposed Rules]
[Pages 31749-31756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14256]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 1, 5, and 7
[Docket No. 99-08]
RIN 1557-AB61
Investment Securities; Rules, Policies, and Procedures for
Corporate Activities; and Interpretive Rulings
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
proposing to update and clarify its rules regarding Investment
Securities, Corporate Activities, and Interpretive Rulings. Most of the
proposed changes amend the OCC's regulation codifying interpretive
rulings. These proposed amendments clarify certain existing
interpretive rulings and add new interpretive rulings based on recent
statutory changes, judicial rulings, OCC decisions, and other
developments. The remaining proposed changes would clarify in the OCC's
regulation on investment securities its long-standing treatment of
instruments secured by Type I securities, and make technical amendments
to the OCC's regulation on corporate activities to update the names of
offices within the OCC, to clarify certain definitions, and to amend
references to the CAMEL rating system to reflect the addition of the
sixth element for sensitivity to market risk. This proposal reflects
the OCC's continuing commitment to assess the effectiveness of our
rules and to make further changes where necessary.
DATES: You should submit written comments by August 13, 1999.
ADDRESSES: You should direct written comments to the Communications
Division, Attention: Docket No. 99-08, Third Floor, Office of the
Comptroller of the Currency, 250 E Street, SW, Washington, DC 20219. In
addition, you may send comments by facsimile transmission to (202) 874-
5274, or by electronic mail to regs.comments@occ.treas.gov.
FOR FURTHER INFORMATION CONTACT: You can request additional information
on this proposal by calling Jacqueline Lussier, Senior Attorney, or
Mark Tenhundfeld, Assistant Director, Legislative and Regulatory
Activities Division, (202) 874-5090. You can inspect and photocopy the
comments at the OCC's Public Disclosure Room, First Floor, 250 E
Street, SW, Washington, DC 20019, between 9:00 am and 5:00 pm on
business days. You can make an appointment to inspect the comments by
calling (202) 874-5043.
SUPPLEMENTARY INFORMATION:
Section-by-Section Analysis of Proposed Changes
As previously noted, most of the changes proposed amend part 7. The
OCC proposes to amend part 7 to clarify and supplement its provisions
where necessary. In addition, the OCC proposes to add new interpretive
rulings, based on recent statutory changes, judicial rulings, OCC
decisions, and other developments. These changes are described below,
followed by a discussion of the proposed changes to parts 1 and 5.
Part 7--Interpretive Rulings
Messenger Service (Sec. 7.1012)
Under 12 U.S.C. 36(j), a ``branch'' of a bank is defined to include
any branch bank where deposits are received, or checks paid, or money
lent. Current Sec. 7.1012(c) sets forth circumstances under which a
national bank and its customers may use a messenger service for various
purposes without the messenger service being deemed a ``branch'' under
section 36. These criteria are derived from caselaw. However, the
criteria do not reflect two recent federal court decisions.1
This proposal amends Sec. 7.1012(c) to reflect these recent cases.
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\1\ See Cades v. H & R Block, 43 F.3d 869 (4th Cir. 1994), cert.
denied, 515 U.S. 1103 (1995); Christiansen v. Beneficial Nat'l Bank,
972 F. Supp. 681 (S.D. Ga. 1997). These cases addressed the issue of
whether a third party should be considered to be a branch of a
national bank where a tax preparation company originated tax refund
anticipation loans between a national bank and taxpayers and
conveyed the loan proceeds to the customers.
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Under the current rule, in order to avoid being treated as a bank
branch, a messenger service, including both a messenger service
affiliated with a bank and a service that is independent of a bank,
generally must both make its services available to the public,
including other depository institutions, and retain the ultimate
discretion to determine which customers and geographic areas it will
serve. 12 CFR 7.1012(c)(2)(ii)(A) and (B). The recent cases indicate
that this test should apply differently depending on whether the
service is affiliated with a bank. Pursuant to these cases, a
nonaffiliated service need show only that it has the discretion to
determine, in its own business judgment, which customers it will serve
and where. In contrast, an affiliated service, because it may be more
likely to favor its affiliates as a result of its common ownership or
control, must show that it actually serves the public generally,
including nonaffiliated depository institutions.
The OCC concludes that this analysis is appropriate when
determining if a messenger service is a bank branch. Accordingly, the
proposal combines the criteria in Sec. 7.1012(c)(2)(ii)(A) and
(c)(2)(ii)(B) into one new paragraph and applies the resulting criteria
differently depending on whether or not the messenger service is
affiliated with the bank. This means that a nonaffiliated messenger
service need only demonstrate that it has the discretion to determine,
in its own business judgment, whom it will serve and where. In
contrast, since the operations of a messenger service that is
affiliated
[[Page 31750]]
with a bank could be influenced by that bank, an affiliated messenger
service must continue to demonstrate both that it actually provide
services to the general public, including nonaffiliated depository
institutions, and that it has the discretion to determine whom it will
serve and where.
The proposal also makes a stylistic amendment to
Sec. 7.1012(c)(2)(i) to state the rule more economically.
Independent Undertakings To Pay Against Documents (Sec. 7.1016)
Section 7.1016 codifies interpretations concerning the issuance by
national banks of letters of credit and other independent undertakings.
The proposal makes five technical amendments to update this section.
The first amendment changes footnote 1 by clarifying that the
United Nations Convention on Independent Guarantees and Standby Letters
of Credit was adopted by the U.N. General Assembly in 1995 and signed
by the United States in 1997. The second amends footnote 1 by adding
the recently finalized International Standby Practices (ISP-98) to the
footnote as another important source of applicable laws or rules of
practice recognized by law related to independent undertakings. The
third amendment replaces the terms ``account party'' and ``customer''
in the text (which refer to the party for whose account an independent
undertaking is issued) with the term ``applicant'' (which is the term
used in the laws and rules of practice cited in the footnote) in
Sec. 7.1016(a), (b)(1)(iii)(C), and (b)(1)(iv). The fourth clarifies,
in Sec. 7.1016(b)(2)(ii), that the precautions taken when an
independent undertaking is renewed apply only to automatic renewals.
Renewals that are within a bank's discretion necessarily allow the bank
to make a credit assessment before renewing. Finally, the fifth
amendment updates one of the telephone numbers in the footnote.
National Bank as Guarantor or Surety on Indemnity Bond (Sec. 7.1017)
In recent rulemakings 2 that amended part 7 and part 28
(the OCC's rule on international banking activities), the provision on
a national bank's guarantees of its foreign operations was relocated
from former Sec. 7.7012 to Sec. 28.4(c) in order to consolidate the
regulations governing international banking activities in one part of
the OCC's regulations. No substantive change was made to the section
relocated. However, because part 7 still has a section on national
banks acting as guarantors (current Sec. 7.1017) and because this
section no longer addresses guarantees abroad, several people have
asked whether a national bank still may guarantee the liabilities of
its foreign operations. The answer is yes, and, to alleviate this
apparent confusion, the proposal adds a cross-reference in Sec. 7.1017
to Sec. 28.4(c).
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\2\ 61 FR 4862 (Feb. 9, 1996) (amending part 7); 61 FR 19524
(May 2, 1996) (amending 12 CFR part 28).
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Ownership of Stock Necessary To Qualify as Director (Sec. 7.2005)
A national bank director must own a qualifying equity interest
(qualifying shares) in a national bank or the company that controls
that national bank. 12 U.S.C. 72; 12 CFR 7.2005. Current Sec. 7.2005
codifies the OCC's guidance about the various ways in which a director
may comply with the requirement.
The proposed revisions to Sec. 7.2005(b)(4) codify guidance
provided in OCC interpretive letters 3 approving buyback or
repurchase agreements between shareholders and prospective directors.
Generally, under a buyback agreement, the transferring shareholder
sells shares of the bank or its holding company to a director subject
to an agreement that the director will sell the shares back to the
transferring shareholder when the director's service ends. This enables
the director to own qualifying shares while permitting the transferring
shareholder to prevent the transfer of the shares to unknown parties.
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\3\ See, e.g., Letter from Julie L. Williams, Chief Counsel
(Mar. 31, 1997) (unpublished); Letter from Jonathan Rushdoony,
Attorney (Mar. 27, 1986) (unpublished); Letter from Leslie G.
Linville, Senior Attorney (Jan. 9, 1986) (unpublished). You can
inspect and photocopy the unpublished OCC staff interpretive letters
cited in this preamble (in redacted form) at the OCC's Public
Disclosure Room, First Floor, 250 E Street, SW, Washington, DC
20219. You can make an appointment to inspect the letters by calling
(202) 874-5043.
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Consistent with these interpretive letters, proposed new paragraphs
(b)(4)(ii), (iii), and (iv) of Sec. 7.2005 state that a buyback
agreement may give a director the option of transferring shares back to
the transferring shareholder if the director no longer needs those
shares to satisfy the ownership requirement. The transferring
shareholder may retain a right of first refusal to reacquire the shares
if the director seeks to transfer ownership to a third person. Further,
a director may assign the right to receive dividends or distributions
on the shares back to the original shareholder and execute an
irrevocable proxy authorizing the original shareholder to vote the
shares. This change will make it easier for banks, including community
banks in particular, to attract qualified people to serve on bank
boards.
Oath of Directors (Sec. 7.2008)
Current Sec. 7.2008 provides guidance on the methods by which the
oath of directors may be administered. However, this section does not
provide instructions for the filing or retention of executed oaths,
prompting questions about what a national bank should do with the
executed oaths once they are obtained.
To respond to these requests for guidance, the proposal amends
paragraph (c) of Sec. 7.2008 so that it informs national banks to file
the original executed oaths with the OCC and retain a copy in the
bank's records in accordance with the instructions set forth in the
Comptroller's Corporate Manual. This guidance is consistent with 12
U.S.C. 73, which states that each director's executed and subscribed
oath must be transmitted to the Comptroller of the Currency and filed
and preserved in the Comptroller's office for a period of 10 years.
The proposal also amends the last sentence in Sec. 7.2008(b) to
reflect the name for the manual currently in use, namely, the
``Comptroller's Corporate Manual.''
Acquisition and Holding of Shares as Treasury Stock (Sec. 7.2020)
Current Sec. 7.2020 provides that a national bank has authority
under 12 U.S.C. 24(Seventh) to acquire its outstanding shares and hold
them as treasury stock to fulfill a legitimate corporate purpose, as
long as the bank complies with the restrictions and procedures
specified in 12 U.S.C. 59. The only guidance contained in current
Sec. 7.2020 on what qualifies as a legitimate corporate purpose is the
statement that it is impermissible to acquire or hold treasury stock
for speculation.
Several OCC interpretive letters 4 explain the term
further, providing that ``legitimate corporate purpose'' includes: (a)
holding shares in connection with an officer or employee stock option,
bonus or repurchase plan; (b) holding shares for sale to a potential
director to meet ``qualifying share'' requirements; (c) purchasing a
director's qualifying shares upon his or her resignation or death if
there is no ready
[[Page 31751]]
market for the shares; (d) reducing the number of shareholders in order
to qualify the bank for reorganization as a Subchapter S corporation;
and (e) reducing the number of shareholders to lower the bank's costs
associated with shareholder communications and meetings.
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\4\ See, e.g., Interpretive Letter No. 825 (Mar. 16, 1998),
reprinted in [1997-98 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 81-274; Interpretive Letter No. 786 (June 9, 1997), reprinted
in [1997 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-213
(IL 786); Interpretive Letter No. 660 (Dec. 19, 1994), reprinted in
[1994-95 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 83,608
(IL 660).
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The proposal revises Sec. 7.2020 to include these examples of
legitimate corporate purposes. The examples listed are not exclusive.
There may be additional circumstances under which a national bank's
acquisition and holding of its shares as treasury stock will serve a
legitimate corporate purpose. While the OCC expects that this guidance
on what is a legitimate corporate purpose will benefit all national
banks, certain of the examples listed as legitimate purposes (namely,
the purchasing of shares upon a director's resignation or death if
there is no ready market for the shares and qualifying the bank for
treatment under the tax laws as a Subchapter S corporation) are
expected to provide a particular benefit to community banks.
Reverse Stock Splits (Proposed New Sec. 7.2023)
In IL 786, the OCC considered the appropriateness of a reverse
stock split, a restructuring of ownership interests in which a national
bank reduces the number of its outstanding shares of stock by, for
instance, replacing outstanding shares with fewer shares of a new
issuance and paying cash to the minority shareholders for their
interests. That opinion determined that the national banking laws
permit a reverse stock split, as long as the bank provides adequate
protection for dissenting shareholders' rights and the transaction
serves a legitimate corporate purpose.
Because the reverse stock split is a device that post-dates most
corporate governance provisions in the national banking laws, those
laws do not explicitly address the authority of a national bank to
effect a reverse stock split. Several provisions of the banking laws--
including 12 U.S.C. 59, 83, 214a, 215, and 215a--authorize components
of a reverse stock split that, when read together, permit the
transaction. One provision (12 U.S.C. 59) permits a national bank to
reduce its capital upon the vote of shareholders holding two-thirds of
its capital stock and OCC approval. Other provisions (12 U.S.C. 214a,
215, and 215a) authorize a national bank to engage in corporate
combinations, including mergers and consolidations, although the bank
must provide rights to shareholders dissenting to these transactions.
Another provision (12 U.S.C. 83) allows national banks to hold treasury
stock for legitimate corporate purposes after obtaining OCC approval
pursuant to section 59.5 The OCC also recognizes that a bank
may acquire its outstanding shares and hold them as treasury stock in
connection with a reverse stock split.
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\5\ See IL 660.
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In light of this statutory authority, IL 786 concluded that a
reverse stock split is permissible if the action serves a legitimate
corporate purpose (in the case discussed in IL 786, a desire to reduce
the number of shareholders to qualify for Subchapter S status) and
dissenters' rights are adequately protected.6 The proposal
codifies this conclusion in new Sec. 7.2023. This conclusion is
expected to benefit all national banks by clarifying the extent of
their flexibility in restructuring their ownership interests, but it is
expected to provide particular benefit to community banks that desire,
for instance, to restructure in order to qualify as a Subchapter S
corporation.
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\6\ This conclusion is consistent with the most recent
applicable court decision, NoDak Bancorp. v. Clarke, 998 F.2d 1416
(8th Cir. 1993), in which the court upheld the OCC's approval of a
cash-out merger in which the OCC found that there was a valid
corporate purpose for the transaction and that minority shareholders
were entitled to dissenters' rights. In an earlier decision, the
Eleventh Circuit found in Lewis v. Clark, 911 F.2d 1558 (11th Cir.
1990), reh'g denied, 972 F.2d 1351 (1991), that the OCC lacked the
authority to approve a bank merger that required minority
shareholders to accept cash for their shares while the majority
shareholders were eligible to receive stock in the resulting bank,
even where the minority shareholders had appraisal rights. The NoDak
court distinguished Lewis v. Clark, finding that a national bank
could cash out minority shareholders under the National Bank Act, as
long as there is a valid business purpose and the minority
shareholders are entitled to dissenters' rights.
In Bloomington Nat'l Bank v. Telfer, 916 F.2d 1305 (7th Cir.
1990), the court reversed the OCC's approval of a reverse stock
split. The court held that the reverse stock split plan violated 12
U.S.C. 83 and 214a-215a, after concluding that the transaction had
no legitimate business purpose and failed to provide for dissenters'
right. The court expressly declined to answer whether section 83
prohibits all reverse stock split transactions, noting that its
opinion was limited to the facts of the case. Id. at 1308 n.4, 1309.
To clarify how the OCC applies the governing law in light of these
decisions, the proposal reflects the OCC's position that the better
reasoned view in the federal courts is that reverse stock splits
will be approved if there is a legitimate corporate purpose and if
shareholders are provided adequate dissenters' rights.
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Visitorial Powers (Sec. 7.4000)
The proposal revises Sec. 7.4000, ``Books and records of national
banks,'' to clarify the extent of the OCC's visitorial powers under 12
U.S.C. 484 and other federal statutes. Section 484 provides, in
relevant part, that no national bank is subject to any visitorial
powers except as authorized by federal law. 12 U.S.C.
484(a).7 Congress vested the OCC with exclusive visitorial
powers to ensure the cohesive, uniform supervision of national banks.
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\7\ The term ``visitorial,'' as used in section 484, derives
from English common law, which used the term ``visitation'' to refer
to the act of a superintending officer who visits a corporation to
examine its manner of conducting business and enforce observance of
the laws and regulations. Guthrie v. Harkness, 199 U.S. 148, 158
(1905) (quoting First National Bank of Youngstown v. Hughes, 6 F.
737 (6th Cir. 1881)). The Guthrie court noted that visitors ``have
power to keep [corporations] within the legitimate sphere of their
operations, and to correct all abuses of authority, and to nullify
all irregular proceedings.'' Id. For purposes of section 484, the
term has been construed broadly, as discussed in the text following
this footnote.
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Courts have defined ``visitation'' expansively to include the
inspection, regulation, or control of the operations of a bank to
enforce the bank's observance of the law. See First National Bank of
Youngstown v. Hughes, 6 F. 737, 740 (6th Cir. 1881), appeal dismissed,
106 U.S. 523 (1883). See also Peoples Bank v. Williams, 449 F. Supp.
254 (W.D. Va. 1978) (visitorial powers involve the exercise of the
right of inspection, superintendence, direction, or regulation over a
bank's affairs).8
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\8\ Recently, a federal district court upheld the OCC's right to
exercise exclusive regulatory authority to enforce applicable state
law against national banks when it enjoined a state banking
authority's administrative enforcement proceeding against two
national banks. Ruling on Motion for Preliminary Injunction, First
Union Nat'l Bank v. Burke, No. 3:98cv2171 (D. Ct. Apr. 7, 1999)
(appeal pending).
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Proposed Sec. 7.4000 codifies the definition of visitorial powers
and illustrates what visitorial powers include by providing a non-
exclusive list of these powers. They include: (a) examination of a
bank; (b) inspection of a bank's books and records; (c) regulation and
supervision of activities authorized or permitted under federal banking
law; and (d) enforcing compliance with any applicable federal or state
laws concerning those activities. The proposal also retitles
Sec. 7.4000 as ``Visitorial powers'' to reflect the rule's intended
focus.
The proposal also reorganizes Sec. 7.4000 by grouping together, in
proposed paragraph (b), the exceptions noted in several different
places in the current rule that are explicitly provided by federal law
to the OCC's exclusive visitorial powers. These exceptions do not
preclude the OCC from exercising its concurrent authority to inspect a
national bank's books and records in the instances listed. This
reorganization of the exceptions in the current rule is done solely for
ease of reference. None of the exceptions listed is new, and the list
is not exclusive.9
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\9\ The exceptions listed in the rule are those where federal
statutory law explicitly provides for another agency to inspect a
national bank's books and records. In addition, the OCC does not
object to state insurance regulators inspecting the records of
national banks related to their insurance activities that are
regulated under applicable state law.
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[[Page 31752]]
Establishment and Operation of Remote Service Units (Proposed New
Sec. 7.4003)
The authority of national banks to establish ``branches'' in a
state is linked to the extent that state law authorizes state banks to
establish branches. See 12 U.S.C. 36(c)-(g). Branches are the only
national bank facilities that are subject to state geographic
restrictions or related approval requirements under 12 U.S.C. 36. The
national bank branching statute, at 12 U.S.C. 36(j), defines a
``branch'' to include any branch bank, branch office, branch agency,
additional office, or any branch place of business located in any state
at which deposits are received, checks paid, or money lent. Section
36(j) explicitly excludes, however, an automated teller machine (ATM)
or remote service unit (RSU) \10\ from the definition of ``branch.''
\11\ In light of the exclusion of ATMs and RSUs from 12 U.S.C. 36(j),
the OCC has concluded in recent interpretive letters \12\ that ATMs and
RSUs established and operated by national banks are not subject to any
state-imposed geographic or operational restrictions or licensing laws.
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\10\ An RSU is an automated facility, operated by a customer of
a bank, that engages in one or more of the core banking functions of
receiving deposits, paying withdrawals, or lending money. An RSU
includes ATMs, automated loan machines, and automated devices for
receiving deposits, and may be equipped with a telephone or
televideo device that allows contact with bank personnel.
\11\ This exclusion was added to section 36(j) by the Economic
Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), Pub.
L. 104-208, sec. 2205, enacted Sept. 30, 1996 (110 Stat. 3009).
\12\ See, e.g., Interpretive Letter No. 789 (June 27, 1997),
reprinted in [1997 Transfer Binder] Fed. Banking L. Rep. (CCH) para.
81-216 (IL 789); Interpretive Letter No. 772 (Mar. 6, 1997),
reprinted in [1996-97 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 81-136 (IL 772).
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Proposed new Sec. 7.4003 codifies the principle, reflected in those
interpretive letters and other OCC interpretations \13\ that automated
loan machines (ALMs) and automated devices for receiving deposits are
appropriately considered to be RSUs and, accordingly, are not subject
to any state-imposed geographic or operational restrictions or
licensing laws. As previously noted, RSUs are automated facilities,
operated by customers of a bank, that receive deposits, pay
withdrawals, or lend money. Similarly, ALMs and automated deposit-
receiving devices are automated facilities, operated by bank customers,
that permit a customer, in the case of an ALM, to apply for a loan and
receive the loan proceeds or have them deposited into the customer's
existing account or, in the case of the deposit-receiving device, make
deposits. ALMs and automated deposit-receiving devices qualify under
this standard as RSUs and, therefore, are regulated in the same way as
other RSUs.
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\13\ Interpretive Letter No. 838 (April 15, 1998), reprinted in
[Current Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-293;
Interpretive Letter No. 821 (Feb. 17, 1998), reprinted in [Current
Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-271; IL 789; IL
772. Despite the plain language of section 36(j), one federal
district court case, Bank One, Utah v. Guttau, Civil No. 4-98-CV-
10247 (D. Iowa July 24, 1998), has held that Iowa ATM law is not
preempted by the National Bank Act. This holding is on appeal to the
Eighth Circuit.
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Deposit Production Offices (Proposed New Sec. 7.4004)
A national bank facility that does not receive deposits, pay
checks, or lend money is not a branch for purposes of 12 U.S.C. 36(j).
The OCC has determined that a national bank deposit production office
(DPO), which merely assists bank customers in making deposits, is not a
branch because it does not engage in any of the core banking functions
that would cause it to be a branch under 12 U.S.C. 36.\14\
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\14\ Interpretive Letter No. 691 (Sept. 25, 1995), reprinted in
[1995-96 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-006
(deposit production offices are not branches as long as deposits are
not accepted at the DPO but rather are mailed by the customer to the
bank after filling out preliminary forms at the DPO); Interpretive
Letter No. 638 (Jan. 6, 1994), reprinted in [1993-94 Transfer
Binder] Fed. Banking L. Rep. (CCH) para. 83,525 (a non-branch
facility may perform deposit origination functions such as providing
information on deposit products or handling application forms, as
long as the activity stops short of actually receiving deposits).
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Proposed new Sec. 7.4004 codifies this interpretation. Paragraph
(a) states that a DPO must not receive deposits in order for it to be
excluded from 12 U.S.C. 36(j)'s definition of ``branch,'' and that all
deposit and withdrawal transactions by customers using a DPO must be
performed by the customer, either in person at the main office or a
branch office of the bank, or by mail, electronic transfer, or a
similar method of transfer. Paragraph (b) states that a national bank
may use the services of, and compensate, persons not employed by the
bank for its deposit production activities. This flexibility to operate
a DPO with people other than bank employees is consistent with the
approach taken with respect to national bank loan production offices
(LPOs). See 12 CFR 7.1004.
Combination of LPO, DPO, and RSU (Proposed New Sec. 7.4005)
When a facility combines the non-branch functions of an LPO, DPO,
and RSU, the OCC has concluded that the facility is not a branch by
virtue of that combination.\15\ Since an LPO, DPO, or RSU is not,
individually, a branch under 12 U.S.C. 36(j), it follows that any
combination of these facilities at one location also would not be a
branch. The proposal adds this interpretation in new Sec. 7.4005.
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\15\ Interpretive Letter No. 843 (Sept. 29, 1998), reprinted in
[Current Transfer Binder] Fed. Banking L. Rep. (CCH) para. 81-298
(IL 843). The proposal also reflects the position the OCC has taken
as amicus curiae in litigation pending in the Federal District Court
of Colorado in a case with substantially similar facts as those in
IL 843. See OCC's Brief Amicus Curiae filed in First Nat'l Bank of
McCook v. Fulkerson, Civil Action No. 98- D-1024 (filed Jan. 4,
1999).
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Part 1--Investment Securities
The OCC proposes to amend 12 CFR 1.3(e)(1) to clarify a provision
that has led to some confusion. Current Sec. 1.3(e)(1) sets forth the
regulatory treatment of Type IV securities that are fully secured by
Type I securities. The OCC proposes to eliminate the statement in
Sec. 1.3(e)(1) that a national bank may deal in Type IV securities that
are fully secured by Type I securities. This language has led to
confusion about the treatment of Type V securities and about the
relationship of the current provision with Sec. 1.3(g) regarding
securitization. Consistent with previous judicial rulings and OCC
decisions,\16\ the OCC will continue to apply its long-standing
regulatory treatment of asset-backed instruments that are fully secured
by Type I securities and treat those instruments as Type I securities.
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\16\ See Security Pacific v. Clarke, 885 F.2d 1034 (2d Cir.
1989), cert. denied, 493 U.S. 1070 (1990) (national bank authority
to securitize assets); Interpretive Letter No. 514 (May 5, 1990),
reprinted in [1990-91 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 83,218 (bonds collateralized by Gov't Nat'l Mortgage Ass'n
(GNMA), Fed. Nat'l Mortgage Ass'n (FNMA) and Fed. Home Loan Mortgage
Ass'n (FHLMC) pass-through certificates); Interpretive Letter No.
362 (May 22, 1986), reprinted in [1985-87 Transfer Binder] Fed.
Banking L. Rep. (CCH) para. 85,532 (issuing, underwriting and
dealing in evidences of indebtedness collateralized by GNMA, FNMA or
FHLMC certificates); Interpretive Letter No. 378 (April 24, 1987),
reprinted in [1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH)
para. 85,602 (issuance and sale of collateralized mortgage
obligations--bonds representing interests in pools of mortgages or
mortgage-related obligations); Interpretive Letter No. 257 (April
12, 1983), reprinted in [1983-84 Transfer Binder] Fed. Banking L.
Rep. (CCH) para. 85,421 (underwriting and dealing in mortgage-backed
pass-through certificates evidencing undivided interests in Fed.
Housing Admin. insured mortgage pools purchased by the bank from
GNMA); Investment Securities Letter No. 29 (Aug. 3, 1988), reprinted
in [1988-89 Transfer Binder] Fed. Banking L. Rep. (CCH) para. 85,899
(investment limits for asset-backed securities consisting of General
Motors Acceptance Corp. receivables).
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Part 5--Rules, Policies, and Procedures for Corporate Activities
In 1996, the interagency Uniform Financial Institutions Rating
System--
[[Page 31753]]
then commonly referred to as the CAMEL rating system \17\--was updated
to add a sixth component, addressing sensitivity to market risk. \18\
To reflect the addition of that sixth component, the acronym CAMEL was
changed to CAMELS. In a recent rulemaking \19\ that amended 12 CFR part
3 (the OCC's rule on minimum capital ratios), the OCC made the
conforming amendment by changing ``CAMEL'' to ``CAMELS'' in
Sec. 3.6(c). However, the other OCC regulation in which the term CAMEL
is used, part 5, was not updated concurrently.
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\17\ The rating system was referred to as the CAMEL rating
system because it assessed five components of a bank's performance:
capital adequacy, asset quality, management administration,
earnings, and liquidity.
\18\ 61 FR 67021 (Dec. 19, 1996).
\19\ 64 FR 10194 (Mar. 2, 1999).
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This proposal changes the references to CAMEL in several sections
of part 5 to CAMELS, reflecting, as discussed in the preceding
paragraph, the recent addition of ``sensitivity to market risk'' to the
Uniform Financial Institutions Rating System. The proposal also
contains technical amendments to several sections in part 5 to conform
them to provisions in the Comptroller's Corporate Manual that have been
revised since part 5 last was amended. Finally, the proposal makes a
technical amendment to Sec. 5.35(g)(3) to correct an error in a
reference to another paragraph of Sec. 5.35.
Request for Comments
The OCC invites comment on any of the proposed changes.
The OCC also seeks comments on the impact of each proposal on
community banks. The OCC recognizes that community banks operate with
more limited resources than larger institutions and may present a
different risk profile. Thus, the OCC specifically requests comments on
the impact of each proposal on community banks' current resources and
available personnel with the requisite expertise, and whether the goals
of the proposed regulation could be achieved, for community banks,
through an alternative approach.
Executive Order 12866 and the President's memorandum of June 1,
1998, require each agency to write all rules in plain language. We
invite your comments on how to make this proposed rule easier to
understand. For example:
Have we organized the material to suit your needs?
Are the requirements in the rule clearly stated?
Does the rule contain technical language or jargon that
isn't clear?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the rule easier to understand?
Would more (but shorter) sections be better?
What else could we do to make the rule easier to
understand?
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b), the OCC hereby certifies that this proposal will not
have a significant economic impact on a substantial number of small
entities. As is discussed more fully in the preamble to this proposal,
the proposal clarifies and updates 12 CFR parts 1, 5, and 7. The
proposal imposes no new requirements on national banks. Accordingly, a
regulatory flexibility analysis for the proposal is not required.
Executive Order 12866
The OCC has determined that this proposal is not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C.
1532 (Unfunded Mandates Act), requires that the agency prepare a
budgetary impact statement before promulgating any rule likely to
result in a federal mandate that may result in the expenditure by
state, local, and tribal governments, in the aggregate, or by the
private sector, of $100 million or more in any one year. If a budgetary
impact statement is required, section 205 of the Unfunded Mandates Act
also requires the agency to identify and consider a reasonable number
of regulatory alternatives before promulgating the rule.
The OCC has determined that this proposal will not result in
expenditures by state, local, and tribal governments, or by the private
sector, of $100 million or more in any one year. Accordingly, the OCC
has not prepared a budgetary impact statement or specifically addressed
any regulatory alternatives. The proposal is clarifying in nature and
imposes no new requirements on national banks.
List of Subjects
12 CFR Part 1
Banks, banking, National banks, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 5
Administrative practice and procedure, National banks, Reporting
and recordkeeping requirements, Securities.
12 CFR Part 7
Credit, Insurance, Investments, National banks, Reporting and
recordkeeping requirements, Securities, Surety bonds.
Authority and Issuance
For the reasons set out in the preamble, chapter I of title 12 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 1--INVESTMENT SECURITIES
1. The authority citation for part 1 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.
2. In Sec. 1.3, paragraph (e)(1) is revised to read as follows:
Sec. 1.3 Limitations on dealing in, underwriting, and purchase and
sale of securities.
* * * * *
(e) Type IV securities--(1) General. A national bank may purchase
and sell Type IV securities for its own account. Except as described in
paragraph (e)(2) of this section, the amount of the Type IV securities
that a bank may purchase and sell is not limited to a specified
percentage of the bank's capital and surplus.
* * * * *
PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES
3. The authority citation for part 5 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a.
4. In Sec. 5.3, paragraph (c) is revised and paragraph (g)(2) is
amended by revising the term ``(CAMEL)'' to read ``(CAMELS)'', to read
as follows:
Sec. 5.3 Definitions.
* * * * *
(c) Appropriate district office means:
(1) Bank Organization and Structure for all national bank
subsidiaries of certain holding companies assigned to the Washington,
D.C., licensing unit;
(2) The appropriate OCC district office for all national bank
subsidiaries of certain holding companies assigned to a district office
licensing unit;
(3) The OCC's district office where the national bank's supervisory
office is located for all other banks; or
[[Page 31754]]
(4) The OCC's International Banking and Finance Department for
federal branches and agencies of foreign banks.
* * * * *
Sec. 5.11 [Amended]
5. In Sec. 5.11, paragraph (i)(1) is amended by revising the phrase
``a representative of the OCC'' to read ``presiding officer''.
6. In Sec. 5.33, paragraph (d)(2)(i) is revised to read as follows:
Sec. 5.33 Business combinations.
* * * * *
(d) * * *
(2) * * *
(i) A business combination between eligible banks, or between an
eligible bank and an eligible depository institution, that are
controlled by the same holding company or that will be controlled by
the same holding company prior to the combination; or
* * * * *
Sec. 5.35 [Amended]
7. In Sec. 5.35, paragraph (g)(3) is amended by revising the term
``paragraph (h)'' to read ``paragraph (i)''.
Sec. 5.37 [Amended]
8. In Sec. 5.37, paragraphs (d)(1)(i) and (d)(3) are amended by
revising the term ``district'' to read ``supervisory'', and paragraph
(d)(3) is amended further by revising the term ``(CAMEL)'' to read
``(CAMELS)''.
Sec. 5.51 [Amended]
9. In Sec. 5.51, paragraph (c)(6)(i) is amended by revising the
term ``(CAMEL)'' to read ``(CAMELS)''.
Sec. 5.64 [Amended]
10. In Sec. 5.64, paragraph (b) is amended by revising the term
``district'' to read ``supervisory''.
PART 7--INTERPRETIVE RULINGS
11. The authority citation for part 7 continues to read as follows:
Authority: 12 U.S.C. 1 et seq. and 93a.
12. In Sec. 7.1012, paragraphs (c)(2)(i) and (c)(2)(ii) are revised
and paragraphs (c)(2)(iii), (c)(2)(iv), (c)(2)(v), and (c)(2)(vi) are
added to read as follows:
Sec. 7.1012 Messenger service.
* * * * *
(c) * * *
(2) * * *
(i) A party other than the national bank owns or rents the
messenger service and its facilities and employs the persons who
provide the service;
(ii)(A) The messenger service retains the discretion to determine
in its own business judgment which customers and geographic areas it
will serve; or
(B) If the messenger service and the bank are under common
ownership or control, the messenger service actually provides its
services to the general public, including other depository
institutions, and retains the discretion to determine in its own
business judgment which customers and geographic areas it will serve;
(iii) The messenger service maintains ultimate responsibility for
scheduling, movement, and routing;
(iv) The messenger service does not operate under the name of the
bank, and the bank and the messenger service do not advertise, or
otherwise represent, that the bank itself is providing the service,
although the bank may advertise that its customers may use one or more
third party messenger services to transact business with the bank;
(v) The messenger service assumes responsibility for the items
during transit and for maintaining adequate insurance covering thefts,
employee fidelity, and other in-transit losses; and
(vi) The messenger service acts as the agent for the customer when
the items are in transit. The bank deems items intended for deposit to
be deposited when credited to the customer's account at the bank's main
office, one of its branches, or another permissible facility, such as a
back office facility that is not a branch. The bank deems items
representing withdrawals to be paid when the items are given to the
messenger service.
* * * * *
13. In Sec. 7.1016, paragraphs (a) including the footnote,
(b)(1)(iii)(C), (b)(1)(iv), and (b)(2)(ii) are revised to read as
follows:
Sec. 7.1016 Independent undertakings to pay against documents.
(a) General authority. A national bank may issue and commit to
issue letters of credit and other independent undertakings within the
scope of the applicable laws or rules of practice recognized by
law.1 Under such letters of credit and other independent
undertakings, the bank's obligation to honor depends upon the
presentation of specified documents and not upon nondocumentary
conditions or resolution of questions of fact or law at issue between
the applicant and the beneficiary. A national bank may also confirm or
otherwise undertake to honor or purchase specified documents upon their
presentation under another person's independent undertaking within the
scope of such laws or rules.
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\1\ Samples of such laws or rules of practice include, but are
not limited to: the applicable version of Article 5 of the Uniform
Commercial Code (UCC) (1962, as amended 1990) or revised Article 5
of the UCC (as amended 1995) (available from West Publishing Co., 1/
800/328-4880); the Uniform Customs and Practice for Documentary
Credits (International Chamber of Commerce (ICC) Publication No.
500) (available from ICC Publishing, Inc., 212/206-1150); the
International Standby Practices (ISP-98) (available from the
Institute of International Banking Law & Practice, 301/869-9840);
the United Nations Convention on Independent Guarantees and Standby
Letters of Credit (adopted by the U.N. General Assembly in 1995 and
signed by the U.S. in 1997) (available from the U.N. Commission on
International Trade Law, 212/963-5353); and the Uniform Rules for
Bank-to-Bank Reimbursements Under Documentary Credits (ICC
Publication No. 525) (available from ICC Publishing, Inc., 212/206-
1150); as any of the foregoing may be amended from time to time.
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(b) * * *
(1) * * *
(iii) * * *
(C) Entitle the bank to cash collateral from the applicant on
demand (with a right to accelerate the applicant's obligations, as
appropriate); and
(iv) The bank either should be fully collateralized or have a post-
honor right of reimbursement from the applicant or from another issuer
of an independent undertaking. Alternatively, if the bank's undertaking
is to purchase documents of title, securities, or other valuable
documents, the bank should obtain a first priority right to realize on
the documents if the bank is not otherwise to be reimbursed.
(2) * * *
(ii) In the event that the undertaking provides for automatic
renewal, the terms for renewal should be consistent with the bank's
ability to make any necessary credit assessments prior to renewal;
* * * * *
14. In Sec. 7.1017, the introductory text is revised to read as
follows:
Sec. 7.1017 National bank as guarantor or surety on indemnity bond.
A national bank may lend its credit, bind itself as a surety to
indemnify another, or otherwise become a guarantor (including, pursuant
to 12 CFR 28.4, guaranteeing the deposits and other liabilities of its
Edge corporations and Agreement corporations and of its corporate
instrumentalities in foreign countries), if:
* * * * *
15. In Sec. 7.2005, paragraph (b)(4) is revised to read as follows:
Sec. 7.2005 Ownership of stock necessary to qualify as director.
* * * * *
(b) * * *
(4) Other arrangements--(i) Shares held through retirement plans
and similar arrangements. A director may
[[Page 31755]]
hold his or her qualifying interest through a profit-sharing plan,
individual retirement account, retirement plan, or similar arrangement,
if the director retains beneficial ownership and legal control over the
shares.
(ii) Shares held subject to buyback agreements. A director may
acquire and hold his or her qualifying interest pursuant to a stock
repurchase or buyback agreement with a transferring shareholder under
which the director purchases the qualifying shares subject to an
agreement that the transferring shareholder will repurchase the shares
when, for any reason, the director ceases to serve in that capacity.
The agreement may give the transferring shareholder a right of first
refusal to repurchase the qualifying shares if the director seeks to
transfer ownership of the shares to a third person.
(iii) Assignment of right to dividends or distributions. A director
may assign the right to receive all dividends or distributions on his
or her qualifying shares to another, including a transferring
shareholder, if the director retains beneficial ownership and legal
control over the shares.
(iv) Execution of proxy. A director may execute a revocable or
irrevocable proxy authorizing another, including a transferring
shareholder, to vote his or her qualifying shares, provided the
director retains beneficial ownership and legal control over the
shares.
* * * * *
16. In Sec. 7.2008, the last sentence of paragraph (b) is revised
and a new paragraph (c) is added to read as follows:
Sec. 7.2008 Oath of directors.
* * * * *
(b) Execution of the oath. * * * Appropriate sample oaths are
located in the ``Comptroller's Corporate Manual.''
(c) Filing and recordkeeping. A national bank must file the
original executed oaths of directors with the OCC and retain a copy in
the bank's records in accordance with the Comptroller's Corporate
Manual filing and recordkeeping instructions for executed oaths of
directors.
17. Section 7.2020 is revised to read as follows:
Sec. 7.2020 Acquisition and holding of shares as treasury stock.
(a) Acquisition of outstanding shares. Under 12 U.S.C. 59, a
national bank may acquire its outstanding shares and hold them as
treasury stock, if the acquisition and retention of the shares is, and
continues to be, for a legitimate corporate purpose.
(b) Legitimate corporate purpose. Examples of legitimate corporate
purposes include the acquisition and holding of treasury stock to:
(1) Have shares available for use in connection with employee stock
option, bonus, purchase, or similar plans;
(2) Sell to a director for the purpose of acquiring qualifying
shares;
(3) Purchase a director's qualifying shares upon the cessation of
the director's service in that capacity if there is no ready market for
the shares;
(4) Reduce the number of shareholders in order to qualify as a
Subchapter S corporation; or
(5) Reduce costs associated with shareholder communications and
meetings.
(c) Other purposes. Purposes other than those enumerated in
paragraph (b) of this section may satisfy the legitimate corporate
purpose test.
(d) Prohibition. It is not a legitimate corporate purpose to
acquire or hold treasury stock on speculation about changes in its
value.
18. A new Sec. 7.2023 is added to subpart B to read as follows:
Sec. 7.2023 Reverse stock splits.
(a) Authority to engage in reverse stock splits. A national bank
may engage in a reverse stock split if the transaction serves a
legitimate corporate purpose and provides adequate dissenting
shareholders' rights.
(b) Legitimate corporate purpose. Examples of legitimate corporate
purposes include a reverse stock split to:
(1) Reduce the number of shareholders in order to qualify as a
Subchapter S corporation; or
(2) Reduce costs associated with shareholder communications and
meetings.
19. In Sec. 7.4000, the section heading and paragraphs (a) and (b)
are revised to read as follows:
Sec. 7.4000 Visitorial powers.
(a) General rule. (1) Only the OCC or an authorized representative
of the OCC may exercise visitorial powers with respect to national
banks, except as otherwise expressly provided by federal law. State
officials may not exercise visitorial powers with respect to national
banks, such as conducting examinations, inspecting or requiring the
production of books or records of national banks, or prosecuting
enforcement actions, except in limited circumstances authorized by
federal law. Production of records may, however, be required under
normal judicial procedures.
(2) For purposes of this section, visitorial powers include:
(i) Examination of a bank;
(ii) Inspection of a bank's books and records;
(iii) Regulation and supervision of activities authorized or
permitted pursuant to federal banking law; or
(iv) Enforcing compliance with any applicable federal or state laws
concerning those activities.
(b) Exceptions to the general rule. Federal law expressly provides
special authority for state or other federal officials to:
(1) Inspect the list of shareholders, provided the official is
authorized to assess taxes under state authority (12 U.S.C. 62; this
section also authorizes inspection of the shareholder list by
shareholders and creditors of a national bank);
(2) Review, at reasonable times and upon reasonable notice to a
bank, the bank's records solely to ensure compliance with applicable
state unclaimed property or escheat laws upon reasonable cause to
believe that the bank has failed to comply with those laws (12 U.S.C.
484(b));
(3) Verify payroll records for unemployment compensation purposes
(26 U.S.C. 3305(c));
(4) Ascertain the correctness of federal tax returns (26 U.S.C.
7602); or
(5) Enforce the Fair Labor Standards Act (29 U.S.C. 211).
* * * * *
20. A new Sec. 7.4003 is added to read as follows:
Sec. 7.4003 Establishment and operation of a remote service unit by a
national bank.
A remote service unit (RSU) is an automated facility, operated by a
customer of a bank, that conducts banking functions, such as receiving
deposits, paying withdrawals, or lending money. A national bank may
establish and operate an RSU pursuant to 12 U.S.C. 24 (Seventh). An RSU
includes an automated teller machine, automated loan machine, and
automated device for receiving deposits. An RSU may be equipped with a
telephone or televideo device that allows contact with bank personnel.
An RSU is not considered a ``branch'' within the meaning of 12 U.S.C.
36(j), and is not subject to state geographic or operational
restrictions or licensing laws.
21. A new Sec. 7.4004 is added to read as follows:
Sec. 7.4004 Establishment and operation of a deposit production office
by a national bank.
(a) General rule. A national bank or its operating subsidiary may
engage in deposit production activities at a site
[[Page 31756]]
other than the main office or a branch of the bank. A deposit
production office (DPO) may solicit deposits, provide information about
deposit products, and assist persons in completing application forms
and related documents to open a deposit account. A DPO is not a branch
within the meaning of 12 U.S.C. 36(j) and 12 CFR 5.30(d)(1) so long as
it does not receive deposits, pay withdrawals, or make loans. All
deposit and withdrawal transactions of a bank customer using a DPO must
be performed by the customer, either in person at the main office or a
branch office of the bank, or by mail, electronic transfer, or a
similar method of transfer.
(b) Services of other persons. A national bank may use the services
of, and compensate, persons not employed by the bank in its deposit
production activities.
22. A new Sec. 7.4005 is added to read as follows:
Sec. 7.4005 Combination of loan production office, deposit production
office, and remote service unit.
A location at which a national bank operates a loan production
office (LPO), a deposit production office (DPO), and a remote service
unit (RSU) is not a ``branch'' within the meaning of 12 U.S.C. 36(j) by
virtue of that combination. Since an LPO, DPO, or RSU is not,
individually, a branch under 12 U.S.C. 36(j), any combination of these
facilities at one location does not create a branch.
Dated: May 11, 1999.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 99-14256 Filed 6-11-99; 8:45 am]
BILLING CODE 4810-33-P
