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FED ER A L R ESER VE BANK OF NEW YORK r Circular L No. 7 3 4 9 “1 February 26, 1974 J REGULATION Y Amendment and Interpretation Regarding Management Consulting Services To A ll Bank H olding Companies, and Others Concerned, in the Second Federal R eserve D istrict: Following is the text of a statement issued today by the Board of Governors of the Federal Reserve System: T he B oard of G overnors of the Federal Reserve System announced today that it is adding to the list of activities permissible for bank holding com panies the provision o f certain kinds o f management consulting advice, under specified conditions, to banks not affiliated with the holding com pany. A t the same time, the Board issued an interpretation defining terms and illustrating the intended scope of the activity. T he B oard also announced approval o f an application, by Citizens and Southern C orp., a Charleston, S. C., bank holding com pany, to provide certain kinds o f management consulting advice to banks outside the holding com pany. T he B oard ’s decision and interpretation follow ed publication for com m ent on June 27, 1973, o f a p ro posal to amend the B oard’s R egulation Y — concerning bank holding com panies— to make management con sulting for non-affiliated banks permissible for bank h oldin g companies. T he B oard has previously held that, while a bank holding com pany can by statute perform services, in cluding management consulting services for its affiliated .banks, a bank holding com pany may not engage in general management consulting. T he present ruling perm its management consulting advice to be furnished to banks not affiliated with the com pany. In perform ing this activity, how ever, bank holding com panies may not perform tasks or operations or provide services to client banks either on a daily or continuing basis. T h e scope of management services to affiliated banks is not affected. In taking this action, the Board considered, but took no action, at this time, on broadening such activity to permit management consulting advice to nonbanking subsidiaries o f bank holding com panies or to holding companies themselves. T he interpretation accom panying today’s am endm ent o f Regulation Y said the B oard considers that m an agement consulting advice provided fo r banks outside the holding com pany w ould include, but not be limited to, the fo llo w in g : Bank operations, systems and p ro ce d u res; Com puter operations and m echanization; Implementation o f electronic funds transfer sy stem s; Site planning and evalu ation ; Bank m ergers and the establishment o f new b ra n ch es; ( over ) O peration and management of a trust departm ent; International banking; F oreign exchange transactions; P urchasing policies and practices; Cost a n alysis; Capital adequacy and p la n n in g ; A u d itin g ; A ccou n tin g p ro ce d u re s; T a x planning; Investment advice (as authorized in R egulation Y ) ; Credit policies and administration, including credit docum entation, evaluation and debt collection ; P roduct developm ent, including specialized lending p ro v is io n s; M arketing operations, including research market developm ent and advertising p rogram s; Personnel operations, including recruiting, training, evaluation and com pensation; Security measures and procedures. T h e B oard attached the follow in g provisos to its am en dm en t: — Neither the bank holding com pany nor any o f its subsidiaries may ow n or control, directly or indi rectly, any equity securities in the bank to which advice is being given, except as specified in the accom pany ing interpretation; — N o officer, director or em ployee of the bank h oldin g com pany or any o f its subsidiaries may serve as an officer, director or em ployee of the client bank; — T h e advice is to be given on an explicit fee b a sis; — D isclosure must be made to each potential client bank of (a ) the names o f all banks that are affiliates o f the consulting com pany, and ( b ) the names o f all existing client banks in the same market area as that o f the potential client. T he B oard said that applications to furnish management consulting advice to non-affiliated banks would be processed initially by the B oard, and not under procedures delegating to the Reserve Banks authority to approve applications to engage in the activity de novo. In its accom panying interpretation, the B oard also s a id : — T he proviso that a bank holding com pany may not ow n or control equity securities of a client bank does not apply to shares acquired by a bank holding com pany or its subsidiaries in tw o w a y s : ( a ) as the result of a debt previously contracted, or ( b ) in g o o d faith as a fiduciary, so long as there is no sole discretionary authority to vote such shares, or. ow nership with sole voting rights, does not exceed 5 per cent o f the client bank’s voting shares. Copies of the amendment to Regulation Y and of the interpretation referred to in the above statement will be sent to you shortly. A lfred H a y e s , President.
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