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l l★K

Federal Reserve Bank
of Dallas

January 24, 2001

DALLAS, TEXAS
75265-5906

Notice 01-09

TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Joint Request for Comment on Proposal to
Permit Financial Holding Companies and Financial Subsidiaries to
Act as Real Estate Brokers and Managers
DETAILS
The Board of Governors of the Federal Reserve System and the Secretary of the Treasury
have requested public comment on whether to determine by rule that real estate brokerage and real
estate management are financial in nature or incidental to a financial activity and, therefore, permissible for financial holding companies and financial subsidiaries of national banks. The proposed rule
would amend subpart I of the Board’s Regulation Y and would amend the Secretary’s financial
subsidiary regulations.
The Board must receive comments by March 2, 2001. Please address comments to
Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and
Constitution Avenue, N.W., Washington, DC 20551. Also, you may mail comments electronically to
regs.comments@federalreserve.gov. All comments should refer to Docket No. R-1091.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 307–14, Vol. 66, No. 2 of the Federal
Register dated January 3, 2001, is attached.
MORE INFORMATION
For more information, please contact Rob Jolley, Banking Supervision Department, (214) 922-6071.
For additional copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254
or access District Notices on our web site at http://www.dallasfed.org/banking/notices/index.html.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

307

Proposed Rules

Federal Register
Vol. 66, No. 2
Wednesday, January 3, 2001

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.

FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R–1091]

Bank Holding Companies and Change
in Bank Control
DEPARTMENT OF THE TREASURY
Office of the Under Secretary for
Domestic Finance
12 CFR Part 1501
RIN 1505–AA84

Financial Subsidiaries
AGENCIES: Board of Governors of the
Federal Reserve System and Department
of the Treasury.
ACTION: Joint proposed rule with request
for public comments.
SUMMARY: The Board of Governors of the
Federal Reserve System and the
Secretary of the Treasury jointly
propose to seek comment on whether to
determine by rule that real estate
brokerage is an activity that is financial
in nature or incidental to a financial
activity and therefore permissible for
financial holding companies and
financial subsidiaries of national banks.
The Board and the Secretary also jointly
propose to solicit comment on whether
real estate management activities could
be considered financial in nature or
incidental to a financial activity. The
Board’s proposed rule would amend
subpart I of the Board’s Regulation Y to
add real estate brokerage and real estate
management to the list of activities
permissible for financial holding
companies. The Secretary’s proposed
rule would amend its financial
subsidiary regulations to add real estate
brokerage and real estate management to
the activities permissible for financial
subsidiaries of national banks. The
Board and the Secretary solicit comment
on all aspects of the proposal.
DATES: Comments must be received by
March 2, 2001.

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Comments should refer to
docket number R–1091 and should be
mailed to Ms. Jennifer J. Johnson,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551 (or mailed electronically to
regs.comments@federalreserve.gov) and
to Real Estate Brokerage and
Management Regulation, Office of
Financial Institution Policy, U.S.
Department of the Treasury, 1500
Pennsylvania Avenue, NW., Room SC
37, Washington, DC 20220 (or mailed
electronically to
financial.institutions@do.treas.gov).
Comments addressed to Ms. Johnson
also may be delivered to the Board’s
mailroom between 8:45 a.m. and 5:15
p.m. and, outside those hours, to the
Board’s security control room. Both the
mailroom and the security control room
are accessible from the Eccles Building
courtyard entrance, located on 20th
Street between Constitution Avenue and
C Street, N.W. Members of the public
may inspect comments in room MP–500
of the Martin Building between 9 a.m.
and 5 p.m. on weekdays. Comments
addressed to the Treasury Department
may also be delivered to the Treasury
Department mail room between the
hours of 8:45 a.m. and 5:15 p.m. at the
15th Street entrance to the Treasury
Building.
FOR FURTHER INFORMATION CONTACT:
Board of Governors: Scott G. Alvarez,
Associate General Counsel (202/452–
3583), or Mark E. Van Der Weide,
Counsel (202/452–2263), Legal Division;
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551. For users of
Telecommunications Device for the Deaf
(‘‘TDD’’) only, contact Janice Simms at
202/872–4984.
Department of the Treasury: Gerry
Hughes, Senior Financial Analyst (202/
622–2740); Roberta K. McInerney,
Assistant General Counsel (Banking and
Finance) (202/622–0480); or Gary W.
Sutton, Senior Banking Counsel (202/
622–0480).
SUPPLEMENTARY INFORMATION:
ADDRESSES:

Background
The Gramm-Leach-Bliley Act (Pub. L.
106–102, 113 Stat. 1338 (1999)) (‘‘GLB
Act’’) amended the Bank Holding
Company Act (12 U.S.C. 1841 et seq.)
(‘‘BHC Act’’) to allow a bank holding

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company or foreign bank that qualifies
as a financial holding company (‘‘FHC’’)
to engage in a broad range of activities
that are defined by the GLB Act to be
financial in nature. The GLB Act also
permits FHCs to engage in other
activities that the Board determines, by
regulation or order and in consultation
with the Secretary of the Treasury
(‘‘Secretary’’), to be financial in nature
or incidental to a financial activity.
The GLB Act also amended the
National Bank Act (12 U.S.C. 1 et seq.)
to allow a national bank to invest in
financial subsidiaries. Financial
subsidiaries may engage, with certain
exceptions, in the same broad range of
activities that are defined by the GLB
Act to be financial in nature and,
therefore, permissible for FHCs.1 In
addition, the GLB Act permits financial
subsidiaries to engage in other activities
that the Secretary determines, in
consultation with the Board, to be
financial in nature or incidental to a
financial activity.
The American Bankers Association
(‘‘ABA’’) and Fremont National Bank &
Trust Company, Fremont, Nebraska,
have asked the Board and the Secretary
(collectively, the ‘‘Agencies’’) to
determine that real estate brokerage and
management activities are financial in
nature. Two additional trade
associations, the Financial Services
Roundtable and the New York Clearing
House Association, have requested that
the Board permit FHCs to engage in real
estate brokerage activities.2 The
National Association of Realtors
(‘‘NAR’’) has urged the Agencies not to
determine that real estate brokerage
activities are financial in nature or
incidental to a financial activity.
The GLB Act directs the Board to
consider a variety of factors when
considering a request for a
determination that an activity is
financial in nature or incidental to a
financial activity, including (i) the
purposes of the BHC Act and the GLB
1 The exceptions are engaging as principal in
certain insurance underwriting activities, real estate
investment and development (unless otherwise
expressly authorized by law), and merchant
banking activities permitted in 12 U.S.C.
1843(k)(4)(H) or (I). 12 U.S.C. 24a(a)(2)(B).
2 The New York Clearing House Association
submitted its request on behalf of The Bank of New
York Company, Inc.; Chase Manhattan Corporation;
Citigroup, Inc.; J.P. Morgan, Inc.; Bankers Trust
Company; Fleet Boston, Inc.; HSBC; Bank One
Corporation; First Union Corporation; and Wells
Fargo & Company.

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Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Proposed Rules

Act; (ii) the changes or reasonably
expected changes in the marketplace in
which FHCs compete; (iii) the changes
or reasonably expected changes in the
technology for delivering financial
services; and (iv) whether the proposed
activity is necessary or appropriate to
allow a FHC to compete effectively with
any company seeking to provide
financial services in the United States,
efficiently deliver financial information
and services through the use of
technological means, or offer customers
any available or emerging technological
means for using financial services or for
the document imaging of data.3 The
Secretary must consider a virtually
identical set of factors in determining
whether an activity is permissible for
financial subsidiaries.4 The Agencies
also may consider other factors and
information that they consider relevant
to their determination.
The Agencies believe that the GLB
Act’s ‘‘financial in nature or incidental’’
standard represents a significant
expansion of the ‘‘closely related to
banking’’ standard that the Board
previously applied in determining the
permissibility of activities for bank
holding companies.5 In considering
whether an activity was closely related
to banking, the Board and the courts
looked to whether banks generally (i)
conduct the proposed activity, (ii)
provide services that are operationally
or functionally so similar to the
proposed services as to equip them
particularly well to provide the
proposed services, or (iii) provide
services that are so integrally related to
the proposed services as to require their
provision in a specialized form.6
Because the new ‘‘financial in nature or
incidental’’ test appears to be
substantially broader than the old
‘‘closely related to banking’’ test, the
Agencies believe that they should
consider an activity to be financial in
nature or incidental to a financial
activity to the extent that it meets the
old standard.
After considering the factors listed
above and other relevant information,
the Agencies propose to seek public
comment on whether to adopt rules that
would define real estate brokerage and
real estate management as activities that
3 See

12 U.S.C. 1843(k)(3).
12 U.S.C. 24a(b)(2).
5 See H.R. Conf. Rep. No. 106–434, at 153 (1999)
(‘‘permitting banks to affiliate with firms engaged in
financial activities represents a significant
expansion from the current requirement that bank
affiliates may only be engaged in activities that are
closely related to banking’’).
6 See National Courier Association v. Board of
Governors of the Federal Reserve System, 516 F.2d
1229, 1237 (D.C. Cir. 1975).
4 See

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are financial in nature or incidental to
a financial activity. The Board’s
proposed rule would amend § 225.86 of
the Board’s Regulation Y to add these
two new activities to the list of activities
permissible for FHCs. Bank holding
companies and foreign banks that
qualify as FHCs would be permitted to
engage in real estate brokerage and real
estate management by using the postconsummation notice procedure
described in § 225.87 of Regulation Y.
Bank holding companies and foreign
banks that do not qualify as FHCs may
engage only in those nonbanking
activities that were permissible for bank
holding companies prior to the
enactment of the GLB Act and, thus,
could not provide real estate brokerage
or management services under the
proposed rule. The Secretary’s proposed
rule would amend its regulations
regarding financial subsidiaries to add
real estate brokerage and real estate
management to the activities
permissible for financial subsidiaries.
Qualifying national banks would be
permitted to engage in these activities
through financial subsidiaries by
providing the Office of the Comptroller
of the Currency (‘‘OCC’’) with a notice
under the OCC’s rules.
The GLB Act requires that the Board
and the Secretary consult with each
other concerning any request, proposal,
or application for a determination that
an activity is financial in nature or
incidental to a financial activity. The
Agencies have consulted with each
other concerning the proposed rules,
and each Agency supports the other’s
determination to seek public comment
on the proposed rules.7
Proposed Rules
A. Real Estate Brokerage
Real estate brokerage is the business
of bringing together parties interested in
consummating a real estate purchase,
sale, exchange, lease, or rental
transaction and negotiating on behalf of
such parties a contract relating to the
transaction. The activity of real estate
brokerage would include acting as agent
for a party to a real estate transaction;
listing and advertising real estate;
locating buyers, sellers, lessors, and
lessees interested in engaging in real
estate transactions among themselves;
conveying information between the
parties to a potential real estate
transaction; providing advice in
7 Under the GLB Act, neither Agency may
determine that an activity is financial in nature or
incidental to a financial activity if the other Agency
indicates in writing that it believes that the activity
is not financial in nature, incidental to a financial
activity, or otherwise permissible. 12 U.S.C.
1843(k)(2)(A)(ii), 24a(b)(1)(B)(i)(II).

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connection with a real estate
transaction; negotiating price and other
terms on behalf of parties to a real estate
transaction; and administering the
closing to a real estate transaction. Real
estate brokerage generally does not
involve purchasing or selling real estate
as principal. The business of real estate
brokerage may only be conducted
pursuant to state licensing laws and
regulations.
As noted, prior to the passage of the
GLB Act, bank holding companies were
permitted to engage only in activities
that the Board determined were closely
related to banking under section 4(c)(8)
of the BHC Act. In 1972, the Board
determined that real estate brokerage
was not closely related to banking for
purposes of the BHC Act.8 Although the
GLB Act does not explicitly authorize
FHCs to act as real estate brokers, the
statute permits FHCs to engage in any
activity that the Board, in consultation
with the Secretary, has determined to be
financial in nature or incidental to a
financial activity. As noted, the GLB
Act’s ‘‘financial in nature or incidental’’
test is broader than the former ‘‘closely
related to banking’’ test.
Similarly, the OCC has not permitted
national banks to engage in general real
estate brokerage.9 Although the GLB Act
does not explicitly authorize financial
subsidiaries to act as real estate brokers,
the statute permits financial subsidiaries
to engage in any activity that the
Secretary, in consultation with the
Board, has determined to be financial in
nature or incidental to a financial
activity. For the reasons discussed
below, the Agencies believe that they
should seek public comment on
whether real estate brokerage activities
are financial in nature or incidental to
a financial activity within the meaning
of section 4(k)(1)(A) of the BHC Act and
section 5136A(a)(2)(A)(i) of the Revised
Statutes.
1. General ‘‘Financial in Nature or
Incidental’’ Analysis
Some depository institutions already
engage in real estate brokerage.
Although, as noted, the OCC has not
permitted national banks to provide
8 12 CFR 225.126(c); Boatmen’s Bancshares, Inc.,
58 Federal Reserve Bulletin 427, 428 (1972). In
1987, as part of a proposal to authorize bank
holding companies to engage in real estate
investment (the ‘‘1987 Proposal’’), the Board
proposed permitting a bank holding company to
provide real estate brokerage services in connection
with real estate in which the bank holding company
had an interest. See 52 FR 543 (Nov. 4, 1987); see
also 50 FR 4519 (Jan. 31, 1985). The Board never
adopted this proposed rule in final form.
9 See OCC Interpretive Letter No. 84, reprinted in
[1978–1979 Transfer Binder] Fed. Banking L. Rep.
(CCH) ¶ 85,159 (Apr. 3, 1979).

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Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Proposed Rules
general real estate brokerage services,
several states currently permit their
state-chartered banks to act as a general
real estate broker.10 The Office of Thrift
Supervision (‘‘OTS’’) also has permitted
the service corporation subsidiaries of
federal savings associations to provide
general real estate brokerage services.11
In addition, national and state bank
trust departments have long been
involved as agent in the purchase and
sale of real estate assets that are part of
trust estates.
Although bank holding companies
and financial subsidiaries do not have
authority to provide real estate
brokerage services, banks and bank
holding companies engage in a wide
variety of other real-estate related
activities, including (i) holding bank
premises and acquiring real estate in a
fiduciary capacity or in full or partial
satisfaction of a debt previously
contracted; (ii) making real estate
investments that have as their primary
purpose community development
(subject to certain limits); (iii) providing
real estate appraisal services; (iv)
arranging commercial real estate equity
financing; (v) real estate lending; (vi)
real estate leasing; (vii) providing real
estate settlement and escrow services;
and (viii) providing real estate
investment advisory services.12 Since
the passage of the GLB Act, FHCs and
financial subsidiaries also have been
able to provide title insurance, private
mortgage insurance, and any other type
of insurance to the parties to a real
estate transaction.13 As a result, banks
10 See, e.g., Iowa Code § 524.802 (‘‘A state bank
shall have * * * the power to * * * engage in the
brokerage of insurance and real estate subject to the
prior approval of the superintendent.’’); N.J. Admin.
Code tit. 3, § 11–11.5(a)(4) (permitting a subsidiary
of a New Jersey state-chartered bank to provide real
estate brokerage services); 1979 Ky. AG LEXIS 224
(‘‘A state bank, through its authorized trust
department, and state trust companies may act as
real estate brokers or salesmen in the general real
estate business, regardless of whether it involves
the institution’s fiducial business or not.’’).
11 See 12 CFR 559.4(e)(4) and OTS Letter, July 16,
1997 (1997 OTS LEXIS 3).
12 With respect to bank holding companies, see,
e.g., 12 CFR 225.22(d)(1) and (3) and 225.28(b)(2),
(3), and (12). With respect to national banks, see,
e.g., 12 U.S.C. 29 (holding bank premises and
acquiring real estate DPC); 12 U.S.C. 92a (general
fiduciary authority); OCC Interpretive Letter No.
467, reprinted in [1988–1989 Transfer Binder] Fed.
Banking L. Rep. (CCH) ¶ 85,691 (Jan. 24, 1989)
(providing real estate appraisal services); OCC
Interpretive Letter No. 387, reprinted in [1988–1989
Transfer Binder] Fed. Banking L. Rep. (CCH) ¶
85,611 (June 22, 1987) (arranging commercial real
estate equity financing); 12 U.S.C. 371 (real estate
lending); 12 CFR 5.34(e)(5)(v) (providing real estate
settlement and escrow services and real estate
investment advisory services).
13 See 12 U.S.C. 1843(k)(4)(B), 24a(b)(1)(A)(i). The
authority of a financial subsidiary to underwrite
certain types of insurance is, however, limited. See
12 U.S.C. 24a(a)(2)(B)(i).

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and bank holding companies participate
in most aspects of the typical real estate
transaction other than brokerage.
In addition, banks and bank holding
companies currently engage in a variety
of activities that are functionally and
operationally similar to real estate
brokerage. Banking organizations have
provided their customers with various
agency transactional services, including
securities brokerage services, private
placement services, futures commission
merchant services, agency transactional
services relating to swaps and other
derivative instruments, and insurance
agency services.14 Although these
agency services are provided by banking
organizations in connection with an
underlying financial transaction (the
purchase of securities, derivatives, or
insurance), the agency services provided
by a real estate broker are similar in
nature to those provided by a securities,
derivatives, or insurance broker.
Although the full range of real estate
brokerage services would not fit within
the scope of national bank or FHC finder
authority,15 many of the essential
aspects of real estate brokerage are
already permissible finder activities.
The OCC’s regulations provide that ‘‘a
national bank may act as a finder in
bringing together a buyer and a seller’’
for a financial or nonfinancial
transaction and further provide that
permissible finder activities include
‘‘identifying potential parties, making
inquiries as to interest, introducing or
arranging meetings of interested parties,
and otherwise bringing parties together
for a transaction that the parties
themselves negotiate and
consummate.’’ 16 Pursuant to the finder
and financial counseling authorities, the
OCC has permitted national banks to
locate, analyze, and make
recommendations regarding the
14 With respect to bank holding companies, see,
e.g., 12 CFR 225.28(b)(7) and 12 U.S.C.
1843(k)(4)(B). With respect to national banks, see,
e.g., 12 U.S.C. 24(7) (securities brokerage services);
OCC Interpretive Letter No. 329, reprinted in [1985–
1987 Transfer Binder] Fed. Banking L. Rep. (CCH)
¶ 85,499 (Mar. 4, 1985) (private placement
services); 12 CFR 5.34(e)(5)(v) (futures commission
merchant services and agency transactional services
relating to swaps and derivatives); and 12 U.S.C. 92
(insurance agency services).
15 Real estate brokerage would not fit within the
finder activities permitted to national banks
because real estate brokerage essentially involves
the real estate broker in negotiation of the real estate
transaction—a role specifically forbidden to
national bank finders. See 12 CFR 7.1002(b). Real
estate brokerage would not fit within the finder
activities authorized for FHCs because the Board’s
finder rule prohibits a finder from becoming
involved in negotiation and specifically excludes
any activity that would require the FHC to register
or obtain a license as a real estate agent or broker.
See Board press release (December 13, 2000).
16 12 CFR 7.1002.

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309

purchase or sale of real estate; and to
place real estate investment properties
by contacting a limited number of
qualified investors, identifying and
engaging real estate brokers, advising
investors regarding the terms of a real
estate sale, and administering a real
estate closing.17 A final rule issued by
the Board on December 13, 2000,
authorized FHCs to act as a finder.18
In addition, the authority of national
banks and bank holding companies to
assist third parties in obtaining
commercial real estate equity financing
includes an important subset, although
not the full panoply, of services
provided by the typical real estate
broker.19 In this regard, the Board has
allowed bank holding companies to act
as an intermediary for the financing of
commercial or industrial incomeproducing real estate by arranging for
the transfer of the title, control, and risk
of such a real estate project to one or
more investors. Bank holding
companies may only arrange
commercial real estate equity financing
with respect to real estate projects that
are not sponsored by or invested in by
the holding company. The OCC
similarly has authorized national banks
to arrange for the placement of equity
interests in commercial and investment
real estate.20
In determining whether an activity is
financial in nature or incidental to a
financial activity, the GLB Act
specifically instructs the Board and the
Secretary to consider whether the
activity is necessary or appropriate to
allow a FHC or a bank, respectively, to
compete effectively with other financial
services companies operating in the
United States.21 Before the passage of
the GLB Act, in determining whether an
activity was ‘‘closely related to
banking,’’ the law directed the Board to
consider whether banks engaged in the
activity, but did not explicitly authorize
the Board to consider whether other
financial service providers engaged in
the activity.22 This change in law
represents a significant expansion of the
17 See OCC Interpretive Letter No. 238, reprinted
in [1983–1984 Transfer Binder] Fed. Banking L.
Rep. (CCH) ¶ 85,402 (Feb. 9, 1982). The OCC also
has allowed national banks to participate in the
structuring and negotiation of certain real estate
exchange transactions. See OCC Interpretive Letter
No. 880, reprinted in [1999–2000 Transfer Binder]
Fed. Banking L. Rep. (CCH) ¶ 81,373 (Dec. 6, 1999).
18 See Board press release (December 13, 2000).
19 See, e.g., 12 CFR 225.28(b)(2)(ii).
20 See OCC Interpretive Letter No. 271, reprinted
in [1983–1984 Transfer Binder] Fed. Banking L.
Rep. (CCH) ¶ 85,435 (Sept. 21, 1983).
21 12 U.S.C. 1843(k)(3)(D)(i), 24a(b)(2)(D)(i).
22 See National Courier Association v. Board of
Governors of the Federal Reserve System, 516 F.2d
1229, 1237 (D.C. Cir. 1975).

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Board’s capacity to consider the
competitive realities of the U.S.
financial marketplace in determining
the permissibility of activities for FHCs.
As the financial marketplace
continues to evolve, it appears that
many financial companies are adding
real estate brokerage to their menu of
services. In this regard, the ABA has
provided evidence that several
diversified financial companies provide
real estate brokerage services in addition
to their more traditional banking,
securities, and insurance services.23 The
ABA also has asserted that buyers and
sellers of real estate are increasingly
looking to a single company to provide
all of their real estate-related needs.
Purchasers of real estate seem especially
interested in obtaining real estate
brokerage and mortgage finance from a
single provider. The ABA argues that
permitting FHCs and financial
subsidiaries to engage in real estate
brokerage activities would permit FHCs
and banks to compete effectively with
other financial service providers in the
United States. The Agencies solicit
comment on the extent to which U.S.
financial services companies provide
real estate brokerage services.
Existing federal and state laws should
operate to mitigate the potential adverse
effects of combining banking and real
estate brokerage. The antitying rules
should help prevent banks from using
any market power they possess to assist
an affiliated financial subsidiary or FHC
in monopolizing or competing unfairly
in the real estate brokerage business.
The antitying rules would prohibit a
subsidiary bank of a FHC engaged in
real estate brokerage or the parent bank
of a financial subsidiary engaged in real
estate brokerage from extending credit,
furnishing any service, or varying the
consideration for any loan or service on
the condition that the customer obtain
real estate brokerage services from the
bank or any affiliate (including a
financial subsidiary) of the bank.24
Sections 23A and 23B of the Federal
Reserve Act would limit the amount of
credit and certain other forms of support
that a bank could provide to a real estate
brokerage affiliate (including a financial
subsidiary).25 In addition, section 23B
would require mortgage loans by a bank
23 For example, General Motors Acceptance
Corporation operates a thrift, makes mortgage loans,
and provides real estate brokerage services;
Prudential Insurance Company provides insurance
and securities products and real estate brokerage
services; Cendant Corporation provides insurance,
mortgage loans, and real estate brokerage services;
and Long & Foster provides mortgage loans,
insurance products, and real estate brokerage
services.
24 12 U.S.C. 1972(1)(B).
25 12 U.S.C. 371c and 371c–1.

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to a customer who obtains real estate
brokerage services from a bank affiliate
(including a financial subsidiary) to be
on market terms.26 Furthermore, federal
and state consumer protection laws,
including the Real Estate Settlement
Procedures Act,27 would help protect
customers of banks and affiliated real
estate brokers. The Agencies solicit
comment on the potential adverse
effects of allowing FHCs or financial
subsidiaries to act as a real estate broker
and whether special restrictions on
transactions or relationships between a
real estate broker and its affiliated
depository institutions are necessary to
mitigate those adverse effects.28
Permitting FHCs and financial
subsidiaries to engage in real estate
brokerage does not appear to present
significant risks to those organizations
or their depository institution affiliates.
The proposed rules would ensure that
the authorized real estate brokerage
services are agency services only and
that FHCs and financial subsidiaries
take no principal risk in connection
with real estate transactions that they
broker. As a consequence, FHCs and
financial subsidiaries engaging in real
estate brokerage would not be subject to
either the liquidity risk or market risk
associated with real estate investment
and development. Real estate brokerage
involves operational and legal risks, but
these risks appear similar in nature and
extent to those posed by other agency
activities conducted by FHCs and
financial subsidiaries.
2. Real Estate Brokerage as a Statutorily
Listed Financial Activity
The ABA has argued that real estate
is a financial asset and that, accordingly,
the Agencies should find real estate
brokerage to be part of the statutorily
listed financial activity of ‘‘[l]ending,
exchanging, transferring, investing for
others or safeguarding financial assets
26 12 U.S.C. 371c–1(a)(2)(D). Section 23A also
would cover mortgage loans by a bank to a customer
to the extent that the customer uses part of the loan
proceeds to pay the brokerage commission of a real
estate brokerage affiliate of the bank.
27 12 U.S.C. 2601 et seq.
28 Under section 114 of the GLB Act, the Board
has authority to impose restrictions or requirements
on transactions or relationships between a
depository institution subsidiary of a bank holding
company and any affiliate of such depository
institution, if the Board finds that such action
would be (i) consistent with the purposes of
applicable Federal law and (ii) appropriate, among
other things, to avoid adverse effects such as undue
concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound
banking practices. GLB Act Section 114(b). Section
114 provides the OCC with similar authority to
impose restrictions or requirements on transactions
or relationships between a national bank and its
subsidiaries. GLB Act Section 114(a).

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other than money or securities.’’29
According to the ABA, real estate is a
financial asset because (i) the home is
the largest asset for many individuals;
(ii) real estate serves as the
underpinning for hundreds of billions of
dollars of mortgage-backed securities;
and (iii) real estate serves as a means of
wealth creation by increasing in value
over time and providing tax benefits.
The Agencies are not convinced that
real estate should be deemed a financial
asset because it is a comparatively large
asset on most individuals’ personal
balance sheet or because it often is used
as collateral for financial instruments.
Airplanes, boats, and automobiles are
large assets that are often used as
collateral for financial instruments
(loans and leases in particular), yet
these assets are generally considered to
be nonfinancial. The Agencies
recognize, however, that real estate does
have certain important attributes of a
financial asset; namely, that individuals
often purchase real estate, at least in
part, for investment purposes and with
a view toward the financial benefits of
the transaction.
These financial attributes of real
estate may, however, not be enough to
justify treating real estate as a financial
asset. Although real estate often is
purchased, in part, for investment
purposes, the same can be said of many
nonfinancial assets such as fine art, rare
stamps, and antique cars. Moreover,
whereas loans, securities, and most
other financial assets are held for
investment purposes only, most
purchasers and renters of real estate also
use the property as a residence or in the
operation of a business. Finally,
financial assets are generally thought to
include money, loans, securities, and
other similar intangible properties. Real
estate, on the other hand, is a tangible,
physical asset.
The ABA also has argued that the
purchase, sale, or lease of real estate is
a financial transaction and that,
accordingly, the Agencies should find
that real estate brokerage is part of the
listed financial activity of ‘‘[a]rranging,
effecting, or facilitating financial
transactions for the account of third
parties.’’ 30 The ABA contends that the
purchase, sale, or lease of real estate is
a financial transaction because it is the
most important, complex, and
financially difficult transaction that
29 12 U.S.C. 1843(k)(5)(B)(i), 24a(b)(3)(A). The
GLB Act requires the Agencies jointly to define this
activity and two other listed activities as ‘‘financial
in nature’’ and to determine ‘‘the extent to which
such activities are financial in nature or incidental
to a financial activity.’’ 12 U.S.C. 1843(k)(5)(A),
24a(b)(3).
30 12 U.S.C. 1843(k)(5)(B)(iii), 24a(b)(3)(C).

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most individuals undertake. The
Agencies are not convinced that the
importance, complexity, or size of a
transaction should affect a
determination as to whether the
transaction is financial in nature. On the
other hand, real estate transactions often
are entered into, at least in part, for
investment purposes. To that extent,
real estate transactions do have some
aspects of a financial transaction. The
Agencies seek comment on the above
issues.
3. Arguments of the NAR
As noted, the NAR has asked that the
Agencies not authorize real estate
brokerage activities. The NAR makes
four principal contentions in support of
its position. First, the NAR notes that
the GLB Act does not specifically
authorize FHCs to engage in real estate
brokerage. Although this contention is
true, the GLB Act also authorizes each
Agency to supplement the statutory
activities list with additional activities
that it determines, in consultation with
the other Agency, to be financial in
nature or incidental to a financial
activity. The NAR points out that the
GLB Act specifically prohibits financial
subsidiaries from engaging in real estate
investment and development activities,
but this prohibition by its terms does
not apply to FHCs or to real estate
brokerage activities.
Second, the NAR suggests that it
would be inappropriate for the Board
now to permit FHCs to provide real
estate brokerage services because the
Board prohibited bank holding
companies from acting as a real estate
broker in 1972. As noted above, the
Board’s 1972 decision on real estate
brokerage was made pursuant to the
former ‘‘closely related to banking’’
standard; the GLB Act now authorizes
the Board to approve any activity that is
‘‘financial in nature’’ or ‘‘incidental to a
financial activity.’’ The plain meaning
of and legislative history behind the
‘‘financial’’ and ‘‘incidental to
financial’’ standards suggest that
Congress intended the new standards to
be significantly broader than the old
‘‘closely related to banking’’ test.
Furthermore, the financial services
environment has changed significantly
in the past 30 years, and what may have
been an inappropriate activity for bank
holding companies in the early 1970s
may be appropriate for the diversified
FHCs of the early 21st century.
Third, the NAR claims that real estate
brokerage is a commercial activity and
not a financial activity. Finally, the NAR
argues that the Agencies should delay
finding real estate brokerage to be a
permissible activity until such time as

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FHCs gain experience in conducting the
various other new activities authorized
by the GLB Act.
The Agencies seek comment on
whether real estate brokerage is an
activity that is financial in nature or
incidental to a financial activity. In
addition, the Agencies seek comment on
the particular arguments advanced by
the NAR.
B. Real Estate Management Services
Real estate management is the
business of providing for others day-today management of real estate. Day-today management of real estate could
include procuring tenants; negotiating
leases; maintaining security deposits;
billing and collecting rent payments;
providing periodic accountings for such
payments; making principal, interest,
insurance, tax, and utilities payments;
and generally overseeing inspection,
maintenance, and upkeep of real
property. Real estate management
generally does not involve purchasing,
selling, or owning real estate as
principal. Although some states do not
subject real estate managers to special
licensing laws or regulations, real estate
managers in other states are subject to
the same state licensing laws and
regulations that apply to real estate
brokers.
The Board first proposed allowing
bank holding companies to provide
property management services in
1971.31 For a variety of reasons,
however, including the substantial
volume of negative public comment
received on the proposal, the Board
determined in 1972 that property
management was not closely related to
banking for purposes of the BHC Act.32
Similarly, the OCC has not permitted
national banks to engage in general real
estate management.33
The Agencies have some doubts as to
whether all aspects of real estate
management are financial in nature or
incidental to a financial activity. The
Agencies also are concerned that certain
forms of real estate management appear
to resemble more closely day-to-day
operation of a commercial enterprise
than serving as the intermediary
between the owners and users of real
estate. Nevertheless, for the reasons
discussed below, the Agencies believe
31 See

36 FR 18427 (Sept. 7, 1971).
CFR 225.126(g); 58 Federal Reserve Bulletin
652 (1972). As part of the 1987 Proposal, the Board
proposed authorizing a bank holding company to
provide real estate management services in
connection with real estate in which the bank
holding company had an interest. See 52 FR 543
(Nov. 4, 1987); see also 50 FR 4519 (Jan. 31, 1985).
As noted above, the Board never finalized this
proposed rule.
33 See OCC Interpretive Letter No. 238, supra.
32 12

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311

that they should seek public comment
on (i) what activities are included
within real estate management and (ii)
which of these activities, if any, are
financial in nature or incidental to a
financial activity within the meaning of
section 4(k)(1)(A) of the BHC Act and
section 5136A(a)(2)(A)(i) of the Revised
Statutes.
1. General ‘‘Financial in Nature or
Incidental’’ Analysis
Neither the OCC nor state banking
departments, to the Agencies’
knowledge, have permitted banks to
provide general real estate management
services. Thrift holding companies
(including non-unitary thrift holding
companies) and thrift service
corporation subsidiaries, however, have
been permitted to maintain and manage
real estate.34 In addition, as noted
above, banking organizations have long
been engaged in a variety of real estaterelated activities. Moreover, some
(though not all) real estate management
activities appear to be functionally and
operationally similar to various other
activities that banks and bank holding
companies currently engage in. For
example, collecting rental payments;
maintaining security deposits; making
principal, interest, taxes, and insurance
payments; and providing periodic
accountings are functionally similar to
collecting loan or lease payments,
disbursing escrow payments, and
performing related accountings. In
addition, banks and bank holding
companies have a long history of
managing real estate assets that are part
of trust estates, that are used by the
banking organization in its own
operations, or that are acquired as a
result of foreclosure.35
As noted above, in determining
whether an activity is financial in
nature or incidental to a financial
activity, the GLB Act instructs the Board
and the Secretary to consider whether
the activity is necessary or appropriate
to allow FHCs or banks, respectively, to
compete effectively with other financial
services companies operating in the
United States. The ABA has contended
that competitive considerations support
a determination to allow FHCs and
financial subsidiaries to provide real
estate management services. The
Agencies solicit comment on the extent
to which financial services companies
34 See

12 CFR 559.4(e)(3), 584.2–1(b)(8).
e.g., OCC Interpretive Letter No. 238,
supra; OCC Interpretive Letter No. 355, reprinted in
[1985–1987 Transfer Binder] Fed. Banking L. Rep.
(CCH) ¶ 85,525 (Dec. 10, 1985); Bancorp Hawaii,
Inc., 71 Federal Reserve Bulletin 168, 168 n.2
(1985); United Missouri Bancshares, Inc., 64
Federal Reserve Bulletin 415, 417 (1978).
35 See,

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provide real estate management services
in the United States and on whether
permitting FHCs and financial
subsidiaries to provide real estate
management services would help ensure
competitive equity between FHCs and
financial subsidiaries and other
financial firms.
The same laws that would operate to
mitigate potential adverse effects in the
real estate brokerage context also would
help to alleviate adverse effects in the
provision of real estate management
services. The Agencies solicit comment
on the potential adverse effects of
allowing FHCs and financial
subsidiaries to act as a real estate
manager and whether special
restrictions are necessary to mitigate
those adverse effects.
Permitting FHCs and financial
subsidiaries to engage in real estate
management activities does not appear
to present significant risks to those
organizations or their depository
institution affiliates. The proposed rules
would ensure that the authorized real
estate management services are agency
services only and that FHCs and
financial subsidiaries take no principal
risk in connection with real estate that
they manage. The Agencies recognize,
however, that engaging in property
management may increase the
operational, legal, and reputational risks
faced by a FHC or financial subsidiary.
Accordingly, the Agencies seek
comment on the nature and extent of
these risks.
2. Real Estate Management as a
Statutorily Listed Financial Activity
The ABA has argued that the
Agencies should find that real estate
management is part of the listed
financial activity of ‘‘[l]ending,
exchanging, transferring, investing for
others or safeguarding financial assets
other than money or securities.’’36 If the
Agencies were to conclude that real
estate is a financial asset, this argument
would have some textual appeal. Real
estate management could be viewed, in
part, as a form of safeguarding real
estate.
The ABA also has argued that the
Agencies should find that real estate
management services are part of the
listed financial activity of ‘‘[a]rranging,
effecting, or facilitating financial
transactions for the account of third
parties.’’ 37 Part of the role of a property
manager does involve the facilitation of
financial transactions: For example,
maintenance of security deposits,
collection of rent payments, and
36 12
37 12

U.S.C. 1843(k)(5)(B)(i), 24a(b)(3)(A).
U.S.C. 1843(k)(5)(B)(iii), 24a(b)(3)(C).

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distribution of principal, interest,
insurance, tax, and utility payments.
Property management also, however,
appears to have components that go
beyond the facilitation of financial
transactions. The Agencies seek
comment on the above issues.
C. Description of the Proposed Rules
1. Real Estate Brokerage
The proposed rules authorize FHCs
and financial subsidiaries to provide
real estate brokerage services and
include examples of the sorts of
activities that the Agencies consider to
be included within real estate brokerage.
The Agencies seek comment on whether
any final rules should provide further
guidance regarding the scope of
activities that are included within real
estate brokerage.
Importantly, the proposed rules also
contain restrictions designed to ensure
that a FHC or financial subsidiary, when
acting as a real estate broker, serves only
as an intermediary between buyers and
sellers (or lessees and lessors) and does
not otherwise become impermissibly
involved in the underlying real estate
transaction. In particular, the proposed
rules make clear that they do not
authorize a FHC or financial subsidiary
to (i) invest in or develop real estate; or
(ii) take title to, acquire, or hold an
ownership interest in any real estate
that is the subject of the company’s real
estate brokerage services.
The Agencies understand that many
real estate brokers offer employee
relocation services to their corporate
clients. Certain fundamental employee
relocation services—assisting a client’s
transferred employees to sell their
existing homes, buy homes in their
destination locations, and obtain
mortgage financing for their new home
purchases—appear to be forms of real
estate brokerage or currently permissible
financial activities.
Other employee relocation activities
seem less obviously a part of real estate
brokerage or otherwise financial in
nature. For example, a real estate broker
providing employee relocation services
often commits to purchase any home
owned by one of its client’s transferred
employees at a fixed price if the broker
fails to sell the home within a certain
time period. The Agencies believe that
such services may be incidental to real
estate brokerage if the homes purchased
by the broker are sold within a short
time period, the broker’s total holdings
of unsold real estate do not exceed some
threshold amount, and the broker only
purchases unsold real estate in
connection with providing bona fide
employee relocation services to

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customers (not for the purpose of
speculating on the price of real estate).
The Agencies also understand that
employee relocation services often
include assisting transferred employees
to move household goods to their
destination locations and assisting the
spouses of transferred employees to find
employment in their destination
locations.
The Agencies request information on
the kinds of employee relocation
services that real estate brokers
currently provide. The Agencies also
seek comment on whether to permit
FHCs or financial subsidiaries: (i) To
provide employee relocation services as
part of real estate brokerage or
otherwise; (ii) to purchase residential
real estate in connection with providing
employee relocation services and, if so,
what conditions or limits should apply
to such real estate purchases; and (iii) to
assist transferred employees to move
their household goods and to assist the
spouses of transferred employees to find
employment in connection with
providing employee relocation services.
2. Real Estate Management
The proposed rules authorize FHCs
and financial subsidiaries to provide
real estate management services and
include examples of the sorts of
activities that the Agencies consider to
be included within real estate
management.
The ABA has suggested that the
Agencies’ definition of real estate
management should include any
activities that may be defined as ‘‘real
estate management’’ under any state
law. The Agencies generally are
reluctant to delegate to state legislatures
any determinations regarding the scope
of permissible activities for federally
regulated banking organizations.
Nevertheless, the Agencies specifically
solicit comment on whether real estate
management activities should be
defined explicitly to include any
activities that are defined as ‘‘real estate
management’’ under state law. The
Agencies also request comment more
generally on whether any final rules
should contain further guidance
regarding the scope of activities that are
included within real estate
management.
The proposed rules contain
restrictions designed to ensure that a
FHC or financial subsidiary, when
providing real estate management
services, acts only in an agency capacity
as an intermediary between the owners
and users of real estate. In particular,
the proposed rules make clear that real
estate management does not include (i)
investing in or developing real estate; or

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Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Proposed Rules
(ii) taking title to, acquiring, or holding
an ownership interest in any real estate
that the FHC or financial subsidiary
manages. In light of these exclusions,
the Agencies request comment on
whether real estate managers receive
compensation in the form of an equity
or equity-like interest in the managed
real estate and, if so, whether the
Agencies should prevent FHCs that
engage in real estate management from
receiving compensation in this form.
The proposed rules also prevent a
FHC or financial subsidiary that
provides real estate management
services from itself repairing or
maintaining the managed real estate.
The Agencies have doubts as to whether
repair and maintenance of real estate are
activities that are financial in nature or
incidental to a financial activity. The
proposed rules allow a FHC or financial
subsidiary, however, to arrange for a
third party to provide these services.
The Agencies request comment on
whether FHCs and financial subsidiaries
should be limited in their authority to
engage in any other aspects of real estate
management.
The Agencies also seek comment on
whether they should draw any
distinctions between the management of
single-family housing, multi-family
housing, office buildings, institutional
buildings (hotels, hospitals, etc.),
commercial and industrial properties,
and farms. In addition, the Agencies
solicit comment on whether real estate
management should include
management of the air rights above and
the oil and mineral rights beneath
particular parcels of land. As noted
above, the Agencies are concerned that
certain forms of real estate management
may more closely resemble day-to-day
operation of a commercial enterprise
than serving as the intermediary
between the owners and users of real
estate.
Plain Language
Section 722 of the GLB Act requires
the Board to use ‘‘plain language’’ in all
proposed and final rules published after
January 1, 2000. In light of this
requirement, the Board has sought to
present its proposed rule in a simple
and straightforward manner and has
included in the rule examples of
activities that would be permissible
under the proposed rule. The Board
invites comments on whether there are
additional steps the Board could take to
make the proposed rule easier to
understand.
Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act, the Agencies

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certify that the proposed rules would
not have a significant economic impact
on a substantial number of small entities
within the meaning of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.).
The proposed rules would remove
regulatory restrictions on financial
holding companies and financial
subsidiaries of national banks by
permitting them to engage in real estate
brokerage and real estate management
activities. The proposed rules would
apply to all financial holding companies
and national bank financial subsidiaries,
regardless of their size. The proposed
rules should enhance the ability of
financial holding companies and
financial subsidiaries, including small
financial holding companies and
financial subsidiaries, to compete with
other providers of financial services in
the United States and to respond to
technological and other changes in the
marketplace in which they compete.
Accordingly, a regulatory flexibility
analysis is not required.

313

1844(b), 1972(l), 3106, 3108, 3310, 3331–
3351, 3907, and 3909.

2. Section 225.86(d), published at 65
FR 80740, December 22, 2000, is
amended by adding new paragraphs
(d)(2) and (d)(3) to read as follows:
§ 225.86 What activities are permissible for
financial holding companies?

Authority and Issuance

*
*
*
*
(d) * * *
(2) Real estate brokerage.
(i) Providing real estate brokerage
services, including, among other things,
acting as an agent for a buyer, seller,
lessor, or lessee of real estate; listing and
advertising real estate; providing advice
in connection with a real estate
purchase, sale, exchange, lease, or rental
transaction; bringing together parties
interested in consummating such a real
estate transaction; and negotiating on
behalf of such parties a contract relating
to such a real estate transaction.
(ii) In providing real estate brokerage
services, a financial holding company
may not:
(A) Invest in or develop real estate as
principal; or
(B) Take title to, acquire, or hold any
ownership interest in real estate
brokered by the company.
(3) Real estate management.
(i) Providing real estate management
services, including, among other things,
procuring tenants; negotiating leases;
maintaining security deposits; billing
and collecting rent payments; providing
periodic accountings for such payments;
making principal, interest, insurance,
tax, and utility payments; and generally
overseeing the inspection, maintenance,
and upkeep of real estate.
(ii) In providing real estate
management services, a financial
holding company may not:
(A) Invest in or develop real estate as
principal;
(B) Take title to, acquire, or hold any
ownership interest in real estate
managed by the company; or
(C) Directly or indirectly maintain or
repair real estate managed by the
company (but may arrange for a third
party to provide these services).

For the reasons set forth in the joint
preamble, part 225 of chapter II, title 12
of the Code of Federal Regulations is
proposed to be amended as follows:

By order of the Board of Governors of the
Federal Reserve System, December 26, 2000.
Jennifer J. Johnson,
Secretary of the Board.

Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506;
5 CFR part 1320 Appendix A.1), the
Board has reviewed the proposed rule
under the authority delegated to the
Board by the Office of Management and
Budget. No collections of information
pursuant to the Paperwork Reduction
Act are contained in the proposed rule.
List of Subjects
12 CFR Part 225
Administrative practice and
procedures, Banks, Banking, Federal
Reserve System, Holding companies,
Reporting and recordkeeping
requirements, Securities.
12 CFR Part 1501
Administrative practice and
procedure, National Banks, Reporting
and recordkeeping requirements.
Federal Reserve System
12 CFR Chapter II

Department of the Treasury

PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)

12 CFR Chapter XV
Authority and Issuance

1. The authority citation for part 225
continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818,
1828(o), 1831i, 1831p-1, 1843(c)(8), 1843(k),

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*

For the reasons set forth in the joint
preamble, part 1501 of chapter XV, title
12 of the Code of Federal Regulations is
proposed to be amended as follows:

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Federal Register / Vol. 66, No. 2 / Wednesday, January 3, 2001 / Proposed Rules

PART 1501—FINANCIAL
SUBSIDIARIES
1. The authority citation for part 1501
continues to read as follows:
Authority: 12 U.S.C. 24a.

2. Section 1501.2, published in an
interim rule in this issue of the Federal
Register, is amended by adding new
paragraphs (b) and (c) to read as follows:
1501.2 What activities has the Secretary
determined to be financial in nature or
incidental to a financial activity?

(a) * * *
(b) Real estate brokerage.
(1) Providing real estate brokerage
services, including, among other things,
acting as an agent for a buyer, seller,
lessor, or lessee of real estate; listing and
advertising real estate; providing advice
in connection with a real estate
purchase, sale, exchange, lease, or rental
transaction; bringing together parties
interested in consummating such a real
estate transaction; and negotiating on
behalf of such parties a contract relating
to such a real estate transaction.
(2) In providing real estate brokerage
services, a financial subsidiary may not:
(i) Invest in or develop real estate as
principal; or
(ii) Take title to, acquire, or hold any
ownership interest in real estate
brokered by the financial subsidiary.
(c) Real estate management.
(1) Providing real estate management
services, including, among other things,
procuring tenants; negotiating leases;
maintaining security deposits; billing
and collecting rent payments; providing
periodic accountings for such payments;
making principal, interest, insurance,
tax, and utility payments; and generally
overseeing the inspection, maintenance,
and upkeep of real estate.
(2) In providing real estate
management services, a financial
subsidiary may not:
(i) Invest in or develop real estate as
principal;
(ii) Take title to, acquire, or hold any
ownership interest in real estate
managed by the financial subsidiary; or
(iii) Directly or indirectly maintain or
repair real estate managed by the
financial subsidiary (but may arrange for
a third party to provide these services).
Dated: December 26, 2000.
Gregory A. Baer,
Assistant Secretary for Financial Institutions,
Department of the Treasury.
[FR Doc. 01–43 Filed 1–2–01; 8:45 am]
BILLING CODE 6210–01–P


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102