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Federal Reserve Bank
of
R O B E R T D. M c T E E R , J R .
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Dallas
DALLAS, TEX AS
August 5, 1998
75265-5906
Notice 98-68
TO:
The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Amendments to Regulation H (Membership of
State Banking Institutions in the Federal Reserve System);
Rescission of Regulation P (Security Procedures)
DETAILS
The Board of Governors of the Federal Reserve System has amended Regulation H {Member
ship o f State Banking Institutions in the Federal Reserve System). The amendments, which become
effective October 1, 1998, reduce regulatory burden, simplify and update requirements, and eliminate
several obsolete interpretations.
In addition, the Board is rescinding Regulation P (Security Procedures), which is no longer
necessary since its provisions have been incorporated into Regulation H. The rescission becomes effec
tive October 1, 1998.
ATTACHMENTS
Copies of the Board’s notices as they appear on pages 37630-59 and 37665, Vol. 63, No. 133
of the Federal Register dated July 13, 1998, are attached.
MORE INFORMATION
For more information regarding Regulation H, please contact Daniel Kirkland at (214)
922-6256. For more information regarding Regulation P, please contact Jane Anne Schmoker at (214)
922-5101. For additional copies of this Bank’s notice, contact the Public Affairs Department at (214)
922-5254.
Sincerely yours,
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.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
37630
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
FEDERAL RESERVE SYSTEM
12CFR Parts 208 and 250
[Regulation H; Docket No. R-0964]
Membership of State Banking
Institutions in the Federal Reserve
System; Miscellaneous Interpretations
Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:
inconsistencies and outm oded and
duplicative requirem ents. The
am endm ents are designed to reduce
regulatory bu rd en and simplify and
update the regulation.
The principal am endm ents are
described below. In general, the
am endm ents serve to reorganize, clarify,
and reduce the burd en of com pliance
w ith Subpart A of Regulation H. The
am endm ents modify the procedures for
m em bership and branch applications,
incorporate a new section designed to
provide guidance to banks regarding
perm issible investm ents in securities,
expand the circum stances under w hich
the Board w ill consider waivers of
conditions of m em bership, eliminate
existing requirem ents regarding
disclosure of financial condition,
elim inate the requirem ent that banks
obtain deposit insurance in order to
become State mem ber banks, and
generally provide a definition of branch
that is consistent w ith OCC regulations
and decisions. The am endm ents also
serve to elim inate a num ber of
interpretations elsewhere; specifically,
interpretations: 12 CFR 250.120,
250.121, 250.122, 250.123, 250.140,
250.161, 250.162, 250.300, 250.301 and
250.302. The am ended Regulation H
replaces the existing Regulation H in its
entirety, except for the A ppendices to
Regulation H, w hich rem ain unchanged.
A red-lined version of the
am endm ents to the regulation and
com m entary is available from the
B oard’s Freedom of Information Office
or by calling 202-452-3684.
The Board published Regulation H for
com m ent in the Federal Register on
March 31, 1997 (62 FR 15272). The
Board received 14 com ments to the
proposed am endm ents from the
following types of institutions:
The Board of Governors of the
Federal Reserve System is am ending
Subpart A of Regulation H, regarding
the general provisions for m em bership
in the Federal Reserve System, and
Subpart E of Regulation H, regarding
Interpretations, in order to reduce
regulatory burden, simplify and update
requirem ents, and elim inate several
obsolete interpretations. As part of the
final rule the Board is reissuing prior
Subparts B and C. Prior Subparts B and
C have not been significantly am ended
but have been relettered (as Subparts D
and E, respectively) to reflect the fact
that prior Subpart A was broken into
four new Subparts (Subparts A, B, C and
F). Prior Subpart D, regarding safety and
soundness standards, has been
incorporated into new Subpart A. The
final ru le does not am end in any way
A ppendices A through E to Part 208.
This final rule to m odernize Subpart A
of Regulation H is in accordance w ith
the B oard’s policy of reviewing its
regulations as w ell as the Board’s review
of regulations under section 303 of the
Riegle Com m unity D evelopm ent and
Regulatory Im provem ent Act of 1994.
EFFECTIVE d a t e : October 1, 1998.
FOR FURTHER INFORMATION CONTACT: Rick
Heyke, Staff Attorney, Legal Division
[202/452-3688), or Jean A nderson, Staff
Attorney, Legal D ivision (202/4523707). For th e hearing im paired only,
B anks/thrifts—1
T elecom m unications Device for the Deaf
C om m unity groups— 1
(TDD), Diane Jenkins (202/452-3544).
T rade associations— 4
SUPPLEMEN TA RY INFORMATION:
Federal Reserve Banks— 7
Background
Clearinghouses— 1
The Board is adopting am endm ents to
its Regulation H (12 CFR part 208),
Twelve of the 14 com ments generally
regarding the general provisions for
supported the proposed am endm ents as
state bank m em bership in the Federal
serving to reduce regulatory burden on
Reserve System, as part of its policy of
banks and as clarifying m em bership
reviewing its regulations, and consistent requirem ents. In addition, the
w ith section 303 of the Riegle
com m ents addressed specific issues
Com m unity Developm ent and
raised by th e proposed am endments.
Regulatory Im provem ent Act of 1994
These com m ents and issues are
(Riegle Act), Pub. L. 103-328. Section
discussed below in the section-by303 of the Riegle Act requires each
section analysis. Any sections of the
Federal banking agency to review and
regulation w hich are not discussed in
stream line its regulations and w ritten
the section-by-section analysis were
policies to im prove efficiency, reduce
adopted as originally proposed by the
unnecessary costs, and remove
Board.
SUMMARY:
Section-by-Section Analysis
Subpart A — General M em bership and
B ranching Requirem ents
Section 208.2 Definitions
D efinition o f Branch. The Board
proposed to define a branch as any
branch bank, branch office, branch
agency, additional office, or any branch
place of business that receives deposits,
pays checks, or lends m oney. The
proposed rule also stated that a branch
m ay include a temporary, seasonal, or
m obile facility. In addition to defining
w hat constitutes a branch, the proposed
rule specified certain arrangements that
do not constitute a branch. The Board
proposed that a branch not include a
loan origination facility w here the
proceeds of loans are not disbursed,
autom ated teller m achines, rem ote
service units, offices of an affiliated
depository institution that provide
services to customers of a State m em ber
bank on behalf of the State member
bank, or a facility that w ould otherwise
qualify as a branch because it engages in
one or more branching functions
(receipt of deposits, paym ent of
w ithdraw als, or making loans) but
w hich prohibits access to members of
the public for purposes of conducting
one or m ore branching functions.
In this regard the proposed rule
requested com ment on w h ether a
branch should include offices of an
unaffiliated depository institution that
provide services to custom ers of a State
m em ber bank on behalf of the State
m em ber bank. Six com menters, the
Federal Reserve Banks of M inneapolis,
A tlanta, Philadelphia and San
Francisco, the America's Com m unity
Bankers, and the American Bankers
Association, supported excluding
unaffiliated depository institutions that
provide services to a State m em ber bank
from the definition of a branch. In light
of these com ments, and in light of
current case law and consistent w ith
Office of the Comptroller of the
Currency (OCC) decisions,1 the Board is
excluding from the definition of branch
arrangements w here either affiliated or
unaffiliated institutions provide services
to custom ers of a State mem ber bank.
The final rule provides that a branch
does not include an office of an
affiliated or unaffiliated institution that
provides services to custom ers of the
m em ber bank on behalf of the mem ber
1 See Cades versus 11 8- H Block, Inc., 43 F.3d 869,
874 (4th Cir. 1994) and OCC letter of October 5,
1993 from William P. Bowden, Jr., Chief Counsel at
page 4, which state that institutions that are not
affiliated with a bank, but provide services to
customers of the bank, do not constitute branches
so long as the bank does not “establish or operate”
the institution providing the services.
Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
bank so long as the bank does not
“establish or operate” the office
providing the services. For exam ple, a
bank could contract w ith an unaffiliated
or affiliated institution to receive
deposits, cash and issue checks, drafts,
and money orders, change m oney and
receive paym ents of existing
indebtedness w ithout becoming a
branch of that bank so long as that bank:
(a) has no ow nership or leasehold
interest in the in stitu tion ’s offices; (b)
has no em ployees w ho w ork for the
institution; and (c) exercises no
authority or control over the
institution’s em ployees or m ethods of
operation.2
With respect to the statem ent in the
proposed rule that a branch does not
include a “rem ote service u n it,” one
com m enter requested that the Board
define the term “rem ote service u n it.”
The Board is adopting the term “remote
service u n it” as proposed and w ithout
further definition. The Board believes
that “rem ote service u n its” may take a
variety of forms, and that defining the
term at this tim e w ould be prem ature.
The Board notes that the OCC has
determ ined that a “rem ote service u n it”
includes an autom ated loan m achine
and believes that “rem ote service u n its”
may include autom ated loan m achines
as well as other arrangements.
D efinition o f Capital Stock a nd
Surplus. The Board proposed to define
capital stock and surplus in Regulation
H to m ean Tier 1 and Tier 2 capital, as
calculated u n d er the risk-based capital
guidelines, plus any allow ance for loan
and lease losses not already in clud ed in
Tier 2 capital. The Board proposed
applying this definition to all references
to capital stock and surplus in the
Federal Reserve Act an d Regulation H,
unless otherwise noted. The Board
received one com m ent that Regulation
H should incorporate the term “ capital”
rather than capital stock an d surplus
because it w ould help to reduce the
historical reference to the more narrow
m eaning of capital stock an d surplus,
w hich related only to part of
shareholders’ equity accounts. Use of
the term capital stock and surplus is
appropriate and consistent w ith the
terms of the Federal Reserve Act. Use of
the term capital stock and surplus
should make it easier for banks to
com ply w ith the Board’s regulations
2 See, e.g., Cades, 43 F.3d at 874. Although the
bank w ould be permitted, in contracting w ith the
institution, to control the terms of the services
provided by the institution. For example, the bank’s
contractual relationship with the institution could
include such issues as which institution would bear
the risk of loss for items in transit or w hen accounts
would be credited with deposits or charged with
withdrawals.
since the term capital stock and surplus,
as defined in the proposal, has been
adopted for purposes of section 23A of
the Federal Reserve Act (12 U.S.C. 371c)
w hich governs transactions between
insured depository institutions) and
Regulation O (12 CFR 215) (which
governs insider lending). All other
com menters supported the proposed
definition of capital stock and surplus,
as well as the use of the term itself, and
the Board is adopting the definition and
term as proposed.
D efinition o f Eligible Bank. The Board
proposed a new definition, eligible
bank, to serve as the qualification for
expedited treatm ent of m em bership and
branch applications. The Board
proposed that eligible bank be defined
as a bank that: (a) is w ell capitalized; (b)
has a Uniform Financial Institutions
Rating System (CAMELS) rating of 1 or
2 (copies are available at th e address
specified in § 216.6 of this chapter); (c)
has a Com m unity R einvestm ent Act
(CRA) rating of “O utstanding” or
“Satisfactory;” (d) has a com pliance
rating of 1 or 2; and (e) has no major
unresolved supervisory issues
outstanding as determ ined by the Board
or the appropriate Federal Reserve
Bank.
The Board received one com m ent that
the definition should require a CRA
rating of “ O utstanding” rather than a
rating of “ O utstanding” or
“ Satisfactory.” The com m enter opposed
allow ing banks w ith “Satisfactory”
ratings to receive eligible bank status
because the com m enter stated most
banks receive “ Satisfactory” ratings and
because CRA ratings are not a reliable
indicator of the b ank’s CRA
performance. The rem ainder of the
com m enters supported the definition of
eligible b ank w ith one com m enter
requesting clarification as to w hether
the Board intended to preclude banks
w ith a com pliance rating of three from
qualifying as an eligible bank.
The Board is adopting the definition
of eligible bank as proposed. Allowing
m em bership or branch applications
from banks w ith “ Satisfactory” CRA
ratings to qualify for expedited
treatm ent continues prior Board policies
and provides for consistency w ith the
OCC’s standards for determ ining
w hether m em bership or branch
applications should receive expedited
treatm ent. The Board has m odified its
previous standard for receiving
expedited treatm ent by requiring a
com pliance rating of 1 or 2 rather than
1, 2, or 3. This change provides
consistency w ith the OCC’s definition of
eligible bank and is being adopted as
proposed.
37631
If a bank has not yet received
com pliance or CRA ratings from a bank
regulatory authority, w hich w ould be
necessary for determ ining w hether it is
an eligible bank, the Board w ill look to
the b an k ’s holding com pany for
purposes of determ ining w hether the
b ank ’s application should receive
expedited processing. If the bank’s
holding com pany meets the criteria for
expedited processing un d er § 225.14(c)
of Regulation Y (12 CFR 225.14(c)), the
bank’s m em bership or branch
application w ill be eligible for
expedited processing.
Banks that have not yet received
com pliance or CRA ratings and that
either are not ow ned by a bank holding
com pany or are ow ned by a bank
holding com pany that does not meet the
criteria for expedited processing under
§ 225.14(c) of Regulation Y, are not
eligible for expedited treatm ent.
D efinition o f M utual Savings Bank.
The Board proposed deleting the
definition of m utual savings bank as
unnecessary. One com m enter opposed
deletion of the definition on th e basis
that deletion “ indirectly suggest[s] that
com panies should abandon the
traditional m utual charter.” The Board
does not believe that rem oval of the
definition carries this im plication an d is
adopting the proposal. The status of
m utual savings banks continues to be
addressed in § 208.3(a) of Regulation H,
concerning applications for m em bership
and stock, as w ell as in the Board’s
Regulation I (12 CFR 209), published
elsew here in today’s Federal Register,
for purposes of determ ining the am ount
of Reserve Bank stock m utual savings
banks are required to purchase (or in
certain special cases the am ount of
m oney they m ust deposit w ith a Reserve
Bank). See 12 CFR 209.4(c).
Section 208.3 A pplication and
Conditions for M em bership
Publication o f M em bership
A pplications. The proposal stated that
public com m ent on m em bership
applications (including conversions) is
not expressly required by statute but
that publication m ight allow the Board
to obtain additional inform ation or
views relevant to a m em bership
application. The Board requested
com m ent as to w hether it should require
publication for m em bership
applications.
The Board received com m ents both
supporting an d opposing elim inating
the publication requirem ent for
m em bership applications. The majority
of com m enters favored elim inating the
requirem ent. These com m enters stated
that no significant inform ation is gained
through publication that w ould
37632
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
outw eigh the burden it places on banks.
Those opposing elim inating the
requirem ent stated that com m ents may
provide useful inform ation in the
context of de novo m em bership
applications or th at the bu rden it places
on banks is m inim al in light of the fact
that m any banks seek FDIC insurance,
w hich requires a public com m ent
period. The Board is elim inating the
requirem ent that banks seeking to
becom e members of the Federal Reserve
System publish notice of m em bership
applications.
Because m em bership applications no
longer confer deposit insurance, the
requirem ent currently contained in the
Board’s Rules of Procedure (12 CFR
262.3), w h ich states that banks m ust
publish notice of their m em bership
applications, no longer applies. The
Board’s Rules of Procedure (12 CFR
262.3) w ill be am ended in the future to
reflect the fact that m em bership no
longer autom atically confers deposit
insurance and to reflect the change that
banks no longer need to publish notice
of m em bership applications.
Processing Tim e Frames fo r E xpedited
M em bership A pplications. The
proposed rule provided that if public
com m ent on m em bership applications
w ere elim inated, expedited m em bership
applications w ou ld be acted on 30 days
after receipt of the application. One
com m enter requested that the Board act
on expedited m em bership applications
w ith in 15 days because, u n d er existing
guidelines, non-expedited m em bership
applications are acted on w ithin 30 days
and expedited m em bership applications
should be acted on sooner than n o n
expedited m em bership applications.
The Board is adopting a rule under
w hich expedited m em bership
applications w ill be acted on w ithin 15
days of receipt of the application. N on
expedited m em bership applications w ill
be acted on prom ptly, however, in
lim ited situations processing tim es may
be longer if the application involves
u n u su al facts or raises novel policy
issues.
M em bership Exams. The proposed
rule did not in clud e inform ation
concerning the tim e frame or conditions
under w hich the Federal Reserve w ill
exam ine banks seeking m em bership in
the Federal Reserve System. One
com m enter requested that guidance be
provided in Regulation H regarding the
time frames for, and necessity of, prem em bership exam inations of banks.
A nother com m enter requested that the
exam guidelines in SR 95-30 be
updated. The Board has decided not to
incorporate pre-m em bership
exam ination guidelines into Regulation
H because the necessity for, and
duration of, exam inations depends on
the individual circum stances of each
bank.
C onditions o f M em bership. The
proposed rule incorporated a new
§ 208.3(d) w h ich com bined and
condensed former §§ 208.6 and 208.7
concerning the general conditions and
requirem ents of m em bership. The
former requirem ent that the capital and
surplus of a State m em ber bank be
adequate in relation to its existing and
prospective deposit liabilities was
m odified and placed in proposed
§ 208.4. Proposed § 208.3(d) also
incorporated the provisions of existing
Subpart D, “ Standards for Safety and
Soundness.”
In addition, the Board proposed to
elim inate existing § 208.6(a), w hich
points out that State m em ber banks
retain all charter and statutory rights
u n d er state law not preem pted by
Federal law, and § 208.6(b), w hich states
that State mem ber banks are entitled to
all the privileges of m em bership
afforded them un der the Federal
Reserve Act and other acts of Congress,
and m ust observe all requirem ents of
Federal law. One com m enter stated that
elim inating existing § 208.6(a) and (b)
w ould create confusion because the
sections state im portant concepts. The
Board continues to believe, however,
th at these propositions are self-evident
and do n o t need to be explicitly stated.
Therefore, existing § 208.6(a) and (b) are
n o t in cluded in the final Regulation H.
A nother com m enter requested that
the term “general character of a bank’s
b u siness” (§ 208.3(d)(2)) be defined. The
Board believes that providing a
definition of the term could result in an
u n d u ly restrictive or inflexible
definition and, therefore, has not
incorporated such a definition in
Regulation H.
contains a cross reference to § 208.45 of
S ubpart D for purposes of determ ining
restrictions on the paym ent of capital
distributions.
Section 208.5 D ividends and Other
Distributions
Proposed § 208.5 revised the existing
provisions concerning paym ent of
dividends an d w ithdraw al of capital,
previously located at § 208.19. Proposed
§ 208.5 also incorporated interpretations
previously located at § 208.125 through
§ 208.127. The final rule retains § 208.5
as proposed, however, in the case of
dividends in excess of n et income for
the year, the final rule clarifies that
banks generally are not required to carry
forward negative am ounts resulting
from such excess.3 The final rule also
Section 208.6 Establishm ent and
M aintenance of Branches
D uration o f C om m ent Period. The
B oard’s proposal requested com m ent on
w h ether it should shorten th e public
com m ent period applicable to branch
applications from the 30 days that is
currently required to 15 days. Those
com m enters favoring shortening the
com m ent period stated th at com ments
on branch applications rarely raise
substantive issues and that shortening
the period w ould serve to reduce
regulatory burden on banks.
Comm enters opposing shortening the
com m ent period stated th at shortening
the com m ent period to 15 days w ould
m ake it difficult for com m enters to
provide substantive com m ents to the
Board on branch applications. The
Board is reducing the public com m ent
period on branch applications from 30
to 15 days but w ill allow, in its
discretion, an extension of the com m ent
period for an additional 15 days.4
Sections 208.6(a)(3) and (a)(4) describe
the new procedural rules for public
com m ent on branch applications,
including the new 15 day com m ent
p eriod an d the potential 15 day
extension. The Board’s Rules of
Procedure (12 CFR 262.3) w ill continue
to describe the form and location for
public notices and w ill be am ended in
the future to reflect the 15 day com m ent
period applicable to branch
applications.
Processing Tim e Frames fo r E xpedited
Branch A pplications. The proposed rule
provided procedures for processing
expedited branch applications that were
m odified slightly from the B oard’s
existing procedures, located in
A dm inistrative Letter 92-82 (November
5, 1992). The proposed ru le provided
that a branch application by an eligible
bank w ould be deem ed approved by the
Board or the appropriate Reserve Bank
five business days after the close of the
public com m ent period, unless the
Board or the appropriate Reserve Bank
notifies the bank that the application is
approved prior to that date or that the
bank is not eligible for expedited
processing because: (a) it is not an
eligible bank; (b) the application
contains a material error or is otherwise
deficient; or (c) the application or notice
3 This clarification addresses only earnings
deficits that result from dividends declared in
excess of net income for the year and does not
apply to other types of current earnings deficits. It
is consistent with the OCC’s letter dated December
22, 1997, and published as Interpretive Letter #816.
4 The OCC, in revising its branch application
procedures, retained a 30 day comment period for
all branch applications other than those involving
“short-distance” relocations (which relocations, if
w ithin the same neighborhood, w ould not require
a branch application under the Board’s final rule).
Federal Register/ Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
required u n d er the B oard’s Rules of
Procedure (12 CFR 262.3), raises
significant supervisory, Community
Reinvestment Act, com pliance, policy
or legal issues that have not been
resolved, or a tim ely substantive adverse
com m ent is subm itted. In addition, the
pream ble to the proposed rule stated
that in no case w ould an expedited
branch application be approved prior to
the third day after the close of the
public com m ent period.
In the final rule, the Board is
including in the text of the regulation an
express statem ent that expedited branch
applications w ill n ot be approved prior
to the third day after the close of the
public com m ent period. W aiting u ntil
the third day enables the Board, or
appropriate Reserve Bank, to determ ine
w hether it has received any public
com ments on the application. In all
other respects the processing time
frames for expedited branch
applications rem ain the same as
proposed. The Board w ill be am ending
its Rules of Procedure to incorporate the
changes adopted in th e final rule.
N on-expedited branch applications
w ill be processed in accordance w ith
the B oard’s A pplication s Procedures
M anual.
Processing Procedures. The proposed
rule required branch applications to be
filed in accordance w ith the Board’s
Rules of Procedure (12 CFR 262.3). One
com m enter raised a question as to
w hether eligible banks m ust file a “full”
branch application. Both eligible and
non-eligible banks m ust com ply w ith
the B oard’s Rules of Procedure. More indepth review is expected in non-eligible
bank branch applications. Accordingly,
the Board may require more extensive
inform ation regarding non-eligible bank
branch applications than eligible bank
branch applications. In particular, the
Board pays close attention to areas that
have caused th e bank to become noneligible.
Notification o f Branch Opening.
Section 208.6(d) of the proposed rule
explicitly authorized a single
consolidated application for branches
that a State m em ber bank plans to
establish in a one-year period, provided
the bank meets the existing requirem ent
that it notify the appropriate Reserve
Bank one w eek prior to opening any
branch covered by the approval. One
com menter raised a question as to
w hether it w as necessary for banks to
provide prior notification of opening a
branch. The Board has reviewed this
policy further and concurs w ith the
com m enter that prior approval is
unnecessary, therefore, § 208.6(d) of the
final rule provides for a more flexible
time for notification, m erely requiring
notice w ithin 30 days after opening the
branch.
Branch Closings. The proposed rule
established a new § 208.6(e) regarding
branch closings, w hich requires branch
closings to com ply w ith section 42 of
the FDI Act (12 U.S.C. 183 1r-l). Section
42(e) requires notice to both customers
and, in the case of insured State mem ber
banks, the Board, of proposed branch
closings. The proposed rule also
clarified that a branch relocation is not
a closing for purposes of section 42(e) of
the FDI Act. U nder section 42(e) of the
FDI Act, a branch relocation is a
m ovem ent that occurs w ith in the
im m ediate neighborhood and that does
not substantially affect the nature of the
business or custom ers served.
One com m enter requested that
§ 208.6(e) refer to the Interagency Policy
Statem ent on Branch Closings. The
Board believes that referring to the
policy statem ent in § 208.6(e) w ould
reduce the flexibility inherent in policy
statem ents and, therefore, is not
referring to it in Regulation H.
Section 208.7 Prohibition Against Use
of Interstate Branches Prim arily for
Deposit Production
The final rule includes the text of
existing § 208.28, as issued in final by
the Board on Septem ber 10, 1997 (62 FR
47727) w ith an effective date of October
10, 1997. Existing §208.28 rem ains
unchanged except that it is being
renum bered from § 208.28 to § 208.7.
Subpart B— Investm ents an d Loans
Section 208.21 Investm ents in
Prem ises and Securities
Investm ents in Premises. Section
208.21(a) of the proposed rule provided
new investm ent lim itations on ban ks’
investm ents in premises. These new
lim itations w ere incorporated into
Regulation H as a result of am endm ents
to section 24A of the Federal Reserve
Act m ade by the Economic Growth and
Regulatory P aperw ork R eduction Act of
1996, Pub. L. 104-208, 110 Stat. 3009,
(Economic Growth Act). The Economic
Growth Act provides that banks may
make investm ents in bank prem ises if
they either: (a) obtain prior approval
from the Board; (b) invest less th a n or
equal to the b an k’s capital stock; or (c)
invest less than or equal to 150 percent
of the b ank ’s capital and surplus so long
as the bank is w ell-rated and well
capitalized and provides the Board w ith
notice no later than 30 days after
making the investm ent. The Economic
Growth Act creates investm ent in
prem ises lim its based on bank s’ “capital
stock” or “capital and surplu s.” The
proposed rule based the investm ent
37633
lim its on the basis of banks’ capital
stock a nd surplus, as defined by
§ 208.2(d) of Regulation H. One
com m enter stated that lim itations on
investm ents in prem ises for non-w ell
rated and non-w ell capitalized banks
should be based on banks’ “capital
stock” rather than the banks’ capital
stock a nd surplus as defined by
Regulation H. The com m enter stated
that liberalizing the investm ent lim it for
non-w ell rated and non-w ell capitalized
banks could result in supervisory
concerns, particularly w ith respect to
problem banks.
The Board believes that basing
investm ent in prem ises lim its on capital
sto ck an d surplu s could present
supervisory problems, therefore, the
Board is basing the investm ent in
prem ises lim its on a bank’s perpetual
preferred stock and related surplus plus
com m on stock plus surplus, as those
terms are defined in the FFIEC
Consolidated Reports of Condition and
Income. If a w ell rated and well
capitalized bank chooses to invest an
am ount above 150% of its perpetual
preferred stock and related surplus plus
com m on stock plus surplus (or, for a
non-w ell-rated and w ell-capitalized
bank, 100% of its perpetual preferred
stock and related surplus plus com m on
stock plus surplus) the bank may do so
as long as it provides the appropriate
Reserve Bank at least 15 days notice
prior to m aking such investm ents and
has not received notice that the
investm ent is subject to further review
by the end of the fifteen day notice
period.
A nother com m enter raised a question
as to w heth er it was necessary for the
Board to receive after-the-fact notice of
investm ents in prem ises that are less
than or equal to 150% of b anks’
perpetual preferred stock and related
surplus plus com m on stock plus surplus
as required by § 208.21(a)(3)(ii)(C). The
com m enter questioned the usefulness of
after-the-fact notice of such investm ents.
The Board has concluded th at such
after-the-fact notice is unnecessary. The
Economic Growth Act provides that
banks w ith a CAMELS rating of 1 or 2,
as of the m ost recent exam ination of the
bank, an d that are, and continue to be,
well capitalized, may make investm ents
in bank prem ises of less than or equal
to 150 percent of the bank’s capital and
surplus so long as they provide the
Board w ith after-the-fact notice of such
investm ents. U nder section 24A the
Board also has the authority to grant
banks prior approval to make
investm ents in premises. Pursuant to
this authority the Board is granting prior
approval for state m em ber banks w ith a
CAMELS rating of 1 or 2, as of the m ost
376 34
Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
recent exam ination of the bank, and that
are, and continue to be, w ell capitalized,
to m ake investm ents in bank prem ises
of less than or equal to 150 percent of
the b ank ’s perpetual preferred stock and
related surplus plus com m on stock plus
surplus w ithout providing the Board
w ith after-the-fact notice of such
investm ents.
Investm ents in Securities. The
proposal incorporated a new § 208.21(b)
w hich provided guidance to banks
regarding perm issible investm ents in
securities. For the reasons outlined
below u n d er the discussion of the
B oard’s interpretation on Investm ents in
Shares of an Investm ent Company, the
Board is am ending § 208.21(b) to clarify
generally that, w ith respect to certain
investm ent com pany shares and
investm ent securities, a State mem ber
bank may look to the OCC’s Part 1 rules
and interpretations to determ ine
w hether a security qualifies as an
investm ent security for the purpose of
section 24, paragraph 7th, and for the
calculations of the lim itations
applicable to such investm ents. Section
208.21(b) is also being am ended to
clarify that a State m em ber bank should
consult the Board for determ inations
w ith respect to issues concerning
investm ent securities that have n ot been
addressed by the OCC rules and
interpretations.
Voting Sto ck in a Fiduciary Capacity.
The proposed rule contained a footnote,
footnote four, w hich several
com m enters stated w ould prevent banks
from voting shares of stock in a
fiduciary capacity. Footnote four was
derived from, and was intended to
update, a Board interpretation located at
12 CFR 250.220, w hich was to be
removed. The Board is not including
footnote four in the final rule and is
retaining the Board interpretation found
at 12 CFR 250.220 w h ich states that
banks may vote shares of stock if they
are acting in a fiduciary capacity.
Subpart C—B a n k Securities and
Securities-R elated A ctivities
Section 208.34 Recordkeeping and
Confirmation of Certain Securities
Transactions
E ffected b y State M em ber Banks. The
final rule includes the text of existing
§ 208.24, as issued in final by the Board
on M arch 5, 1997 (62 FR 9909), w ith an
effective date of A pril 1, 1997. Existing
§ 208.24 rem ains unchanged except that
it is being renum bered from § 208.24 to
§208.34.
Section 208.35 Qualification
Requirements for the Recomm endation
or Sale of Certain Securities
The final rule includes a place holder
for proposed new § 208.35. The Board is
seeking public com m ent on proposed
§ 208.35 separately.
Section 208.37
Sales Practices
G overnment Securities
The final rule includes the text of
existing § 208.25, as issued in final by
the Board on March 19, 1997 (62 FR
13275) w ith an effective date of July 1,
1997. Existing § 208.25 rem ains
unchanged except that it is being
renum bered from § 208.25 to § 208.37.
Subpart D— Prom pt Corrective A ction
The proposed rule did not
significantly am end the terms of prior
Subpart B other than to redesignate it as
Subpart D and to am end § 208.41 to
provide the Federal Reserve w ith the
option of using period-end total assets
rather than average total assets for
purposes of defining total assets. The
Board received two com ments regarding
Subpart D. The first com menter
inquired as to w hether other
governm ental agencies allow the option
of using period-end total assets rather
than average total assets for purposes of
defining total assets. In this regard the
Board notes that the OCC’s definition of
total assets, for purposes of its prom pt
corrective action rule, is th e same as the
Board’s.5
The second com m enter stated that
§ 208.43(c)(2) should be updated to
reflect all applicable CAMELS
com ponents. The Board has added
“ sensitivity to m arket risk” as the final
CAMELS com ponent.
Subpart F— M iscellaneous
Requirem ents
Section 208.61
Procedures
Bank Security
Regulation P (12 CFR part 216), as
am ended by the Board on May 1,1991,
is being incorporated into Regulation H
at §208.61. A final rule rem oving 12
CFR part 216 is found elsewhere in
today’s Federal Register.
Section 208.64
Examination
Frequency of
The final rule includes the text of
existing § 208.26, as issued in final by
the Board on April 2, 1998 (63 FR
16378), also effective on April 2, 1998).
Existing § 208.26 rem ains unchanged
except that it is being renum bered from
§208.26 to §208.64.
512 CFR 6.2{j).
Subpart G— Interpretations
Proposed § 208.101 Investm ents in
Federal A gricultural Mortgage
Corporation (Farmer Mac) Stock
This proposed interpretation restated
an existing staff opinion 6 regarding the
perm issibility of banks investing in the
stock of the Federal Agricultural
Mortgage Corporation (Farmer Mac),
w hich is a governm ent agency. One
com m enter stated that the Board should
either provide a com plete list of
perm issible investm ents in stocks of
governm ental agencies or provide no
list.
In general, banks are prohibited from
ow ning stock pursuant to paragraph
seventh of section 5136 of the Revised
Statutes (12 U.S.C. 24 1 7th), w hich was
m ade applicable to State mem ber banks
u n d er paragraph 20 of § 9 of the Federal
Reserve Act (12 U.S.C. 335). A lthough
State m em ber banks are generally
prohibited from owning stock, the Board
has, in the past, allowed banks to own
the stock of certain governmental
agencies w here Congress has evidenced
a clear intention that banks be allow ed
to hold such stock in order to achieve
a legislative purpose. Since decisions
regarding perm issible stock investm ents
in governm ental agencies m ust be m ade
on a case-by-case basis, the Board has
decided n ot to include proposed
§ 208.101 in the final rule. However, the
Board w ill retain the existing staff
opinion regarding investm ents in
Farm er Mac stock in the Federal Reserve
Regulatory Service.
Proposed Section 208.102 Investm ents
in Shares of an Investm ent Company
The Board proposed to retain its
existing interpretation, entitled
“Purchase of investm ent com pany stock
by a State mem ber bank,” and renam e
it “Investm ents in Shares of an
Investm ent C om pany,” and renum ber it
from § 208.124 to § 208.102. In addition,
the Board requested com ment as to
w hether the existing interpretation
should be am ended to provide an
alternative lim it for certain diversified
investm ent companies. U nder the
alternative limit, a bank could elect not
to com bine its pro rata interest in a
particular security held by an
investm ent com pany w ith the b an k’s
direct holdings of the security where: (a)
the investm ent com pany’s holdings of
the securities of any one issuer do not
exceed 5 percent of its total portfolio;
and (b) the bank’s total holdings of the
investm ent com pany’s shares do not
exceed the most stringent limit
applicable to any of the securities in the
&F.R.R.S. 3-447.13 (July 26, 1988).
Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
com pany’s portfolio if those securities
were purchased directly by the bank.
This alternative lim it is currently
available to national banks under OCC
rules.
Several com m enters pointed to
conflicts betw een the Board’s
interpretation and the provisions of the
OCC’s Part 1 concerning investm ent
com pany shares an d recom m ended that
the Board w ithdraw its interpretation in
order to avoid a conflict w ith the OCC
rules. Alternatively, these com menters
supported efforts to conform the Board’s
interpretation to the OCC’s current
provisions concerning investm ent
com panies, including adoption of the
alternative lim it and other conforming
am endments.
In addition to differences concerning
calculation of limits, the com menters
pointed out that the Board’s
interpretation generally perm its
investm ent only in investm ent
com panies that are registered w ith the
Securities and Exchange Commission
under the Investm ent Company Act of
1940 and the Securities Act of 1933,
w hile the OCC rule provides for case-bycase consideration of investm ent
com panies that are exem pt from
registration w here the portfolio of the
investm ent com panies consist entirely
of assets that a national bank may
purchase and sell for its ow n account.
Comm enters also pointed out that the
OCC’s rule requires only that the
portfolio of the investm ent com pany
consist exclusively of assets that a
national bank could purchase directly.
The B oard’s interpretation, on the other
hand, requires that lim its on the
investm ent com pany’s authority be
included in the investm ent com pany’s
prospectus, w hich one com m enter
argued prevented State mem ber banks
from being able to “ seed” start-up
investm ent com panies w here funds
were initially invested only in bank
eligible securities. The Board’s
interpretation also differs from the OCC
rule in other technical respects and
includes requirem ents that relate to
safety and soundness, rather than
investm ent authority.
The Board believes that State mem ber
banks should be perm itted to use the
alternative m ethod of calculating
investm ent lim its available under the
OCC’s rules for diversified investm ent
com panies. A dditionally, although the
circum stances u n d er w hich a State
member bank may provide funds to
“seed” an investm ent com pany are
lim ited, the Board believes that State
member banks should be perm itted to
do so w here the activity is consistent
w ith the Glass-Steagall Act. The Board
also notes that its interpretation was not
intended to preclude the consideration
on a case-by-case basis of investm ents
not covered by its interpretation,
including unregistered investm ent
com panies.
W ith respect to the provisions of the
interpretation concerning internal
procedures for approval and
m anagem ent of investm ents in
investm ent com panies, guidance issued
by Board staff concerning risk
m anagem ent practices related to
investm ent and end-user activities
provides more thorough guidance
concerning appropriate risk
m anagem ent practices th a n was
available at the time the interpretation
was adopted.7 Further, internal
procedures and practices discussed in
current guidance cover the bank’s
investm ent activities generally and are
not lim ited to a particular area. The
Board therefore believes that the
specific internal procedures required
un d er the B oard’s interpretation are no
longer necessary.
Based on the above considerations,
the Board has concluded that its
existing interpretation, § 208.124
(proposed § 208.102), no longer serves a
useful purpose and is rescinding it. The
Board is adding language to the
§ 208.21(b) on investm ents in securities
to clarify generally that, w ith respect to
certain investm ent com pany shares and
investm ent securities, a State mem ber
bank may look to the OCC’s Part 1 rules
and interpretations to determ ine
w hether a security qualifies as an
investm ent security for the purpose of
section 24, paragraph 7th, and for the
calculations of the lim itations
applicable to such investm ents.
Regulation H also is being am ended to
clarify that a State m em ber bank should
consult the Board for determ inations
w ith respect to issues concerning
investm ent securities that have not been
addressed by the OCC rules and
interpretations.
Section 208.101 Obligations
Concerning Institutional Customers
The final rule includes the text of
existing § 208.129, as issued in final by
the Board on M arch 19, 1997 (62 FR
13275). Existing § 208.129 rem ains
unchanged except that it is being
renum bered from § 208.129 to § 208.101.
Investm ents in operating subsidiaries.
Several com menters recom m ended that
the Board rescind its 1968 interpretation
concerning “ operations subsidiaries,”
published at 12 CFR 250.141, noting
that this interpretation w as obsolete.
The interpretation states that a State
m em ber bank may invest in the shares
7 See SR 95-17 (SUP), March 28,1995.
37635
of a w holly ow ned “ operations
subsidiary” w ithou t violating the
provisions of the Glass-Steagall Act
concerning the purchase of stock by
m em ber banks. At the present tim e the
Board is retaining the existing
interpretation regarding “operations
subsidiaries.”
M iscellaneous. Financial Condition.
The Board proposed elim inating
existing § 208.17, entitled Disclosure of
Financial Information by State m em ber
banks, from the proposed Regulation H
on the basis that call report inform ation
for banks is now available through the
internet. In response to this proposal the
Board received three com m ents from
Federal Reserve Banks w hich stated that
it was prem ature to elim inate § 208.17
because a large segment of the public
does not have access to the internet. The
Board has decided to rescind § 208.17
despite these objections. The Board
believes th at § 208.17 places a burden
on banks by requiring them to make
available a potentially unlim ited
num ber of copies of statem ents
regarding their financial condition to
the public. This burden has been
justified in the past because it was the
only effective m eans for the public to
obtain inform ation concerning a b an k ’s
financial condition. However, now that
m any private institutions, as well as
m any public institutions, such as public
libraries, offer access to the internet,
w here such financial inform ation
concerning banks can be obtained, the
Board does not believe the burd en on
banks of providing such inform ation
continues to be justified, and therefore,
is rem oving existing § 208.17 from the
final rule.
Final Regulatory Flexibility Analysis
Two of the three requirem ents of a
final regulatory flexibility analysis (5
U.S.C. 604), (1) a succinct statem ent of
the need for and the objectives of the
rule and (2) a sum m ary of the issues
raised by the public com ments, the
agency’s assessm ent of the issues, and a
statem ent of the changes m ade in the
final rule in response to the com ments,
are discussed above. The third
requirem ent of a final regulatory
flexibility analysis is a description of
significant alternatives to the rule that
w ould m inim ize the ru le’s econom ic
im pact on sm all entities and reasons
w hy the alternatives were rejected.
The final am endm ents w ill apply to
all State m em ber banks, w hich
num bered approxim ately 997 as of
February 1998, regardless of size, and
represent changes to the existing rules
that should reduce burden for those
institutions by reducing regulatory
filings, reducing the paperw ork burden
37636
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
Domestic B ranch Notifications (FR
4001; OMB No. 7100-0097), w hich are
m andatory, w ill be subm itted resulting
from the elim ination of th e notification
requirem ent for ATMs and certain other
offices and from the broadening of the
interpretation of “ location.” The
proposed rule also had provided that
depository institutions be perm itted to
file a single notification for prior
approval of m ultiple branches to be
established w ithin a year following the
notification. The requirem ent for prior
approval was elim inated in the final
rule, w h ich only requires notification
w ithin thirty days after each branch is
opened. Further study, based on an
analysis of th e types of notifications
received in the past, has led the Federal
Reserve to increase its initial estim ate of
the effect of these changes on the annual
b u rden from a decrease of 20 percent to
more than 50 percent, from 415 to 201
hours.
The revisions to Regulation H are
expected to affect the relative
distribution of two of the types of
Reports Related to Public Welfare
Investm ents of State M ember Banks
(OMB No. 7100-0278) that are
subm itted to the Federal Reserve. The
Board is elim inating the requirem ent
that, to avoid applying for Board
approval, the investm ent m ust be
sm aller th an 2 percent of capital and
surplus. This should result in fewer
applications and m ore notices of
Paperwork Reduction Act
investm ents not requiring Board
In accordance w ith the Paperw ork
approval. A requirem ent has been added
Reduction Act of 1995 (44 U.S.C. 3506;
to the applications for Board approval:
5 CFR Part 1320 A ppendix A .l), the
if the bank is n ot perm itted to make the
Board review ed the final rule u n d er the
investm ent w itho ut Board approval, the
authority delegated to the Board by the
institution m ust explain the reason or
Office of M anagem ent and Budget. The
reasons w hy the investm ent is
Federal Reserve m ay not conduct or
ineligible. This is expected to increase
sponsor, and an organization is not
the burd en per response from two and
required to respond to, these
one-half hours to two and three-quarters
inform ation collections unless they
hours. The estim ated bu rden per
display a currently valid OMB control
response for a notice of investm ent not
num ber. The OMB control num bers for
requiring Board approval is two hours.
the affected inform ation collections are
There were tw enty notices and fourteen
7100-0097, 7100-0278, 7100-0046, and applications received during 1997. It is
7100-0139.
estim ated that following the revision
The sections of the regulation
there w ill be tw enty-seven notices and
pertaining to the revised inform ation
seven applications subm itted annually.
collections are found in 12 CFR 208.2,
There is estim ated to be no effect on the
208.3, 208.6, 208.21, and 208.22. This
divestiture notice requirem ents, one of
inform ation is need ed in order for the
w hich is expected to be subm itted
Federal Reserve System to conduct its
annually. The burden per response for
supervisory responsibility for state
the divestiture notice is estim ated to be
m em ber banks. The respondents and
five hours. Altogether the total am ount
recordkeepers are state mem ber banks.
of annual burden is estim ated to be
Individual respondent data generally are reduced 3 percent from eighty hours to
seventy-eight. There is estim ated to be
not regarded as confidential.
No com m ents specifically addressing
no annual cost burden over the annual
the b u rden estim ate were received. Four hour b u rden a nd no capital or start-up
existing inform ation collections covered costs associated w ith the changes.
The b u rden for the M em bership
by Regulation H are affected by the
A pplication (FR 2083; OMB No. 7100changes to the regulation. Fewer
and processing tim e associated w ith
regulatory filings, reducing th e costs
associated w ith com plying w ith
regulation, and im proving the ability of
banks to conduct business on a more
cost-efficient basis. For exam ple, the
ru le is generally designed to reduce
bu rden by rem oving out-dated m aterial
and by re-organizing the rem aining
m aterial so it is easier to locate and to
read.
The rule also seeks to reduce burden
by incorporating expedited procedures
for m em bership and branch applications
for certain banks and by reducing the
processing period for expedited
applications from 5 to 3 days after the
close of the public com m ent period. In
addition, the rule expands the
circum stances u n d er w hich the Board
w ill consider w aivers of conditions of
mem bership, elim inates existing
requirem ents regarding disclosure of
financial condition, and elim inates the
requirem ent that banks obtain deposit
insurance in order to becom e State
mem ber banks. The rule also provides
for an alternate definition of total-assets
for institutions w ith rapidly declining
asset bases.
The am endm ents should not have a
negative econom ic effect on small
institutions, and, therefore, there were
no significant alternatives that w ould
have m inim ized the econom ic im pact
on those institutions.
0046) w ill experience a m inim al
reduction in the current annual burden
of 3,450 hours, resulting from the
elim ination of the publication
requirem ent, the broadened authority of
the Board to waive the application, and
the reduction in the processing tim e for
expedited applications from thirty to
fifteen days.
The final rule contains changes that
affect another existing inform ation
collection. The proposed rule provided
that the Investm ent in Bank Premises
Notification (FR 4014; OMB No. 71000139) m ust be filed by a state m em ber
bank w henever it proposes to make an
investm ent in bank prem ises th at results
in its total bank prem ises investm ent
exceeding its capital stock and surplus,
or if the bank is w ell capitalized and in
good condition, exceeding 150 percent
of its capital stock and surplus. In the
final rule, the Board decided to base its
analysis on the bank’s perpetual
preferred stock and related surplus plus
com m on stock plus surplus, w hich is a
m ore conservative m easure than the
capital stock and surplus proposed
initially. In addition, after-the-fact
notification is no longer required from
banks for investm ents w ithin the limits.
The net effect of these changes is
expected to have a m inim al effect on the
annual respondent burden for this
inform ation collection of eight hours.
The Federal Reserve has a continuing
interest in the pub lic’s opinions of our
collections of information. At any time,
com m ents regarding the burden
estim ate, or any other aspect of these
collections of inform ation, including
suggestions for reducing the burden,
m ay be sent to: Secretary, Board of
Governors of the Federal Reserve
System, 20th and C Streets, N.W.,
W ashington, DC 20551; and to the
Office of Management and Budget,
P aperw ork R eduction Project (71000097, 7100-0278, 7100-0046, or 71000139), W ashington, DC 20503.
Derivation Table
This table directs readers to the
provision(s) of existing Regulation H, if
any, u p o n w hich the proposed
provision is based.
Revised provision
208.1 ........................
208.2 ........................
208.3(a)....................
208.3(b) ....................
208.3(c) ....................
208.3(d) ....................
208.3(e) ....................
208.3(f) .....................
208.3(g)....................
208.4 ........................
208.5 ........................
Original provision
None
208.1
208.2
208.4, 208.5
208.5
added
208.7
208.10
208.11
208.13
208.19
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
Revised provision
208.6(a) ....................
208.6(b)....................
208.6(c) ....................
208.6(d) ....................
208.6(e) ....................
208.6(f).....................
208.7 ........................
208.20 ......................
208.21 ......................
208.22 ......................
208.23 ......................
208.24 ......................
208.25 ......................
208.30 ......................
208.31 ......................
208.32 ......................
208.33 ......................
208.34 ......................
208.35 ......................
208.36 ......................
208.37 ......................
208.40 ......................
208.41 ......................
208.42 ......................
208.43 ......................
208.44 ......................
208.45 ......................
208.50 ......................
208.51 ......................
208.60 ......................
208.61 ......................
208.62 ......................
208.63 ......................
208.64 ......................
208.100 ....................
208.101 ....................
Original provision
208.9
None
None
None
208.9(b)(7)
None
208.28
None
None
208.21
208.15
208.8(d)
208.23
None
208.8(f)
208.8(h), 208.8(i)
208.8(g)
208.24
None
208.16
208.25
208.30
208.31
208.32
208.33
208.34
208.35
208.51
208.52
None
None
208.20
208.14
208.26
208.116
208.129
List o f Subjects
12 CFR Part 208
A ccounting, Agriculture, Banks,
Banking, C onfidential business
information, Crime, Currency, Federal
Reserve System, Mortgages, Reporting
and recordkeeping requirem ents,
Securities.
12 CFR Part 250
Federal Reserve System.
For the reasons set forth in the
pream ble, the Board is am ending
chapter II of title 12 of the Code of
Federal Regulations as follows:
PART 208— MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
1. The authority citation for part 208
is revised to read as follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a,
248(a), 248(c), 321-338a, 371d, 461, 481-486,
601, 611, 1814, 1816, 1818, 1823(j), 1828(o),
18310, 1831p— 1831r-l, 1835a, 1882, 29011,
2907, 3105, 3310, 3331-3351, and 39063909; 15 U.S.C. 78b, 781(b), 781(g), 78l(i),
78o—
4(c)(5), 78q, 78q-l, and 78w; 31 U.S.C.
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106
and 4128.
2. The table of contents to part 208 is
revised to read as follows:
Subpart A— General Membership and
Branching Requirements
Sec.
208.1 Authority, purpose, and scope.
208.2 Definitions.
208.3 Application and conditions for
membership in the Federal Reserve
System.
208.4 Capital adequacy.
208.5 Dividends and other distributions.
208.6 Establishment and maintenance of
branches.
208.7 Prohibition against use of interstate
branches primarily for deposit
production.
Subpart B— Investments and Loans
208.20 Authority, purpose, and scope.
208.21 Investments in premises and
securities.
208.22 Community development and public
welfare investments.
208.23 Agricultural loan loss amortization.
208.24 Letters of credit and acceptances.
208.25 Loans in areas having special flood
hazards.
Subpart C— Bank Securities and SecuritiesRelated Activities
208.30 Authority, purpose, and scope.
208.31 State member banks as transfer
agents.
208.32 Notice of disciplinary sanctions
imposed by registered clearing agency.
208.33 Application for stay or review of
disciplinary sanctions imposed by
registered clearing agency.
208.34 Recordkeeping and confirmation of
certain securities transactions effected by
State member banks.
208.35 Qualification requirements for
transactions in certain securities.
[Reserved]
208.36 Reporting requirements for State
member banks subject to the Securities
Exchange Act of 1934.
208.37 Government securities sales
practices.
Subpart D— Prompt Corrective Action
208.40 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
208.41 Definitions for purposes of this
subpart.
208.42 Notice of capital category.
208.43 Capital measures and capital
category definitions.
208.44 Capital restoration plans.
208.45 Mandatory and discretionary
supervisory actions under section 38.
Subpart E— Real Estate Lending and
Appraisal Standards
208.50 Authority, purpose, and scope.
208.51 Real estate lending standards.
Subpart F— Miscellaneous Requirements
208.60 Authority, purpose, and scope.
208.61 Bank security procedures.
208.62 Suspicious activity reports.
208.63 Procedures for monitoring Bank
Secrecy Act compliance.
208.64 Frequency of examination.
37637
Subpart G— Interpretations
208.100 Sale of bank’s money orders off
premises as establishment of branch
office.
208.101 Obligations concerning
institutional customers.
Appendix A to Part 208—Capital Adequacy
Guidelines for State Member Banks: RiskBased Measure
Appendix B to Part 208—Capital Adequacy
Guidelines for State Member Banks: Tier 1
Leverage Measure
Appendix C to Part 208—Interagency
Guidelines for Real Estate Lending Policies
Appendix D to Part 208—Interagency
Guidelines Establishing Standards for Safety
and Soundness
Appendix E to Part 208—Capital Adequacy
Guidelines for State Member Banks: Market
Risk Measure
3. Subparts A through E are revised
and Subparts F and G are added to read
as follows:
Subpart A— General Membership and
Branching Requirements
§ 208.1
Authority, purpose, and scope.
(a) A uthority. Subpart A of Regulation
H (12 CFR part 208, Subpart A) is issued
by the Board of Governors of the Federal
Reserve System (Board) u n d er 12 U.S.C.
24, 36; sections 9, 11, 21, 25 and 25A
of th e Federal Reserve A ct (12 U.S.C.
321—
338a, 248(a), 248(c), 481-486, 601
and 611); sections 1814, 1816, 1818,
1831o, 1831p— 1831r— and 1835a of
1,
1
the Federal Deposit Insurance Act (FDI
Act) (12 U.S.C. 1814, 1816, 1818, 1831o,
1831p— 1831r— and 1835); an d 12
1,
1,
U.S.C. 3906-3909.
(b) Purpose a nd scope o f Part 208.
The requirem ents of this part 208
govern State m em ber banks and state
banks applying for adm ission to
m em bership in the Federal Reserve
System (System) u n d er section 9 of the
Federal Reserve Act (Act), except for
§ 208.7, w hich also applies to certain
foreign banks licensed by a State. This
part 208 does n ot govern banks eligible
for m em bership u n d er section 2 or 19 of
the A ct.1 A ny bank desiring to be
adm itted to the System un d er the
provisions of section 2 or 19 should
com m unicate w ith the Federal Reserve
1 Under section 2 of the Federal Reserve Act,
every national bank in any state shall, upon
commencing business, or w ithin 90 days after
admission into the Union of the State in which it
is located, become a member of the System. Under
section 19 of the Federal Reserve Act, national
banks and banks organized under local laws,
located in a dependency or insular possession or
any part of the United States outside of the States
of the United States and the District of Columbia,
are not required to become members of the System
but may, w ith the consent of the board, become
members of the System.
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Bank w ith w hich it w ould like to
become a member.
(c) Purpose and scope o f Subpart A.
This Subpart A describes the eligibility
requirem ents for m em bership of statechartered banking institutions in the
System, the general conditions im posed
up on members, including capital and
dividend requirem ents, as w ell as the
requirem ents for establishing and
m aintaining branches.
§208.2
Definitions.
For the purposes of this part:
(a) Board o f Directors m eans the
governing board of any institution
performing the usual functions of a
board of directors.
(b) Board m eans the Board of
Governors of the Federal Reserve
System.
(c) Branch. (1) B ranch m eans any
branch bank, branch office, branch
agency, additional office, or any branch
place of business that receives deposits,
pays checks, or lends money. A branch
may include a temporary, seasonal, or
m obile facility that meets these criteria.
(2) Branch does not include:
(i) A loan origination facility w here
the proceeds of loans are not disbursed;
(ii) A n office of an affiliated or
unaffiliated institution that provides
services to custom ers of the mem ber
bank on behalf of the m em ber bank so
long as the institution is not established
or operated by the bank;
(iii) An autom ated teller machine;
(iv) A rem ote service unit;
(v) A facility to w hich the bank does
not perm it mem bers of the public to
have physical access for purposes of
making deposits, paying checks, or
borrowing m oney (such as an office
established by the bank that receives
deposits only through the mail); or
(vi) A facility that is located at the site
of, or is an extension of, an approved
m ain office or branch. The Board
determ ines w hether a facility is an
extension of an existing m ain or branch
office on a case-by-case basis.
(d) Capital sto ck and surplus means,
unless otherw ise provided in this part,
or by statute, Tier 1 an d Tier 2 capital
inclu ded in a m em ber b ank’s risk-based
capital (under the guidelines in
appendix A of this part) and the balance
of a mem ber bank’s allow ance for loan
and lease losses not included in its Tier
2 capital for calculation of risk-based
capital, based on the bank ’s most recent
consolidated Report of Condition and
Income filed un d er 12 U.S.C. 324.
(e) Eligible b ank m eans a mem ber
bank that:
(1) Is w ell capitalized as defined in
subpart D of this part;
(2) Has a com posite Uniform
Financial Institutions Rating System
(CAMELS) rating of 1 or 2;
(3) Has a Com m unity Reinvestment
Act (CRA) (12 U.S.C. 2906) rating of
“O utstanding” or “ Satisfactory;”
(4) Has a com pliance rating of 1 or 2;
and
(5) Has no major unresolved
supervisory issues outstanding (as
determ ined by the Board or appropriate
Federal Reserve Bank in its discretion).
(f) State bank m eans any bank
incorporated by special law of any State,
or organized under the general laws of
any State, or of the U nited States,
including a Morris Plan bank, or other
incorporated banking institution
engaged in a sim ilar business.
(g) State m em ber bank or m em ber
bank m eans a state bank that is a
mem ber of the Federal Reserve System.
§ 208.4, an d its future earnings
prospects.
(3) C onvenience and needs. The
convenience and needs of the
com m unity.
(4) Corporate powers. W hether the
b ank ’s corporate pow ers are consistent
w ith the purposes of the Federal
Reserve Act.
(c) E xp edited approval fo r eligible
banks a n d bank holding com panies. (1)
A va ila bility o f expedited treatm ent. The
expedited m em bership procedures
described in paragraph (c)(2) of this
section are available to:
(1) A n eligible bank; and
(ii) A bank that cannot be determ ined
to be an eligible bank because it has not
received com pliance or CRA ratings
from a bank regulatory authority, if it is
controlled by a bank holding com pany
that m eets the criteria for expedited
processing und er § 225.14(c) of
§ 208.3 Application and conditions for
Regulation Y (12 CFR 225.14(c)).
membership in the Federal Reserve System.
(2) E xped ited procedures. A
(a) A pplications fo r m em bership and
com pleted m em bership application
stock. (1) State banks applying for
filed w ith the appropriate Reserve Bank
m em bership in the Federal Reserve
w ill be deem ed approved on the
System shall file w ith the appropriate
fifteenth day after receipt of the
Federal Reserve Bank an application for com plete application by the Board or
m em bership in the Federal Reserve
appropriate Reserve Bank, unless the
System and for stock in the Reserve
Board or the appropriate Reserve Bank
Bank,2 in accordance w ith this part and
notifies th e bank that the application is
§ 262.3 of the Rules of Procedure,
approved prior to that date or the Board
located at 12 CFR 262.3.
or the appropriate Federal Reserve Bank
(2) Board approval. If an applying
notifies the bank that the application is
bank conforms to all the requirem ents of not eligible for expedited review for any
the Federal Reserve Act and this
reason, including, w ithout lim itation,
section, and is otherw ise qualified for
that:
m em bership, the Board may approve its
(i) The bank w ill offer banking
application subject to such conditions
services that are materially different
as the Board may prescribe.
from those currently offered by the
(3) Effective date o f m em bership. A
bank, or by the affiliates of the proposed
State bank becom es a mem ber of the
bank;
Federal Reserve System on the date its
(ii) The bank or bank holding
Federal Reserve Bank stock is credited
com pany does not meet the criteria
to its account (or its deposit is accepted, under § 208.3(c)(1);
if it is a m utual savings bank not
(iii) The application contains a
authorized to purchase Reserve Bank
m aterial error or is otherw ise deficient;
stock) in accordance w ith the Board’s
or
Regulation I (12 CFR part 209).
(iv) T he application raises significant
(b) Factors considered in approving
supervisory, com pliance, policy or legal
applications fo r m em bership. Factors
issues that have not been resolved, or a
given special consideration by the Board tim ely substantive adverse com m ent is
in passing up on an application are:
subm itted. A com m ent w ill be
(1) F inancial condition and
considered substantive unless it
m anagem ent. The financial history and
involves individual com plaints, or
condition of the applying bank and the
raises frivolous, previously considered,
general character of its management.
or w holly unsubstantiated claims or
(2) Capital. The adequacy of the
irrelevant issues.
bank’s capital in accordance with
(d) C onditions o f m em bership. (1)
Safety an d soundness. Each m em ber
2 A m utual savings bank not authorized to
bank shall at all times conduct its
purchase Federal Reserve Bank stock may apply for
business and exercise its pow ers w ith
membership evidenced initially by a deposit, but if
the laws under which the bank is organized are not
due regard to safety and soundness.
amended at the first session of the legislature after
(The Interagency G uidelines
its admission to authorize the purchase, or if the
E stablishing Standards for Safety and
bank fails to purchase the stock w ithin six months
Soundness prescribed pu rsuant to
of the amendment, its membership shall be
section 39 of the FDI Act (12 U.S.C.
terminated.
Federal Register/ Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
1 8 3 1 p -l), as set forth as appendix D to
this part apply to all m em ber banks.)
(2) General character o f b a n k ’s
business. A m em ber bank may not,
w ithout the perm ission of the Board,
cause or perm it any change in the
general character of its business or in
the scope of the corporate pow ers it
exercises at the tim e of adm ission to
m embership.
(3) C om pliance with conditions o f
m em bership. Each m em ber bank shall
com ply at all times w ith this Regulation
H (12 CFR part 208) and any other
conditions of m em bership prescribed by
the Board.
(e) Waivers. (1) C onditions o f
m em bership. A mem ber bank may
petition the Board to w aive a condition
of m em bership. The Board m ay grant a
waiver of a condition of m em bership
upon a show ing of good cause and, in
its discretion, may limit, among other
items, the scope, duration, and tim ing of
the waiver.
(2) R eports o f affiliates. Pursuant to
section 21 of the Federal Reserve Act
(12 U.S.C. 486), the Board waives the
requirem ent for the subm ission of
reports of affiliates of m em ber banks,
unless such reports are specifically
requested by the Board.
(f) Voluntary w ithdraw al from
m em bership. V oluntary w ithdraw al
from m em bership becom es effective
upon cancellation of the Federal
Reserve Bank stock held by the mem ber
bank, and after the bank has m ade due
provision to pay any indebtedness due
or to becom e due to the Federal Reserve
Bank in accordance w ith the B oard’s
Regulation I (12 CFR part 209).
§208.4
Capital adequacy.
(a) A dequacy. A mem ber bank’s
capital, as defined in appendix A to this
part, shall be at all times adequate in
relation to the character and condition
of its assets and to its existing and
prospective liabilities and other
corporate responsibilities. If at any time,
in light of all the circum stances, the
bank’s capital appears inadequate in
relation to its assets, liabilities, and
responsibilities, the bank shall increase
the am ount of its capital, w ithin such
period as the Board deems reasonable,
to an am ount w hich, in the judgm ent of
the Board, shall be adequate.
(b) Standards fo r evaluating capital
adequacy. Standards and guidelines by
w hich the Board evaluates the capital
adequacy of mem ber banks include
those in appendices A and E to this part
for risk-based capital purposes and
appendix B to this part for leverage
m easurem ent purposes.
§ 208.5
Dividends and other distributions.
(a) D efinitions. For the purposes of
this section:
(1) Capital surplus m eans the total of
surplus as reportable in the b an k’s
Reports of Condition and Income and
surplus on perpetual preferred stock.
(2) P erm anent capital m eans the total
of the b ank’s perpetual preferred stock
and related surplus, com m on stock and
surplus, and m inority interest in
consolidated subsidiaries, as reportable
in the Reports of Condition and Income.
(b) Lim itations. The lim itations in this
section on the paym ent of dividends
and w ithdraw al of capital apply to all
cash and property dividends or
distributions on com mon or preferred
stock. The lim itations do not apply to
dividends paid in the form of com mon
stock.
(c) Earnings lim itations on p a ym en t o f
dividends. (1) A mem ber bank may not
declare or pay a dividend if the total of
all dividends declared during the
calendar year, including the proposed
dividend, exceeds the sum of the bank’s
net incom e (as reportable in its Reports
of Condition and Income) during the
current calendar year and the retained
net incom e of the prior tw o calendar
years, unless the dividend has been
approved by the Board.
(2) “Retained net incom e” in a
calendar year is equal to the b ank ’s net
incom e (as reported in its Report of
Condition and Income for such year),
less any dividends declared during such
year.3 The bank’s net incom e during the
current year and its retained net income
from the prior two calendar years is
reduced by any net losses incurred in
the current or prior two years and any
required transfers to surplus or to a fund
for the retirem ent of preferred stock.4
3 In the case of dividends in excess of net income
for the year, a bank generally is not required to
carry forward negative amounts resulting from such
excess. Instead, the bank may attribute the excess
to the prior two years, attributing the excess first to
the earlier year and then to the immediately
preceding year. If the excess is greater than the
bank’s previously undistributed net income for the
preceding two years, prior Board approval of the
dividend is required and a negative amount would
be carried forward in future dividend calculations.
However, in determining any such request for
approval, the Board could consider any request for
different treatment of such negative amount,
including advance waivers for future periods. This
applies only to earnings deficits that result from
dividends declared in excess of net income for the
year and does not apply to other types of current
earnings deficits.
4 State member banks are required to comply with
state law provisions concerning the maintenance of
surplus funds in addition to common capital.
Where the surplus of a State member bank is less
than what applicable state law requires the bank to
maintain relative to its capital stock account, the
bank may be required to transfer amounts from its
undivided profits account to surplus.
37639
(d) Lim itation on w ithdraw al o f
capital by d ividen d or otherwise. (1) A
m em ber bank may not declare or pay a
dividend if the div iden d w ould exceed
the bank’s u ndivided profits as
reportable on its Reports of Condition
and Income, unless the bank has
received the prior approval of the Board
and of at least tw o-thirds of the
shareholders of each class of stock
outstanding.
(2) A m em ber bank m ay not perm it
any portion of its perm anent capital to
be w ithdraw n unless the w ithdraw al
has been approved by the Board and by
at least tw o-thirds of the shareholders of
each class of stock outstanding.
(3) If a mem ber bank has capital
surplus in excess of that required by
law, the excess am ount m ay be
transferred to the bank ’s u nd iv ided
profits account and be available for the
paym ent of dividends if:
(1) The am ount transferred came from
the earnings of prior periods, excluding
earnings transferred as a result of stock
dividends;
(ii) The bank’s board of directors
approves the transfer of funds; and
(iii) The transfer has been approved
by the Board.
(e) P aym ent o f capital distributions.
All m em ber banks also are subject to the
restrictions on paym ent of capital
distributions contained in § 208.45 of
subpart D of this part im plem enting
section 38 of the FDI Act (12 U.S.C.
1831o).
(f) Com pliance. A m em ber bank shall
use the date a dividend is declared to
determ ine com pliance w ith this section.
§208.6 Establishment and maintenance of
branches.
(a) Branching. (1) To th e extent
authorized by state law, a m em ber bank
m ay establish and m aintain branches
(including interstate branches) subject
to the same lim itations and restrictions
that apply to the establishm ent and
m aintenance of national bank branches
(12 U.S.C. 36 and 1831u), except that
approval of such branches shall be
obtained from the Board rather than
from the Com ptroller of the Currency.
(2) Branch applications. A State
mem ber bank w ishing to establish a
branch in the U nited States or its
territories m ust file an application in
accordance w ith th e B oard’s Rules of
Procedure, located at 12 CFR 262.3, and
m ust com ply w ith the public notice and
com m ent rules contained in paragraphs
(a)(3) and (a)(4) of this section. Branches
of m em ber banks located in foreign
nations, in the overseas territories,
dependencies, and insular possessions
of those nations and of the U nited
States, and in the C om m onw ealth of
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Puerto Rico, are subject to the Board’s
U.S.C. 2901 et seq.) and Regulation BB
(12 CFR part 228); and
Regulation K (12 CFR part 211).
(3) Public notice o f branch
(5) Investm en t in bank prem ises.
applications, (i) Location o f publication. W hether the bank ’s investm ent in bank
A State m em ber bank w ishing to
prem ises in establishing the branch is
consistent w ith § 208.21.
establish a branch in the U nited States
(c) E xp edited approval fo r eligible
or its territories m ust publish notice in
banks a nd bank holding com panies. (1)
a new spaper of general circulation in
A vailability o f exp edited treatm ent. The
the form and at the locations specified
expedited branch application
in § 262.3 of the Rules of Procedure (12
procedures described in paragraph (c)(2)
CFR 262.3).
(ii) C ontents o f notice. The new spaper of this section are available to:
(1) A n eligible bank; and
notice referred to in paragraph (a)(3) of
(ii) A bank that cannot be determ ined
this section shall provide an
to be an eligible bank because it has not
opportunity for interested persons to
com m ent on the application for a period received com pliance or CRA ratings
from a bank regulatory authority, if it is
of at least 15 days.
controlled by a bank holding com pany
(iii) Tim ing o f publication. Each
that meets the criteria for expedited
new spaper notice shall be published no
more than 7 calendar days before and no processing under § 225.14(c) of
Regulation Y (12 CFR 225.14(c)).
later than the calendar day on w hich an
(2) E xpedited procedures. A
application is filed w ith the appropriate
com pleted domestic branch application
Reserve Bank.
filed w ith the appropriate Reserve Bank
(4) Public com m ent, (i) T im ely
w ill be deem ed approved on the fifth
com m ents. Interested persons may
day after the close of the com m ent
subm it inform ation and com ments
period, unless the Board or the
regarding a branch application under
appropriate Reserve Bank notifies the
§ 208.6. A com m ent shall be considered
tim ely for purposes of this subpart if the bank that the application is approved
prior to that date (but in no case w ill an
com m ent, together w ith all
application be approved before the third
supplem ental inform ation, is subm itted
day after the close of the public
in w riting in accordance w ith the
com m ent period) or the Board or the
B oard’s Rules of Procedure (12 CFR
262.3)
an d received by th e Board or the appropriate Federal Reserve Bank
notifies the bank that the application is
appropriate Reserve Bank prior to the
expiration of the public com m ent period n ot eligible for expedited review for any
reason, including, w ithout limitation,
provided in paragraph (a)(3)(h) of this
that:
section.
(ii) E xtension o f co m m en t period. The (i) The bank or bank holding com pany
does not m eet the criteria u nder
Board may, in its discretion, extend the
§ 208.6(c)(1);
public com m ent period regarding any
(ii) The application contains a
application u nder § 208.6. In the event
m aterial error or is otherwise deficient;
that an interested person requests a
or
copy of an application subm itted under
(iii) The application or the notice
§ 208.6, the Board may, in its discretion
required under paragraph (a)(3) of this
and based on the facts and
section, raises significant supervisory,
circum stances, grant such person an
Com m unity Reinvestment Act,
extension of the com m ent period for up
com pliance, policy or legal issues that
to 15 calendar days.
(b)
Factors considered in approving have not been resolved, or a timely
substantive adverse com m ent is
dom estic branch applications. Factors
given special consideration by the Board subm itted. A com m ent w ill be
considered substantive unless it
in passing up on a branch application
involves individual com plaints, or
are:
raises frivolous, previously considered,
(1) F inancial condition and
or w holly unsubstantiated claims or
m anagem ent. The financial history and
irrelevant issues.
condition of the applying bank and the
(d) C onsolidated A pplications. (1)
general character of its management;
Proposed branches; notice o f branch
(2) Capital. The adequacy of the
opening. A m em ber bank m ay seek
bank ’s capital in accordance w ith
approval in a single application or
§ 208.4, and its future earnings
notice for any branches that it proposes
prospects;
to establish w ithin one year after the
(3) Convenience a nd needs. The
approval date. The bank shall, unless
convenience and needs of the
notification is waived, notify the
com m unity to be served by the branch;
(4) CRA perform ance. In the case of
appropriate Reserve Bank n ot later than
branches w ith deposit-taking capability, 30 days after opening any branch
the bank’s performance u n d er the
approved un der a consolidated
Com m unity R einvestm ent Act (12
application. A bank is not required to
open a branch approved u n d er either a
consolidated or single branch
application.
(2) Duration o f branch approval.
B ranch approvals rem ain valid for one
year unless the Board or the appropriate
Reserve Bank notifies the bank th at in
its judgm ent, based on reports of
condition, exam inations, or other
inform ation, there has been a change in
the bank’s condition, financial or
otherwise, that w arrants reconsideration
of the approval.
(e) Branch closings. A m em ber bank
shall com ply w ith section 42 of the FDI
Act (FDI Act), 12 U.S.C. 1 8 3 1 r-l, w ith
regard to branch closings.
(f) Branch relocations. A relocation of
an existing branch does not require
filing a branch application. A relocation
of an existing branch, for purposes of
determ ining w hether to file a branch
application, is a m ovem ent that does not
substantially affect the nature of the
branch’s business or custom ers served.
§208.7 Prohibition against use of
interstate branches primarily for deposit
production.
(a) Purpose and scope— (1) Purpose.
The purpose of this section is to
im plem ent section 109 (12 U.S.C.
1835a) of the Riegle-Neal Interstate
Banking an d Branching Efficiency Act
of 1994 (Interstate Act).
(2) Scope, (i) This section applies to
any State mem ber b an k that has
operated a covered interstate branch for
a period of at least one year, an d any
foreign bank that has operated a covered
interstate branch licensed by a State for
a period of at least one year.
(ii) This section describes the
requirem ents im posed u n d er 12 U.S.C.
1835a, w hich requires the appropriate
Federal banking agencies (the Board, the
Office of the Comptroller of the
Currency, and the Federal Deposit
Insurance Corporation) to prescribe
uniform rules that prohibit a bank from
using any authority to engage in
interstate branching pu rsuant to the
Interstate Act, or any am endm ent m ade
by the Interstate Act to any other
provision of law, prim arily for the
purpose of deposit production.
(b) D efinitions. For purposes of this
section, the following definitions apply:
(1) B ank means, unless th e context
indicates otherwise:
(1) A State mem ber bank as that term
is defined in 12 U.S.C. 1813(d)(2); and
(ii) A foreign bank as that term is
defined in 12 U.S.C. 3101(7) and 12 CFR
211. 21.
(2) Covered interstate branch m eans
any branch of a State m em ber bank, and
any uninsured branch of a foreign bank
licensed by a State, that:
Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
(i) Is established or acquired outside
the b an k’s hom e state pursu ant to the
interstate branching authority granted
by the Interstate Act or by any
am endm ent m ade by the Interstate Act
to any other provision of law; or
(ii) Could not have been established
or acquired outside of the bank’s home
state b ut for the establishm ent or
acquisition of a branch described in
paragraph (b)(2)(i) of this section.
(3) H om e state means:
(1) W ith respect to a state bank, the
state that chartered the bank;
(ii) W ith respect to a national bank,
the state in w h ich the m ain office of the
bank is located; and
(iii) W ith respect to a foreign bank,
the hom e state of the foreign bank as
determ ined in accordance w ith 12
U.S.C. 3103(c) and 12 CFR 211.22.
(4) H ost state m eans a state in w hich
a bank establishes or acquires a covered
interstate branch.
(5) H ost state loan-to-deposit ratio
generally m eans, w ith respect to a
particular host state, the ratio of total
loans in the h ost state relative to total
deposits from the host state for all banks
(including institutions covered u n d er
the definition of “bank” in 12 U.S.C.
1813(a)(1)) that have th at state as their
hom e state, as determ ined and updated
periodically by the appropriate Federal
banking agencies and m ade available to
the public.
(6) State m eans state as that term is
defined in 12 U.S.C. 1813(a)(3).
(7) Statew ide loan-to-deposit ratio
m eans, w ith respect to a bank, the ratio
of the bank’s loans to its deposits in a
state in w hich the bank has one or more
covered interstate branches, as
determ ined by the Board.
(c) Loan-to-deposit ratio screen— (1)
A pplication o f screen. Beginning no
earlier than one year after a bank
establishes or acquires a covered
interstate branch, the Board w ill
consider w hether the bank’s statewide
loan-to-deposit ratio is less than 50
percent of the relevant host state loanto-deposit ratio.
(2) R esults o f screen, (i) If the Board
determ ines that the b ank’s statewide
loan-to-deposit ratio is 50 percent or
m ore of the host state loan-to-deposit
ratio, no further consideration under
this section is required.
(ii) If the Board determ ines that the
b ank ’s statew ide loan-to-deposit ratio is
less than 50 percent of the host state
loan-to-deposit ratio, or if reasonably
available data are insufficient to
calculate the b an k ’s statew ide loan-todeposit ratio, the Board w ill make a
credit needs determ ination for the bank
as provided in paragraph (d) of this
section.
37641
(d) Credit needs determ ination— (1) In
(2) N otice prior to closure o f a covered
interstate branch. Before exercising the
general. The Board w ill review the loan
Board’s authority to order the bank to
portfolio of the bank and determ ine
close a covered interstate branch, the
w hether the bank is reasonably helping
Board w ill issue to the bank a notice of
to m eet the credit needs of the
com m unities in the host state that are
the B oard’s intent to order the closure
and w ill schedule a hearing w ithin 60
served by the bank.
(2)
G uidelines. The Board w ill use the days of issuing the notice.
following considerations as guidelines
(3) Hearing. The Board w ill conduct a
w hen making the determ ination
hearing scheduled un d er paragraph
pursuant to paragraph (d)(1) of this
(e)(2) of this section in accordance w ith
section:
the provisions of 12 U.S.C. 1818(h) and
(i) W hether covered interstate
12 CFR part 263.
branches w ere formerly part of a failed
Subpart B— Investments and Loans
or failing depository institution;
(ii) W hether covered interstate
§208.20 Authority, purpose, and scope.
branches were acquired under
(a) A uthority. Subpart B of Regulation
circum stances w here there was a low
H (12 CFR part 208, subpart B) is issued
loan-to-deposit ratio because of the
by the Board of Governors of the Federal
nature of the acquired institution ’s
Reserve System u n d er 12 U.S.C. 24;
business or loan portfolio;
sections 9,11 and 21 of the Federal
(iii) W hether covered interstate
Reserve Act (12 U.S.C. 321-338a, 248(a),
branches have a high concentration of
248(c), and 481-486); sections 1814,
com m ercial or credit card lending, trust
1816, 1818, 1823(j), 18310, 1 8 3 1 p -l and
services, or other specialized activities,
1831r— of the FDI A ct (12 U.S.C. 1814,
1
including the extent to w hich the
1816, 1818, 1823(j), 1831o, 1 8 3 1 p -l and
covered interstate branches accept
1831r-l); and the N ational Flood
deposits in the host state;
Insurance Act of 1968 and the Flood
(iv) The Com m unity Reinvestment
Disaster Protection A ct of 1973, as
Act ratings received by the bank, if any,
am ended (42 U.S.C. 4 0 0 1 ^ 1 2 9 ).
u n d er 12 U.S.C. 2901 et seq.;
(b) Purpose an d scope. This subpart B
(v) Economic conditions, including
describes certain investm ent lim itations
the level of loan dem and, w ithin the
on m em ber banks, statutory
com m unities served by the covered
requirem ents for am ortizing losses on
interstate branches;
(vi) The safe and sound operation and agricultural loans and extending credit
condition of the bank; and
in areas having special flood hazards, as
(vii) The B oard’s Regulation BB—
w ell as th e requirem ents for issuing
C om m unity R einvestm ent (12 CFR part
letters of credit and acceptances.
228) and interpretations of that
§208.21 Investments in premises and
regulation.
securities.
(e) Sanctions—(1) In general. If the
(a) In vestm ent in b ank prem ises. No
Board determ ines that a bank is not
state m em ber bank shall invest in bank
reasonably helping to m eet the credit
prem ises, or in the stock, bonds,
needs of the com m unities served by the
debentures, or other such obligations of
bank in the h ost state, and that the
any corporation holding the prem ises of
b an k ’s statew ide loan-to-deposit ratio is
such bank, or m ake loans to or u p o n the
less than 50 percent of the h o st state
security of any such corporation unless:
loan-to-deposit ratio, the Board:
(1) The b ank notifies the appropriate
(i) May order that a bank’s covered
Reserve Bank at least fifteen days prior
interstate branch or branches be closed
to such investm ent an d has not received
unless the bank provides reasonable
notice that the investm ent is subject to
assurances to the satisfaction of the
further review by the end of the fifteen
Board, after an opportunity for public
day notice period;
com m ent, that the bank has an
(2) The aggregate of all such
acceptable plan u n d er w hich the bank
investm ents and loans, together w ith the
w ill reasonably help to m eet the credit
am ount of any indebtedness incurred by
needs of the com m unities served by the
any such corporation that is an affiliate
bank in the host state; and
(ii) Will not perm it the bank to open
of the bank (as defined in section 2 of
a new branch in the host state that
the Banking A ct of 1933, as am ended,
w ould be considered to be a covered
12 U.S.C. 221a), is less than or equal to
interstate branch unless the bank
the b ank’s perpetual preferred stock and
provides reasonable assurances to the
related surplus plus com m on stock plus
satisfaction of the Board, after an
surplus, as those term s are defined in
opportunity for public com ment, that
the FFIEC Consolidated Reports of
C ondition and Income; or
the bank w ill reasonably help to meet
(3)(i) The aggregate of all such
the credit needs of the com m unity that
investm ents and loans, together w ith the
the new branch w ill serve.
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Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
am ount of any indebtedness incurred by
any such corporation that is an affiliate
of the bank, is less th a n or equal to 150
percent of the bank’s perpetual
preferred stock and related surplus plus
com m on stock plus surplus, as those
terms are defined in the FFIEC
C onsolidated Reports of C ondition and
Income; and
(ii) The bank:
(A) Has a CAMELS com posite rating
of 1 or 2 u n d er the Uniform Interagency
Bank Rating System 5 (or an equivalent
rating un d er a com parable rating
system) as of the m ost recent
exam ination of the bank; and
(B) Is w ell capitalized and w ill
continue to be well capitalized, in
accordance w ith subpart D of this part,
after the investm ent or loan.
(b) Investm ents in securities. Member
banks are subject to the same lim itations
and conditions w ith respect to
purchasing, selling, underw riting, and
holding investm ent securities and
stocks as are national banks u n d er 12
U.S.C. 24, H 7th. To determ ine w hether
an obligation qualifies as an investm ent
security for the purposes of 12 U.S.C.
2 4 ,1 7th, and to calculate the limits
w ith respect to the purchase of such
obligations, a state m em ber bank may
look to part 1 of the rules of the
Com ptroller of the C urrency (12 CFR
part 1) and interpretations thereunder.
A state m em ber bank m ay consult the
Board for a determ ination w ith respect
to the application of 12 U.S.C. 2 4 , 1 7th,
w ith respect to issues n ot addressed in
12 CFR part 1. The provisions of 12 CFR
part 1 do not provide authority for a
state m em ber bank to purchase
securities of a type or am ount that the
bank is not authorized to purchase
und er applicable state law.
§ 208.22 Community developm ent and
public welfare investments.
(a) D efinitions. F’or purposes of this
section:
(1) Low- or m oderate-incom e area
means:
(i) One or m ore census tracts in a
M etropolitan Statistical Area w here the
m edian family incom e adjusted for
family size in each census tract is less
than 80 percent of the m edian family
incom e adjusted for family size of the
M etropolitan Statistical Area; or
(ii) If not in a M etropolitan Statistical
Area, one or more census tracts or
block-num bered areas w here the m edian
family incom e adjusted for family size
in each census tract or block-num bered
area is less than 80 percent of the
5 See FRRS 3-1575 for an explanation of the
Uniform Interagency Bank Rating System. (For
availability, see 12 CFR 261.10(f).)
placem ent facilities or programs that
m edian family incom e adjusted for
w ill be targeted tow ards low- and
family size of the State.
(2) Low- and m oderate-incom e
m oderate-incom e persons;
(E) Investing in an entity located in a
persons has the same m eaning as lowlow- or m oderate-incom e area if the
and m oderate-incom e persons as
defined in 42 U.S.C. 5302(a)(20)(A).
entity creates long-term em ploym ent
(3) S m all business m eans a business
opportunities, a majority of w hich
that meets the size-eligibility standards
(based on full-tim e equivalent positions)
of 13 CFR 121.802(a)(2).
w ill be h e ld by low- and moderate(b) Investm ents n o t requiring prior
incom e persons; and
Board approval. N otw ithstanding the
(F) Providing technical assistance,
provisions of section 5136 of the
credit counseling, research, and
Revised Statutes (12 U.S.C. 24, f 7th)
program developm ent assistance to lowm ade applicable to m em ber banks by
and m oderate-incom e persons, small
paragraph 20 of section 9 of the Federal
businesses, or nonprofit corporations to
Reserve Act (12 U.S.C. 335), a member
help achieve com m unity development;
bank m ay make an investm ent, w ithout
(2) The investm ent is perm itted by
prior Board approval, if the following
state law;
(3) The investm ent w ill not expose
conditions are met:
(1) The investm ent is in a corporation, the m em ber bank to liability beyond the
lim ited partnership, or other entity, and: am ount of the investm ent;
(i) The Board has determ ined that an
(4) The aggregate of all such
investm ent in that entity or class of
investm ents of the m em ber bank does
entities is a public welfare investm ent
not exceed the sum of five percent of its
under paragraph 23 of section 9 of the
capital stock and surplus;
(5) The mem ber bank is well
Federal Reserve Act (12 U.S.C. 338a), or
capitalized or adequately capitalized
a com m unity developm ent investm ent
u n d er §§ 208.43(b) (1) and (2);
un d er Regulation Y (12 CFR
(6) The m em ber bank received a
225.25(b)(6)); or
(ii) The Com ptroller of the Currency
com posite CAMELS rating of “ 1” or “2”
u n d er the Uniform Financial
has determ ined, by order or regulation,
that an investm ent in that entity by a
Institutions Rating System as of its most
recent exam ination and an overall rating
national bank is a public welfare
investm ent u n d er section 5136 of the
of “ 1” or “ 2” as of its m ost recent
consum er com pliance examination; and
Revised Statutes (12 U.S.C. 24
(7) The m em ber bank is not subject to
(Eleventh)); or
(iii) The entity is a com m unity
any w ritten agreement, cease-and-desist
order, capital directive, promptdevelopm ent financial institution as
defined in section 103(5) of the
corrective-action directive, or
Com m unity Developm ent Banking and
m em orandum of understanding issued
by the Board or a Federal Reserve Bank.
Financial Institutions Act of 1994 (12
(c) N otice to Federal Reserve Bank.
U.S.C. 4702(5)); or
(iv) The entity, directly or indirectly,
Not m ore than 30 days after making an
engages solely in or makes loans solely
investm ent un d er paragraph (b) of this
for the purposes of one or more of the
section, the m em ber bank shall advise
following com m unity developm ent
its Federal Reserve Bank of the
activities:
investm ent, including the am ount of the
(A) Investing in, developing,
investm ent and the identity of the entity
rehabilitating, managing, selling, or
in w hich the investm ent is made.
renting residential property if a majority
(d) Investm ents requiring Board
of the units w ill be occupied by lowapproval. (1) W ith prior Board approval,
and m oderate-incom e persons, or if the
a m em ber bank may make public
property is a “qualified low-income
welfare investm ents under paragraph 23
bu ild in g” as defined in section 42(c)(2)
of section 9 of the Federal Reserve Act
of the Internal Revenue Code (26 U.S.C.
(12 U.S.C. 338a), other than those
42(c)(2));
specified in paragraph (b) of this
(B) Investing in, developing,
section.
rehabilitating, managing, selling, or
(2) Requests for Board approval under
renting nonresidential real property or
this paragraph (d) shall include, at a
other assets located in a low- or
m inim um :
(i) The am ount of the proposed
m oderate-incom e area and targeted
investm ent;
tow ards low- and moderate-incom e
(ii) A description of the entity in
persons;
w hich the investm ent is to be made;
(C) Investing in one or more small
(iii) An explanation of w hy the
businesses located in a low- or
investm ent is a public welfare
m oderate-incom e area to stim ulate
investm ent un d er paragraph 23 of
econom ic development;
(D) Investing in, developing, or
section 9 of the Federal Reserve Act (12
U.S.C. 338a);
otherwise assisting job training or
Federal Register/ Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
(iv) A description of the member
bank’s potential liability under the
proposed investm ent;
(v) The am ount of the mem ber b ank’s
aggregate outstanding public welfare
investm ents u n d er paragraph 23 of
section 9 of the Federal Reserve Act;
(vi) The am ount of the mem ber bank’s
capital stock and surplus; and
(vii) If the bank investm ent is not
eligible un d er paragraph (b) of this
section, explain the reason or reasons
w hy it is ineligible.
(3) The Board shall act on a request
un d er this paragraph (d) w ithin 60
calendar days of receipt of a request that
meets the requirem ents of paragraph
(d)(2) of this section, unless the Board
notifies the requesting mem ber bank
that a longer time period w ill be
required.
(e)
D ivestiture o f investm ents. A
mem ber bank shall divest itself of an
investm ent m ade un d er paragraph (b) or
(d) of this section to the extent that the
investm ent exceeds the scope of, or
ceases to meet, th e requirem ents of
paragraphs (b)(1) through (b)(4) or
paragraph (d) of this section. The
divestiture shall be m ade in the m anner
specified in 12 CFR 225.140, Regulation
Y, for interests acquired by a lending
subsidiary of a bank holding com pany
or the bank holding com pany itself in
satisfaction of a debt previously
contracted.
§ 208.23 Agricultural loan loss
amortization.
(a)
D efinitions. For purposes of this
section:
(1) A cceptin g official means:
(1) The Reserve Bank in w hose district
the bank is located; or
(ii) The Director of the Division of
Banking Supervision and Regulation in
cases in w hich the Reserve Bank cannot
determ ine that th e bank qualifies.
(2) A griculturally related other
property m eans any property, real or
personal, that the bank ow ned on
January 1, 1983, and any additional
property that it acquired prior to
January 1,1992, in connection w ith a
qualified agricultural loan. For the
purposes of paragraph (d) of this
section, the value of such property shall
include th e am ount previously charged
off as a loss.
(3) Participating ban k m eans an
agricultural bank (as defined in 12
U.S.C. 1823(j)(4)(A)) that, as of January
1, 1992, h ad a proposal for a capital
restoration plan accepted by an
accepting official and received
perm ission from the accepting official,
subject to paragraphs (d) and (e) of this
section, to amortize losses in accordance
w ith paragraphs (b) and (c) of this
section.
(4) Q ualified agricultural loan means:
(i) Loans that finance agricultural
production or are secured by farm land
for purposes of Schedule RC-C of the
FFIEC C onsolidated Report of Condition
or such other com parable schedule;
(ii) Loans secured by farm machinery;
(iii) Other loans that a bank proves to
be sufficiently related to agriculture for
classification as an agricultural loan by
the Board; and
(iv) The rem aining un paid balance of
any loans described in paragraphs (a)(4)
(i), (ii) and (iii) of this section that have
been charged off since January 1, 1984,
and that qualify for deferral under this
section.
(b)(1) Provided there is no evidence
that the loss resulted from fraud or
crim inal abuse on the part of the bank,
the officers, directors, or principal
shareholders, a participating bank may
am ortize in its Reports of Condition and
Income:
(1) Any loss on a qualified agricultural
loan that the bank w ould be required to
reflect in its financial statem ents for any
period betw een and including 1984 and
1991; or
(ii) Any loss that the bank w ould be
required to reflect in its financial
statem ents for any period betw een and
including 1983 and 1991 resulting from
a reappraisal or sale of agriculturallyrelated other property.
(2) A m ortization u n d er this section
shall be com puted over a period not to
exceed seven years on a quarterly
straight-line basis com mencing in the
first quarter after the loan was or is
charged off so as to be fully am ortized
not later than December 31,1998.
(c) A ccounting fo r am ortization. Any
bank that is perm itted to am ortize losses
in accordance w ith paragraph (b) of this
section may restate its capital and other
relevant accounts and account for future
authorized deferrals and authorizations
in accordance w ith the instructions to
the FFIEC C onsolidated Reports of
C ondition and Income. Any resulting
increase in the capital account shall be
inclu ded in qualifying capital pursuant
to appendix A of this part.
(d) C onditions o f participation. In
order for a bank to m aintain its status
as a participating bank, it shall:
(1) A dhere to the approved capital
plan and obtain the prior approval of
the accepting official before making any
m odifications to the plan;
(2) M aintain accounting records for
each asset subject to loss deferral und er
the program that docum ent the am ount
and timing of the deferrals, repaym ents,
and authorizations;
37643
(3) M aintain the financial condition of
the bank so that it does not deteriorate
to the point w here it is no longer a
viable, fundam entally sound institution;
(4) Make a reasonable effort,
consistent w ith safe and sound banking
practices, to m aintain in its loan
portfolio a percentage of agricultural
loans, including agriculturally-related
other property, not less than the
percentage of such loans in its loan
portfolio on January 1, 1986; and
(5) Provide the accepting official,
upon request, w ith any inform ation the
accepting official deem s necessary to
m onitor the bank’s am ortization, its
com pliance w ith the conditions of
participation, and its continued
eligibility.
(e) R evocation o f eligibility fo r loss
am ortization. The failure to com ply
w ith any condition in an acceptance,
w ith the capital restoration plan, or w ith
the conditions stated in paragraph (d) of
this section, is grounds for revocation of
acceptance for loss am ortization and for
an adm inistrative action against the
bank u n d er 12 U.S.C. 1818(b). In
addition, acceptance of a bank for loss
am ortization shall not foreclose any
adm inistrative action against the bank
that the Board m ay deem appropriate.
(f) Expiration date. The term s of this
section w ill no longer be in effect as of
January 1, 1999.
§ 208.24
Letters of credit and acceptances.
(a) S ta n d b y letters o f credit. For the
purpose of this section, standby letters
of credit include every letter of credit
(or sim ilar arrangem ent how ever nam ed
or designated) th at represents an
obligation to the beneficiary on the part
of the issuer:
(1) To repay m oney borrow ed by or
advanced to or for the account of the
account party; or
(2) To m ake paym ent on account of
any evidence of indebtedness
undertaken by the account party; or
(3) To make paym ent on account of
any default by the party procuring the
issuance of the letter of credit in the
perform ance of an obligation.6
(b) Ineligible acceptance. An
ineligible acceptance is a tim e draft
accepted by a bank, w hich does not
m eet the requirem ents for discount w ith
a Federal Reserve Bank.
(c) B a n k ’s lending lim its. Standby
letters of credit and ineligible
6 A standby letter of credit does not include: (1)
Commercial letters of credit and similar
instruments, where the issuing bank expects the
beneficiary to draw upon the issuer, and w hich do
not guaranty payment of a money obligation; or (2)
a guaranty or similar obligation issued by a foreign
branch in accordance w ith and subject to the
limitations of 12 CFR part 211 (Regulation K).
3 7644
Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
acceptances count tow ard mem ber
banks’ lending lim its im posed by state
law.
(d) Exceptions. A standby letter of
credit or ineligible acceptance is not
subject to the restrictions set forth in
paragraph (c) of this section if prior to
or at the tim e of issuance of the credit:
(1) The issuing bank is paid an
am ount equal to the bank’s m axim um
liability un d er the standby letter of
credit; or
(2) The party procuring the issuance
of a letter of credit or ineligible
acceptance has set aside sufficient funds
in a segregated, clearly earm arked
deposit account to cover the bank ’s
m axim um liability u n d er the standby
letter of credit or ineligible acceptance.
§208.25 Loans in areas having special
flood hazards.
(a) Purpose and scope. (1) Purpose.
The purpose of this section is to
im plem ent the requirem ents of the
N ational Flood Insurance Act of 1968
and the Flood Disaster Protection Act of
1973, as am ended (42 U.S.C. 40 0 1 4129).
(2) Scope. This section, except for
paragraphs (f) and (h) of this section,
applies to loans secured by buildings or
m obile hom es located or to be located
in areas determ ined by the Director of
the Federal Emergency M anagem ent
Agency to have special flood hazards.
Paragraphs (f) and (h) of this section
apply to loans secured by buildings or
mobile homes, regardless of location.
(b) D efinitions. For purposes of this
section:
(1) A c t m eans the N ational Flood
Insurance Act of 1968, as am ended (42
U.S.C. 4001-4129).
(2) Building m eans a w alled and
roofed structure, other th a n a gas or
liquid storage tank, that is principally
above ground and affixed to a
perm anent site, and a w alled and roofed
structure w hile in the course of
construction, alteration, or repair.
(3) C om m unity m eans a State or a
political subdivision of a State that has
zoning and building code jurisdiction
over a particular area having special
flood hazards.
(4) D esignated loan m eans a loan
secured by a building or m obile hom e
that is located or to be located in a
special flood hazard area in w h ich flood
insurance is available u n d er the Act.
(5) Director ofF E M A m eans the
Director of the Federal Emergency
M anagem ent Agency.
(6) M obile hom e m eans a structure,
transportable in one or more sections,
that is b u ilt on a perm anent chassis and
designed for use w ith or w ithout a
perm anent foundation w h en attached to
the required utilities. The term m obile
satisfactory to the Director of FEMA,
hom e does not include a recreational
w ho publishes and periodically revises
vehicle. For purposes of this section, the the list of States falling w ithin this
term m obile h om e m eans a mobile home exem ption; or
(2) Property securing any loan w ith an
on a perm anent foundation. The term
original principal balance of $5,000 or
m obile hom e includes a m anufactured
less and a repaym ent term of one year
hom e as th at term is used in the
or less.
National Flood Insurance Program.
(e) Escrow requirem ent. If a m ember
(7) NFIP m eans the N ational Flood
Insurance Program authorized un d er the bank requires th e escrow of taxes,
insurance prem ium s, fees, or any other
Act.
charges for a loan secured by residential
(8) Residential im proved real estate
m eans real estate up on w hich a hom e or im proved real estate or a m obile home
th at is m ade, increased, extended, or
other residential building is located or
renew ed after October 1, 1996, the
to be located.
mem ber bank shall also require the
(9) Servicer m eans the person
escrow of all prem ium s and fees for any
responsible for:
(1) Receiving any scheduled, periodic
flood insurance required un d er
paym ents from a borrow er u n d er the
paragraph (c) of this section. The
m em ber bank, or a servicer acting on its
terms of a loan, including am ounts for
behalf, shall deposit the flood insurance
taxes, insurance prem ium s, and other
prem ium s on behalf of the borrow er in
charges w ith respect to the property
an escrow account. This escrow account
securing the loan; and
(ii) Making paym ents of principal and w ill be subject to escrow requirem ents
interest and any other paym ents from
adopted pursuant to section 10 of the
the am ounts received from the borrower Real Estate Settlem ent Procedures Act of
1974 (12 U.S.C. 2609) (RESPA), w hich
as may be required under the terms of
generally limits the am ount that may be
the loan.
(10) Special flo o d h azard area means
m aintained in escrow accounts for
the land in the flood plain w ithin a
certain types of loans and requires
com m unity having at least a one percent escrow account statem ents for those
chance of flooding in any given year, as
accounts, only if the loan is otherwise
subject to RESPA. Following receipt of
designated by th e Director of FEMA.
(11) Table fu n d in g m eans a settlement a notice from the Director of FEMA or
at w hich a loan is funded by a
other provider of flood insurance that
contem poraneous advance of loan funds prem ium s are due, the m em ber bank, or
and an assignm ent of the loan to the
a servicer acting on its behalf, shall pay
person advancing the funds.
the am ount owed to the insurance
(c) R equirem ent to purchase flo o d
provider from the escrow account by the
insurance where available. (1) In
date w h en such prem ium s are due.
(f) Required use o f standard flo o d
general. A m em ber bank shall not make,
hazard determ ination form . (1) Use o f
increase, extend, or renew any
form . A m em ber bank shall use the
designated loan unless the building or
m obile hom e an d any personal property standard flood hazard determ ination
form developed by the Director of
securing the loan is covered by flood
FEMA (as set forth in appendix A of 44
insurance for th e term of the loan. The
CFR part 65) w hen determ ining w hether
am ount of insurance m ust be at least
the building or mobile hom e offered as
equal to the lesser of the outstanding
principal balance of the designated loan collateral security for a loan is or w ill
be located in a special flood hazard area
or the m axim um limit of coverage
in w hich flood insurance is available
available for the particular type of
property u n d er the Act. Flood insurance und er the Act. The standard flood
hazard determ ination form m ay be used
coverage u n d er the Act is lim ited to the
in a printed, com puterized, or electronic
overall value of the property securing
manner.
the designated loan m inus the value of
(2) R etention o f form . A mem ber bank
the land on w hich the property is
shall retain a copy of th e com pleted
located.
standard flood hazard determ ination
(2) Table fu n d e d loans. A m em ber
form, in either hard copy or electronic
bank that acquires a loan from a
form, for the period of tim e the bank
mortgage broker or other entity through
ow ns the loan.
table funding shall be considered to be
(g) Forced pla cem en t o f flo o d
making a loan for the purposes of this
insurance. If a m em ber bank, or a
section.
servicer acting on behalf of the bank,
(d) Exem ptions. The flood insurance
requirem ent prescribed by paragraph (c) determ ines at any tim e during the term
of a designated loan that the building or
of this section does not apply w ith
mobile hom e and any personal property
respect to:
(1) Any State-ow ned property covered securing the designated loan is not
u n d er a policy of self-insurance
covered by flood insurance or is covered
Federal Register/ Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
by flood insurance in an am ount less
special flood hazard area, the bank shall
than the am ount required und er
m ail or deliver a w ritten notice to the
paragraph (c) of this section, then the
borrow er an d to th e servicer in all cases
bank or its servicer shall notify the
w hether or not flood insurance is
borrow er that the borrower should
available u n d er the A ct for the collateral
obtain flood insurance, at the borrow er’s securing the loan.
(1)
Contents o f notice. The w ritten
expense, in an am ount at least equal to
notice m ust include the following
the am ount required un d er paragraph
information:
(c) of this section, for the rem aining
(1) A w arning, in a form approved by
term of the loan. If the borrower fails to
the D irector of FEMA, that the building
obtain flood insurance w ithin 45 days
after notification, then the m em ber bank or the m obile hom e is or w ill be located
in a special flood hazard area;
or its servicer shall purchase insurance
(ii) A description of the flood
on the borrow er’s behalf. The mem ber
insurance purchase requirem ents set
bank or its servicer m ay charge the
forth in section 102(b) of the Flood
borrow er for th e cost of prem ium s and
Disaster Protection Act of 1973, as
fees incurred in purchasing the
am ended (42 U.S.C. 4012a(b));
insurance.
(iii) A statem ent, w here applicable,
(hj D eterm ination fees. (1) General.
that flood insurance coverage is
N otw ithstanding any Federal or State
available u n d er the NFIP an d may also
law other than the Flood Disaster
be available from private insurers; and
Protection Act of 1973, as am ended (42
(iv) A statem ent w hether Federal
U.S.C. 4001—
4129), any mem ber bank,
disaster relief assistance m ay be
or a servicer acting on behalf of the
available in the event of damage to the
bank, may charge a reasonable fee for
building or m obile hom e caused by
determ ining w h ether the building or
flooding in a Federally declared
mobile hom e securing the loan is
disaster.
located or w ill be located in a special
(2) Tim ing o f notice. The m em ber
flood hazard area. A determ ination fee
bank shall provide the notice required
m ay also include, but is not lim ited to,
by paragraph (i)(l) of this section to the
a fee for life-of-loan monitoring.
borrow er w ithin a reasonable time
(2) Borrower fee. The determ ination
before the com pletion of the transaction,
fee authorized by paragraph (h)(1) of
and to the servicer as prom ptly as
this section m ay be charged to the
practicable after the bank provides
borrower if the determination:
notice to th e borrower and in any event
(i) Is m ade in connection w ith a
no later than the tim e the bank provides
making, increasing, extending, or
other sim ilar notices to the servicer
renew ing of the loan that is initiated by
concerning hazard insurance and taxes.
the borrower;
Notice to the servicer may be m ade
(ii) Reflects the Director of FEMA’s
revision or updating of flood plain areas electronically or m ay take the form of a
copy of the notice to the borrower.
or flood-risk zones;
(3) Record o f receipt. The m em ber
(iii) Reflects the Director of FEMA’s
bank shall retain a record of the receipt
publication of a notice or com pendium
of the notices by the borrow er and the
that:
servicer for the period of tim e the bank
(A) Affects the area in w hich the
owns the loan.
building or mobile hom e securing the
(4) A lternate m eth o d o f notice.
loan is located; or
(B) By determ ination of the Director of Instead of providing the notice to the
borrow er required by paragraph (i)(l) of
FEMA, may reasonably require a
this section, a m em ber bank m ay obtain
determ ination w hether the building or
satisfactory w ritten assurance from a
m obile hom e securing the loan is
seller or lessor that, w ithin a reasonable
located in a special flood hazard area;
time before the com pletion of the sale or
(iv) Results in the purchase of flood
lease transaction, the seller or lessor has
insurance coverage by the lender or its
servicer on behalf of the borrower u n d er provided su ch notice to the purchaser or
lessee. The mem ber bank shall retain a
paragraph (g) of this section.
(3) Purchaser or transferee fee. The
record of the w ritten assurance from the
determ ination fee authorized by
seller or lessor for the period of tim e the
paragraph (h)(1) of this section m ay be
bank owns the loan.
(5) Use o f prescribed form o f notice.
charged to the purchaser or transferee of
A m em ber bank w ill be considered to be
a loan in th # 3 case of the sale or transfer
in com pliance w ith the requirem ent for
of the loan.
(i)
N otice o f special flo o d h azards andnotice to th e borrower of this paragraph
availability o f Federal disaster relief
(i) by providing w ritten notice to the
assistance. W hen a mem ber bank
borrower containing the language
makes, increases, extends, or renew s a
presented in appendix A of this section
loan secured by a building or a mobile
w ithin a reasonable tim e before the
hom e located or to be located in a
com pletion of the transaction. The
37645
notice presented in ap pendix A of this
section satisfies the borrow er notice
requirem ents of the Act.
(j) N otice o f servicer’s identity. (1)
N otice requirem ent. W hen a m em ber
bank makes, increases, extends, renew s,
sells, or transfers a loan secured by a
building or m obile hom e located or to
be located in a special flood hazard area,
the bank shall notify the Director of
FEMA (or the Director’s designee) in
w riting of the identity of the servicer of
the loan. The Director of FEMA has
designated the insurance provider to
receive the m em ber b an k ’s notice of the
servicer’s identity. This notice m ay be
provided electronically if electronic
transm ission is satisfactory to the
Director of FEMA’s designee.
(2)
Transfer o f servicing rights. The
m em ber bank shall notify the Director of
FEMA (or the Director’s designee) of any
change in the servicer of a loan
described in paragraph (j)(l) of this
section w ithin 60 days after the effective
date of the change. This notice m ay be
provided electronically if electronic
transm ission is satisfactory to the
Director of FEMA’s designee. U pon any
change in the servicing of a loan
described in paragraph (j)(l) of this
section, the duty to provide notice
u n d er this paragraph (j)(2) shall transfer
to the transferee servicer.
Appendix A to § 208.25 Sample Form of
Notice
Notice of Special Flood Hazards and
Availability of Federal Disaster Relief
Assistance
We are giving you this notice to inform you
that:
The building or mobile home securing the
loan for which you have applied is or will
be located in an area with special flood
hazards.
The area has been identified by the
Director of the Federal Emergency
Management Agency (FEMA) as a special
flood hazard area using FEMA’s Flood
Insurance Rate Map or the Flood Hazard
Boundary Map for the following community:
__________________. This area has a one
percent (1%) chance of a flood equal to or
exceeding the base flood elevation (a 100year flood) in any given year. During the life
of a 30-year mortgage loan, the risk of a 100year flood in a special flood hazard area is
26 percent (26%).
Federal law allows a lender and borrower
jointly to request the Director of FEMA to
review the determination of whether the
property securing the loan is located in a
special flood hazard area. If you would like
to make such a request, please contact us for
further information.
_____ The community in which the
property securing the loan is located
participates in the National Flood Insurance
Program (NFIP). Federal law will not allow
us to make you the loan that you have
applied for if you do not purchase flood
37646
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
insurance. The flood insurance must be
maintained for the life of the loan. If you fail
to purchase or renew flood insurance on the
property, Federal law authorizes and requires
us to purchase the flood insurance for you at
your expense.
• Flood insurance coverage under the
NFIP may be purchased through an insurance
agent who will obtain the policy either
directly through the NFIP or through an
insurance company that participates in the
NFIP. Flood insurance also may be available
from private insurers that do not participate
in the NFIP.
• At a minimum, flood insurance
purchased must cover the lesser of.
(1) the outstanding principal balance of the
loan; or
(2) the maximum amount of coverage
allowed for the type of property under the
NFIP.
Flood insurance coverage under the NFIP
is limited to the overall value of the property
securing the loan minus the value of the land
on which the property is located.
• Federal disaster relief assistance (usually
in the form of a low-interest loan) may be
available for damages incurred in excess of
your flood insurance if your community's
participation in the NFIP is in accordance
with NFIP requirements.
_____ Flood insurance coverage under the
NFIP is not available for the property
securing the loan because the community in
which the property is located does not
participate in the NFIP. In addition, if the
non-participating community has been
identified for at least one year as containing
a special flood hazard area, properties
located in the community will not be eligible
for Federal disaster relief assistance in the
event of a Federally declared flood disaster.
Subpart C— Bank Securities and
Securities-Related Activities
§ 208.30
Authority, purpose, and scope.
(a) A uthority. Subpart C of Regulation
H (12 CFR part 208, subpart C) is issued
by the Board of Governors of the Federal
Reserve System u n d er 12 U.S.C. 24, 92a,
93a; sections 1818 and 1831p-l(a)(2) of
the FDI Act (12 U.S.C. 1818, 1831p 1(a)(2)); and sections 78b, 781(b), 781(g),
78l(i), 78o—
4(c)(5), 78o-5, 78q, 7 8 q -l,
and 78 w of the Securities Exchange Act
of 1934 (15 U.S.C. 78b, 781(b), 781(g),
78l(i), 78o—
4(c)(5), 780-5, 78q, 7 8 q -l,
78w).
(b) Purpose and scope. This subpart C
describes the requirem ents im posed
u p o n mem ber banks acting as transfer
agents, registered clearing agencies, or
sellers of securities un d er the Securities
Exchange Act of 1934. This subpart C
also describes the reporting
requirem ents im posed on m em ber banks
w hose securities are subject to
registration u n d er the Securities
Exchange Act of 1934.
§ 208.31
agents.
State member banks as transfer
(a) The rules adopted by the
Securities and Exchange Comm ission
(SEC) pursu ant to section 17A of the
Securities Exchange Act of 1934 (15
U.S.C. 78q-l) prescribing procedures for
registration of transfer agents for w hich
the SEC is the appropriate regulatory
agency (17 CFR 240.17A c2-l) apply to
m em ber bank transfer agents. References
to the “C om m ission” are deem ed to
refer to the Board.
(b) The rules adopted by the SEC
pursuant to section 17A prescribing
operational and reporting requirem ents
for transfer agents (17 CFR 240.17Ac2—
2 and 240.1 7A d-l through 240.17A d16) apply to m em ber bank transfer
agents.
§ 208.32 Notice of disciplinary sanctions
imposed by registered clearing agency.
(a) N otice requirem ent. A ny mem ber
bank .or any of its subsidiaries that is a
registered clearing agency pursu an t to
section 17A(b) of the Securities
Exchange Act of 1934 (the Act), and
that:
(1) Imposes any final disciplinary
sanction on any participant therein;
(2) Denies participation to any
applicant; or
(3) Prohibits or lim its any person in
respect to access to services offered by
the clearing agency, shall file w ith the
Board (and the appropriate regulatory
agency, if other than the Board, for a
participant or applicant) notice thereof
in the m anner prescribed in this section.
(b) N otice o f fin a l disciplinary
actions. (1) Any registered clearing
agency for w hich the Board is the
appropriate regulatory agency that takes
any final disciplinary action w ith
respect to any participant shall
prom ptly file a notice thereof w ith the
Board in accordance w ith paragraph (c)
of this section. For the purposes of this
paragraph (b), fin a l disciplinary action
m eans the im position of any
disciplinary sanction pursuant to
section 17A(b)(3)(G) of the Act, or other
action of a registered clearing agency
w hich, after notice and opportunity for
hearing, results in final disposition of
charges of:
(1) One or more violations of the rules
of the registered clearing agency; or
(ii) Acts or practices constituting a
statutory disqualification of a type
defined in paragraph (iv) or (v) (except
prior convictions) of section 3(a)(39) of
the Act.
(2) However, if a registered clearing
agency fee schedule specifies certain
charges for errors m ade by its
participants in giving instructions to the
registered clearing agency w h ich are de
m in im is on a per error basis, and whose
purpose is, in part, to provide revenues
to the clearing agency to com pensate it
for effort expended in beginning to
process an erroneous instruction, such
error charges shall not be considered a
final disciplinary action for purposes of
this paragraph (b).
(c) C ontents o f fin a l disciplinary
action notice. Any notice filed pursuant
to paragraph (b) of this section shall
consist of the following, as appropriate:
(1) The nam e of the respondent and
the respondent’s last k now n address, as
reflected on the records of the clearing
agency, and the nam e of the person,
committee, or other organizational unit
that brought the charges. However,
identifying inform ation as to any
respondent found not to have violated a
provision covered by a charge m ay be
deleted insofar as the notice reports the
disposition of that charge and, prior to
the filing of the notice, the respondent
does not request that identifying
inform ation be included in the notice;
(2) A statem ent describing the
investigative or other origin of the
action;
(3) As charged in the proceeding, the
specific provision or provisions of the
rules of the clearing agency violated by
the respondent, or the statutory
disqualification referred to in paragraph
(b)(2) of th is section, and a statem ent
describing the answ er of the respondent
to the charges;
(4) A statem ent setting forth findings
of fact w ith respect to any act or practice
in w hich the respondent w as charged
w ith having engaged in or omitted; the
conclusion of the clearing agency as to
w hether the respondent violated any
rule or was subject to a statutory
disqualification as charged; and a
statem ent of the clearing agency in
support of its resolution of the principal
issues raised in the proceedings;
(5) A statem ent describing any
sanction im posed, the reasons therefor,
and the date upon w hich the sanction
became or w ill become effective; and
(6) Such other matters as the clearing
agency m ay deem relevant.
(d) N otice o f fin a l denial, prohibition,
term ination or lim itation based on
qualification or adm inistrative rules. (1)
A ny registered clearing agency, for
w hich the Board is the appropriate
regulatory agency, th at takes any final
action that denies or conditions the
participation of any person, or prohibits
or limits access, to services offered by
the clearing agency, shall prom ptly file
notice thereof w ith the Board (and the
appropriate regulatory agency, if other
than the Board, for the affected person)
in accordance w ith paragraph (e) of this
section; b u t such action shall not be
Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
considered a final disciplinary action
for purposes of paragraph (b) of this
section w here the action is based on an
alleged failure of such person to:
(1) Comply w ith th e qualification
standards prescribed by the rules of the
registered clearing agency pursuan t to
section 17A(b)(4)(B) of the Act; or
(ii) Comply w ith any adm inistrative
requirem ents of the registered clearing
agency (including failure to pay entry or
other dues or fees, or to file prescribed
forms or reports) not involving charges
of violations that m ay lead to a
disciplinary sanction.
(2) However, no such action shall be
considered final pursuant to this
paragraph (d) that results m erely from a
notice of such failure to com ply to the
person affected, if such person has not
sought an adjudication of the matter,
including a hearing, or otherwise
exhausted the adm inistrative rem edies
w ith in the registered clearing agency
w ith respect to such a matter.
(e) C ontents o f notice required by
paragraph (d) o f this section. A ny notice
filed pursuant to paragraph (d) of this
section shall consist of th e following, as
appropriate:
(1) The nam e of each person
concerned an d each person’s last know n
address, as reflected in the records of
the clearing agency;
(2) The specific grounds upo n w hich
the action of the clearing agency was
based, an d a statem ent describing the
answ er of the person concerned;
(3) A statem ent setting forth findings
of fact and conclusions as to each
alleged failure of the person to com ply
w ith qualification standards or
adm inistrative obligations, and a
statem ent of the clearing agency in
support of its resolution of the principal
issues raised in the proceeding;
(4) The date u p o n w hich such action
becam e or w ill becom e effective; and
(5) Such other m atters as th e clearing
agency deem s relevant.
(f) N otice o f fin a l action based on
prior adjudicated statutory
disqualifications. Any registered
clearing agency for w hich the Board is
the appropriate regulatory agency that
takes any final action shall prom ptly file
notice thereof w ith the Board (and the
appropriate regulatory agency, if other
than the Board, for th e affected person)
in accordance w ith paragraph (g) of this
section, w here the final action:
(1) Denies or conditions participation
to any person, or prohibits or lim its
access to services offered by the clearing
agency; and
(2) Is based u pon a statutory
disqualification of a type defined in
paragraph (A), (B) or (C) of section
3(a)(39) of th e Act, consisting of a prior
conviction, as described in
subparagraph (E) of section 3(a)(39) of
the Act. However, no such action shall
be considered final p ursuant to this
paragraph (f) that results m erely from a
notice of such disqualification to the
person affected, if such person has not
sought an adjudication of th e matter,
including a hearing, or otherwise
exhausted the adm inistrative rem edies
w ithin the clearing agency w ith respect
to such a matter.
(g) C ontents o f notice required by
paragraph (f) o f this section. Any notice
filed pursuan t to paragraph (f) of this
section shall consist of th e following, as
appropriate:
(1) The nam e of each person
concerned and each person ’s last know n
address, as reflected in the records of
the clearing agency;
(2) A statem ent setting forth the
principal issues raised, th e answ er of
any person concerned, and a statem ent
of the clearing agency in support of its
resolution of the principal issues raised
in the proceeding;
(3) A ny description furnished by or
on behalf of th e person concerned of the
activities engaged in by the person since
the adjudication up on w hich the
disqualification is based;
(4) A copy of the order or decision of
the court, appropriate regulatory agency,
or self-regulatory organization that
adjudicated the m atter giving rise to the
statutory disqualification;
(5) The nature of the action taken and
the date u pon w hich such action is to
be m ade effective; and
(6) Such other matters as the clearing
agency deems relevant.
(h) N otice o f su m m ary suspension o f
participation. Any registered clearing
agency for w hich the Board is the
appropriate regulatory agency that
sum m arily suspends or closes the
accounts of a participant p u rsu an t to the
provisions of section 17A(b)(5)(C) of the
Act shall, w ithin one business day after
such action becomes effective, file
notice thereof w ith the Board and the
appropriate regulatory agency for the
participant, if other than the Board, of
such action in accordance w ith
paragraph (i) of this section.
(i) C ontents o f notice o f sum m ary
suspension. A ny notice p u rsu an t to
paragraph (h) of this section shall
contain at least th e following
inform ation, as appropriate:
(1) The nam e of the participant
concerned and the participant’s last
know n address, as reflected in the
records of the clearing agency;
(2) The date upo n w hich the sum mary
action becam e or w ill becom e effective;
(3) If the sum m ary action is based
upo n the provisions of section
37647
17A(b)(5)(C)(i) of the Act, a copy of the
relevant order or decision of the selfregulatory organization, if available to
the clearing agency;
(4) If the sum m ary action is based
u p o n the provisions of section
17A(b)(5)(C)(ii) of th e Act, a statem ent
describing the default of any delivery of
funds or securities to the clearing
agency;
(5) If the sum m ary action is based
u p o n the provisions of section
17A(b)(5)(C)(iii) of the Act, a statem ent
describing the financial or operating
difficulty of the participant based up on
w hich th e clearing agency determ ined
that the suspension and closing of
accounts was necessary for the
protection of the clearing agency, its
participants, creditors, or investors;
(6) The nature and effective date of
the suspension; and
(7) Such other m atters as the clearing
agency deem s relevant.
§208.33 Application for stay or review of
disciplinary sanctions imposed by
registered clearing agency.
(a) Stays. The rules adopted by the
Securities and Exchange Comm ission
(SEC) pu rsuant to section 19 of the
Securities Exchange Act of 1934 (15
U.S.C. 78s) regarding applications by
persons for w hom the SEC is the
appropriate regulatory agency for stays
of disciplinary sanctions or sum m ary
suspensions im posed by registered
clearing agencies (17 CFR 240.19d-2)
apply to applications by m em ber banks.
References to the “C om m ission” are
deem ed to refer to the Board.
(b) Reviews. The regulations adopted
by the Securities an d Exchange
Comm ission pursu an t to section 19 of
the Securities an d Exchange Act of 1934
(15 U.S.C. 78s) regarding applications
by persons for w hom th e SEC is the
appropriate regulatory agency for
reviews of final disciplinary sanctions,
denials of participation, or prohibitions
or lim itations of access to services
im posed by registered clearing agencies
(17 CFR 240.19d—
3(a)— apply to
(f))
applications by m em ber banks.
References to the “C om m ission” are
deem ed to refer to the Board. The
Board’s Uniform Rules of Practice and
Procedure (12 CFR part 263) apply to
review proceedings u n d er this § 208.33
to th e extent not inconsistent w ith this
§208.33.
§208.34 Recordkeeping and confirmation
of certain securities transactions effected
by State member banks.
(a) E xceptions a n d safe a n d sou n d
operations. (1) A State m em ber bank
m ay be excepted from one or m ore of
the requirem ents of th is section if it
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Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
meets one of the following conditions of bank in its capacity as trustee, executor,
adm inistrator, guardian, or custodian
paragraphs (a)(l)(i) through (a){l)(iv) of
this section:
u n d er the Uniform Gifts to M inors Act;
(1) De m in im is transactions. The
or
requirem ents of paragraphs (c)(2)
(ii) In a fund consisting solely of
through (c)(4) and paragraphs (e)(1)
assets of retirem ent, pension, profit
through (e)(3) of this section shall not
sharing, stock bonus or sim ilar trusts
apply to banks having an average of less w hich are exem pt from Federal incom e
than 200 securities transactions per year taxation un der the Internal Revenue
for custom ers over the prior three
Code (26 U.S.C.).
(3) Com pletion o f the transaction
calendar year period, exclusive of
effected by or through a state mem ber
transactions in governm ent securities;
bank shall mean:
(ii) G overnm ent securities. The
(i) For purchase transactions, the time
recordkeeping requirem ents of
w hen the custom er pays the bank any
paragraph (c) of this section shall not
part of the purchase price (or the time
apply to banks effecting fewer than 500
w hen the bank makes the book-entry for
governm ent securities brokerage
any part of the purchase price if
transactions per year; provided that this
exception shall not apply to governm ent applicable); however, if the custom er
pays for the security prior to the time
securities transactions by a State
paym ent is requested or becom es due,
mem ber bank that has filed a w ritten
then the transaction shall be com pleted
notice, or is required to file notice, w ith
w hen the bank transfers the security
the Federal Reserve Board th at it acts as
into the account of the customer; and
a governm ent securities broker or a
(ii) For sale transactions, th e tim e
governm ent securities dealer;
w hen the bank transfers the security out
(iii) M unicipal securities. The
m unicipal securities activities of a State of the account of the custom er or, if the
security is n ot in the b ank’s custody,
m em ber bank that are subject to
then th e tim e w hen the security is
regulations prom ulgated by the
M unicipal Securities Rulem aking Board delivered to the bank; however, if the
custom er delivers the security to the
shall n ot be subject to the requirem ents
bank prior to the tim e delivery is
of this section; and
(iv) Foreign branches. The
requested or becom es due then the
requirem ents of this section shall not
transaction shall be com pleted w h en the
apply to the activities of foreign
banks makes paym ent into th e account
branches of a State m em ber bank.
of the customer.
(2) Every State mem ber bank
(4) Crossing o f b uy and sell orders
qualifying for an exem ption u n d er
shall m ean a security transaction in
paragraph (a)(1) of this section that
w hich the same bank acts as agent for
conducts securities transactions for
both the buyer and the seller.
(5) Custom er shall m ean any person
custom ers shall, to ensure safe and
or account, including any agency, trust,
sound operations, m aintain effective
estate, guardianship, or other fiduciary
systems of records and controls
account, for w hich a State m em ber bank
regarding its custom er securities
effects or participates in effecting the
transactions that clearly and accurately
purchase or sale of securities, but shall
reflect appropriate inform ation and
not include a broker, dealer, bank acting
provide an adequate basis for an audit
as a broker or dealer, m unicipal
of the information.
(b) D efinitions. For purposes of this securities broker or dealer, or issuer of
section:
the securities w hich are the subject of
(1) A sset-backed security shall m ean a the transactions.
security that is serviced prim arily by the
(6) Debt security as used in paragraph
cash flows of a discrete pool of
(c) of this section shall m ean any
receivables or other financial assets,
security, such as a bond, debenture,
either fixed or revolving, that by their
note or any other similar instrum ent
terms convert into cash w ithin a finite
w hich evidences a liability of the issuer
tim e period plus any rights or other
(including any security of this type that
assets designed to assure th e servicing
is convertible into stock or similar
or tim ely distribution of proceeds to the
security) and fractional or participation
security holders.
interests in one or more of any of the
(2) Collective investm en t fu n d shall
foregoing; provided, however, that
m ean funds held by a State mem ber
securities issued by an investm ent
bank as fiduciary and, consistent w ith
com pany registered un d er the
local law, invested collectively as
Investm ent Company Act of 1940, 15
follows:
U.S.C. 8 0 a -l et seq., shall not be
(i)
In a com m on trust fund m aintainedincluded in this definition.
by such bank exclusively for the
(7) G overnm ent security shall mean:
collective investm ent and reinvestm ent
(i) A security that is a direct
of m onies contributed thereto by the
obligation of, or obligation guaranteed
as to principal and interest by, the
U nited States;
(ii) A security th at is issued or
guaranteed by a corporation in w hich
the U nited States has a direct or indirect
interest and w hich is designated by the
Secretary of the Treasury for exem ption
as necessary or appropriate in the public
interest or for the protection of
investors;
(iii) A security issued or guaranteed as
to principal and interest by any
corporation w hose securities are
designated, by statute specifically
nam ing the corporation, to constitute
exem pt securities w ithin the m eaning of
the laws adm inistered by the Securities
and Exchange Commission; or
(iv) Any put, call, straddle, option, or
privilege on a security as described in
paragraphs (b)(7) (i), (ii), or (iii) of this
section other th an a put, call, straddle,
option, or privilege that is traded on one
or more national securities exchanges,
or for w hich quotations are
dissem inated though an autom ated
quotation system operated by a
registered securities association.
(8) Investm ent discretion w ith respect
to an account shall m ean if the State
mem ber bank, directly or indirectly, is
authorized to determ ine w hat securities
or other property shall be purchased or
sold by or for the account, or makes
decisions as to w hat securities or other
property shall be purchased or sold by
or for the account even though some
other person may have responsibility for
such investm ent decisions.
(9) M unicipal security shall m ean a
security w hich is a direct obligation of,
or obligation guaranteed as to principal
or interest by, a State or any political
subdivision thereof, or any agency or
instrum entality of a State or any
political subdivision thereof, or any
m unicipal corporate instrum entality of
one or more States, or any security
w hich is an industrial developm ent
bond (as defined in 26 U.S.C. 103(c)(2)
the interest on w hich is excludable from
gross incom e u n d er 26 U.S.C. 103(a)(1),
by reason of the application of
paragraph (4) or (6) of 26 U.S.C. 103(c)
(determ ined as if paragraphs (4)(A), (5)
and (7) were not included in 26 U.S.C.
103(c)), paragraph (1) of 26 U.S.C. 103(c)
does not apply to such security.
(10) Periodic p lan shall mean:
(i)
A w ritten authorization for a State
mem ber bank to act as agent to purchase
or sell for a custom er a specific security
or securities, in a specific am ount
(calculated in security units or dollars)
or to the extent of dividends an d funds
available, at specific time intervals, and
setting forth the com m ission or charges
to be paid by the custom er or the
m anner of calculating them (including
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
dividend reinvestm ent plans, automatic reproduced in a hard copy. A bank may
investm ent plans, and em ployee stock
contract w ith third party service
purchase plans); or
providers, including broker/dealers, to
(ii) A ny prearranged, automatic
m aintain records required u n d er this
transfer or sw eep of funds from a
part.
deposit account to purchase a security,
(1) Chronological records of original
or any prearranged, automatic
entry containing an item ized daily
redem ption or sale of a security w ith the record of all purchases and sales of
funds being transferred into a deposit
securities. The records of original entry
account (including cash management
shall show the account or custom er for
sweep services).
w hich each such transaction was
(11)
Security shall mean:
effected, the description of the
(i) A ny note, stock, treasury stock,
securities, the un it and aggregate
bond, debenture, certificate of interest
purchase or sale price (if any), the trade
or participation in any profit-sharing
date and the nam e or other designation
agreement or in any oil, gas, or other
of the broker/dealer or other person
m ineral royalty or lease, any collateralfrom w hom purchased or to w hom sold;
trust certificate, preorganization
(2) A ccount records for each custom er
certificate or subscription, transferable
w hich shall reflect all purchases and
share, investm ent contract, voting-trust
sales of securities, all receipts and
certificate, for a security, any put, call,
deliveries of securities, and all receipts
straddle, option, or privilege on any
and disbursem ents of cash w ith respect
security, or group or index of securities
to transactions in securities for such
(including any interest therein or based
account and all other debits and credits
on the value thereof), any instrum ent
pertaining to transactions in securities;
com monly know n as a “security”; or
(3) A separate m em orandum (order
any certificate of interest or
ticket) of each order to purchase or sell
participation in, tem porary or interim
securities (w hether executed or
certificate for, receipt for, or w arrant or
canceled), w hich shall include:
right to subscribe to or purchase, any of
(i) The account(s) for w hich the
the foregoing.
transaction w as effected;
(ii) But does n o t inclu de a deposit or
(ii) W hether the transaction was a
share account in a federally or state
m arket order, lim it order, or subject to
insured depository institution, a loan
special instructions;
participation, a letter of credit or other
(iii) The tim e the order was received
form of bank indebtedness incurred in
by the trader or other bank em ployee
the ordinary course of business,
responsible for effecting the transaction;
currency, any note, draft, bill of
(iv) The tim e the order w as placed
exchange, or bankers acceptance w hich
w ith the broker/dealer, or if there was
has a m aturity at the tim e of issuance of no broker/dealer, th e tim e the order was
not exceeding n in e m onths, exclusive of executed or canceled;
days of grace, or any renew al thereof the
(v) The price at w hich the order was
m aturity of w hich is likewise lim ited,
executed; and
units of a collective investm ent fund,
(vi) The broker/dealer utilized;
interests in a variable am ount (master)
(4) A record of all broker/dealers
note of a borrow er of prim e credit, or
selected by the bank to effect securities
U.S. Savings Bonds.
transactions and the am ount of
(c)
Recordkeeping. Except as providedcom missions paid or allocated to each
in paragraph (a) of this section, every
such broker during the calendar year;
State mem ber bank effecting securities
and
transactions for customers, including
(5) A copy of the w ritten notification
transactions in governm ent securities,
required by paragraphs (d) and (e) of
and m unicipal securities transactions by this section.
banks n ot subject to registration as
(d) C ontent and tim e o f notification.
m unicipal securities dealers, shall
Every State m em ber bank effecting a
m aintain the following records w ith
securities transaction for a custom er
respect to such transactions for at least
shall give or send to such custom er
three years. N othing contained in this
either of the following types of
section shall require a bank to m aintain
notifications at or before com pletion of
the records required by this paragraph
the transaction or; if the bank uses a
in any given m anner, provided that the
broker/dealer’s confirm ation, w ithin one
inform ation required to be show n is
business day from the b ank’s receipt of
clearly and accurately reflected and
the broker/dealer’s confirmation:
provides an adequate basis for the audit
(1) A copy of the confirm ation of a
of such information. Records may be
broker/dealer relating to the securities
m aintained in h ard copy, autom ated, or
transaction; and if the bank is to receive
electronic form provided the records are rem uneration from the custom er or any
easily retrievable, readily available for
other source in connection w ith the
inspection, and capable of being
transaction, and the rem uneration is not
37649
determ ined pu rsuant to a prior w ritten
agreem ent betw een the bank and the
customer, a statem ent of the source and
the am ount of any rem uneration to be
received; or
(2) A w ritten notification disclosing:
(i) The nam e of the bank;
(ii) The nam e of the customer;
(iii) W hether the bank is acting as
agent for such customer, as agent for
both such custom er and some other
person, as principal for its ow n account,
or in any other capacity;
(iv) The date of execution and a
statem ent that the time of execution w ill
be furnished w ithin a reasonable tim e
upon w ritten request of such custom er
specifying the identity, price and
num ber of shares or units (or principal
am ount in the case of debt securities) of
such security purchased or sold b y such
customer;
(v) The am ount of any rem uneration
received or to be received, directly or
indirectly, by any broker/dealer from
such custom er in connection w ith the
transaction;
(vi) The am ount of any rem uneration
received or to be received by the bank
from the custom er and the source and
am ount of any other rem uneration to be
received by the bank in connection w ith
the transaction, unless rem uneration is
determ ined pu rsuant to a w ritten
agreem ent betw een the bank and the
customer, provided, however, in the
case of Government securities and
m unicipal securities, this paragraph
(d)(2)(vi) shall ap ply only w ith respect
to rem uneration received by the bank in
an agency transaction. If the bank elects
not to disclose the source and am ount
of rem uneration it has or w ill receive
from a party other than the custom er
pursu an t to this paragraph (d)(2)(vi), the
w ritten notification m ust disclose
w hether the bank has received or w ill
receive rem uneration from a party other
than the customer, and that the bank
w ill furnish w ithin a reasonable time
the source and am ount of this
rem uneration u p o n w ritten request of
the customer. This election is not
available, how ever, if, w ith respect to a
purchase, the bank was participating in
a distribution of that security; or w ith
respect to a sale, the bank was
participating in a tender offer for that
security;
(vii) The nam e of the broker/dealer
utilized; or, w here there is no broker/
dealer, the nam e of the person from
w hom the security was purchased or to
w hom it was sold, or the fact that such
inform ation w ill be furnished w ith in a
reasonable time u p o n w ritten request;
(viii) In the case of a transaction in a
debt security subject to redem ption
before m aturity, a statem ent to the effect
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Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
that the debt security may be redeem ed
in w hole or in part before m aturity, that
the redem ption could affect the yield
represented and that additional
inform ation is available on request;
(ix) In the case of a transaction in a
debt security effected exclusively on the
basis of a dollar price:
(A) The dollar price at w hich the
transaction w as effected;
(B) The yield to m aturity calculated
from the dollar price; provided,
however, that this paragraph
(c)(2)(ix)(B) shall not apply to a
transaction in a debt security th at either
has a m aturity date that may be
extended by the issuer w ith a variable
interest payable thereon, or is an assetbacked security that represents an
interest in or is secured by a pool of
receivables or other financial assets that
are subject to continuous prepaym ent;
(x) In the case of a transaction in a
debt security effected on the basis of
yield:
(A) The yield at w hich the transaction
was effected, including the percentage
am ount and its characterization (e.g.,
current yield, yield to maturity, or yield
to call) and if effected at yield to call,
the type of call, the call date, and the
call price; and
(B) The dollar price calculated from
the yield at w hich the transaction was
effected; and
(C) If effected on a basis other than
yield to m aturity and the yield to
m aturity is low er th a n the represented
yield, the yield to m aturity as w ell as
the represented yield; provided,
however, that this paragraph (c)(2)(x)(C)
shall not apply to a transaction in a debt
security that either has a m aturity date
that may be extended by the issuer w ith
a variable interest rate payable thereon,
or is an asset-backed security that
represents an interest in or is secured by
a pool of receivables or other financial
assets that are subject to continuous
prepaym ent;
(xi) In the case of a transaction in a
debt security that is an asset-backed
security w hich represents an interest in
or is secured by a pool of receivables or
other financial assets that are subject
continuously to prepaym ent, a
statem ent indicating that the actual
yield of such asset-backed security may
vary according to the rate at w hich the
underlying receivables or other financial
assets are prepaid and a statem ent of the
fact that inform ation concerning the
factors that affect yield (including at a
m inim um , the estim ated yield, w eighted
average life, and the prepaym ent
assum ptions underlying yield) w ill be
furnished u p o n w ritten request of such
customer; and
(xii) In the case of a transaction in a
debt security, other than a governm ent
security, that the security is unrated by
a nationally recognized statistical rating
organization, if that is the case.
(e) N otification by agreement;
alternative fo rm s and tim es o f
notification. A State m em ber bank may
elect to use the following alternative
procedures if a transaction is effected
for:
(1) A ccounts (except periodic plans)
w here the bank does not exercise
investm ent discretion and the bank and
the custom er agree in w riting to a
different arrangem ent as to the tim e and
content of the notification; provided,
however, that such agreement makes
clear the custom er’s right to receive the
w ritten notification pursu ant to
paragraph (c) of this section at no
additional cost to the customer;
(2) A ccounts (except collective
investm ent funds) w here the bank
exercises investm ent discretion in other
than an agency capacity, in w hich
instance the bank shall, upo n request of
the person having the pow er to
term inate the account or, if there is no
such person, u pon the request of any
person holding a vested beneficial
interest in such account, give or send to
such person the w ritten notification
w ithin a reasonable time. The bank may
charge such person a reasonable fee for
providing this information;
(3) A ccounts, w here the bank
exercises investm ent discretion in an
agency capacity, in w hich instance:
(i) The bank shall give or send to each
custom er not less frequently than once
every three m onths an itemized
statem ent w hich shall specify the funds
and securities in the custody or
possession of the bank at the end of
such period and all debits, credits and
transactions in the custom er’s accounts
during such period; and
(ii) If requested by the customer, the
bank shall give or send to each custom er
w ithin a reasonable tim e the w ritten
notification described in paragraph (c)
of this section. The bank may charge a
reasonable fee for providing the
inform ation described in paragraph (c)
of this section;
(4) A collective investm ent fund, in
w hich instance th e bank shall at least
annually furnish a copy of a financial
report of the fund, or provide notice that
a copy of such report is available and
w ill be furnished u pon request, to each
person to w hom a regular periodic
accounting w ould ordinarily be
rendered w ith respect to each
participating account. This report shall
be based u pon an audit m ade by
independent public accountants or
internal auditors responsible only to the
board of directors of the bank;
(5) A periodic plan, in w hich instance
the bank:
(i) Shall (except for a cash
m anagem ent sweep service) give or send
to th e custom er a w ritten statem ent not
less th a n every three m onths if there are
no securities transactions in the
account, show ing the custom er’s funds
and securities in the custody or
possession of the bank; all service
charges an d com m issions paid by the
custom er in connection w ith the
transaction; and all other debits and
credits of the custom er’s account
involved in th e transaction; or
(ii) Shall for a cash m anagem ent
sw eep service or sim ilar periodic plan
as defined in § 208.34(b)(10)(ii) give or
send its custom er a w ritten statem ent in
the sam e form as prescribed in
paragraph (e)(3) above for each m onth in
w h ich a purchase or sale of a security
takes place in a deposit account and not
less th a n once every three m onths if
there are no securities transactions in
the account subject to any other
applicable laws or regulations;
(6) U pon the w ritten request of the
custom er the bank shall furnish the
inform ation described in paragraph (d)
of th is section, except that any such
inform ation relating to rem uneration
paid in connection w ith the transaction
need n ot be provided to the custom er
w h en paid by a source other th an the
customer. T he bank may charge a
reasonable fee for providing the
inform ation described in paragraph (d)
of this section.
(f) Settlem en t o f securities
transactions. All contracts for the
purchase or sale of a security shall
provide for com pletion of the
transaction w ithin the num ber of
business days in the standard settlement
cycle for th e security followed by
registered broker dealers in the U nited
States unless otherwise agreed to by the
parties at the time of the transaction.
(g) Securities trading policies an d
procedures. Every State m em ber bank
effecting securities transactions for
custom ers shall establish w ritten
policies and procedures providing:
(1) A ssignm ent of responsibility for
supervision of all officers or employees
who:
(i) T ransm it orders to or place orders
w ith broker/dealers;
(ii) Execute transactions in securities
for customers; or
(iii) Process orders for notification
and/o r settlem ent purposes, or perform
other back office functions w ith respect
to securities transactions effected for
customers; provided that procedures
established u n d er this paragraph
Federal Register/ Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
(g)(l)(iii) should provide for supervision
and reporting lines that are separate
from supervision of personnel under
paragraphs (g)(l)(i) and (g)(l)(ii) of this
section;
(2) For the fair and equitable
allocation of securities and prices to
accounts w h en orders for the same
security are received at approxim ately
the same tim e and are placed for
execution either individually or in
combination;
(3) Where applicable and w here
perm issible un d er local law, for the
crossing of buy and sell orders on a fair
and equitable basis to the parties to the
transaction; and
(4) That bank officers and em ployees
w ho make investm ent recom m endations
or decisions for the accounts of
customers, w ho participate in the
determ ination of such recom m endations
or decisions, or w ho, in connection w ith
their duties, obtain inform ation
concerning w hich securities are being
purchased or sold or recom m ended for
such action, m u st report to the bank,
w ith in ten days after the end of the
calendar quarter, all transactions in
securities m ade by them or on their
behalf, either at th e bank or elsewhere
in w hich they have a beneficial interest.
The report shall identify the securities
purchased or sold and indicate the dates
of the transactions and w hether the
transactions w ere purchases or sales.
Excluded from this requirem ent are
transactions for the benefit of th e officer
or em ployee over w hich the officer or
em ployee has no direct or indirect
influence or control, transactions in
m utual fund shares, and all transactions
involving in the aggregate $10,000 or
less during th e calendar quarter. For
purposes of this paragraph (g)(4), the
term securities does not include
governm ent securities.
§208.35 Qualification requirements for
transactions in certain securities.
[Reserved]
§ 208.36 Reporting requirements for State
member banks subject to the Securities
Exchange Act of 1934.
(a) Filing requirem ents. Except as
otherwise provided in this section, a
m em ber bank w hose securities are
subject to registration pursuant to
section 12(b) or section 12(g) of the
Securities Exchange Act of 1934 (the
1934 Act) (15 U.S.C. 781 (b) and (g))
shall com ply w ith the rules, regulations,
and forms adopted bj' the Securities and
Exchange Comm ission (Commission)
pursuant to sections 12, 13, 14(a), 14(c),
14(d), 14(f) and 16 of the 1934 Act (15
U.S.C. 781, 78m, 78n(a), (c), (d), (f) and
78p). The term “Com m ission” as used
in those rules and regulations shall w ith
respect to securities issued by mem ber
banks be deem ed to refer to the Board
unless the context otherwise requires.
(b) E lections p erm itted fo r m em ber
banks with total assets o f $150 m illion
or less. (1) N otw ithstanding paragraph
(a) of this section or the rules and
regulations prom ulgated by the
Comm ission pursuant to the 1934 Act a
mem ber bank that has total assets of
$150 m illion or less as of the end of its
most recent fiscal year, and no foreign
offices, may elect to substitute for the
financial statem ents required by the
Com m ission’s Form 10-Q, the balance
sheet and incom e statem ent from the
quarterly report of condition required to
be filed by th e bank w ith the Board
u n d er section 9 of the Federal Reserve
Act (12 U.S.C. 324) (Federal Financial
Institutions Exam ination Council Form
033 or 034).
(2) A m em ber bank qualifying for and
electing to file financial statem ents from
its quarterly report of condition
pursuant to paragraph (b)(1) of this
section in its form 10-Q shall include
earnings per share or n et loss per share
data prepared in accordance w ith GAAP
and disclose any m aterial contingencies,
as required by Article 10 of the
Com m ission’s Regulation S-X (17 CFR
210.10-01), in the M anagem ent’s
D iscussion and Analysis of Financial
Condition an d Results of O perations
section of Form 10-Q.
(c) R equired filings. (1) Place and
tim ing o f filing. All papers required to
be filed w ith the Board, pursu an t to the
1934 Act or regulations thereunder,
shall be subm itted to the Division of
Banking Supervision and Regulation,
Board of Governors of the Federal
Reserve System, 20th Street and
C onstitution A venue, NW., W ashington,
DC 20551. M aterial may be filed by
delivery to the Board, through the mails,
or otherwise. The date on w hich papers
are actually received by the Board shall
be the date of filing thereof if all of the
requirem ents w ith respect to the filing
have been com plied with.
(2) Filing fees. No filing fees specified
by the C om m ission’s rules shall be paid
to the Board.
(3) P ublic inspection. Copies of the
registration statem ent, definitive proxy
solicitation materials, reports, and
annual reports to shareholders required
by this section (exclusive of exhibits)
shall be available for public inspection
at the B oard’s offices in W ashington,
DC, as w ell as at the Federal Reserve
Banks of New York, Chicago, and San
Francisco and at the Reserve Bank in the
district in w hich the reporting bank is
located.
(d) C onfidentiality o f filing. Any
person filing any statem ent, report, or
37651
docum ent und er the 1934 Act may make
w ritten objection to the public
disclosure of any inform ation contained
therein in accordance w ith the
following procedure:
(1) The person shall om it from the
statem ent, report, or docum ent, w hen it
is filed, the portion thereof that the
person desires to keep undisclosed
(hereinafter called the confidential
portion). The person shall indicate at
the appropriate place in the statem ent,
report, or docum ent that the
confidential portion has been om itted
and filed separately w ith th e Board.
(2) The person shall file the following
w ith the copies of the statem ent, report,
or docum ent filed w ith the Board:
(i) As m any copies of the confidential
portion, each clearly m arked
“CONFIDENTIAL TREATMENT,” as
there are copies of the statem ent, report,
or docum ent filed w ith the Board. Each
copy of the confidential portion shall
contain the com plete text of the item
and, notw ithstanding that the
confidential portion does not constitute
the w hole of th e answer, the entire
answ er thereto; except th at in case the
confidential portion is part of a financial
statem ent or schedule, only the
particular financial statem ent or
schedule need be included. All copies
of the confidential portion shall be in
the sam e form as the rem ainder of the
statem ent, report, or docum ent; and
(ii) A n application m aking objection
to the disclosure of th e confidential
portion. The application shall be on a
sheet or sheets separate from the
confidential portion, and shall:
(A) Identify the portion of the
statem ent, report, or docum ent that has
been omitted;
(B) Include a statem ent of the grounds
of objection; and
(C) Include the nam e of each
exchange, if any, w ith w hich the
statem ent, report, or docum ent is filed.
(3) The copies of the confidential
portion and the application filed in
accordance w ith this paragraph shall be
enclosed in a separate envelope m arked
“CONFIDENTIAL TREATMENT,” and
addressed to Secretary, Board of
Governors of the Federal Reserve
System, W ashington, DC 20551.
(4) Pending determ ination by the
Board on the objection filed in
accordance w ith this paragraph, the
confidential portion shall not be
disclosed by the Board.
(5) If the Board determ ines to sustain
the objection, a notation to that effect
shall be m ade at the appropriate place
in the statem ent, report, or docum ent.
(6) If the Board determ ines not to
sustain the objection because disclosure
of the confidential portion is in the
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Federal Register/ Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
public interest, a finding and
determ ination to that effect shall be
entered and notice of the finding and
determ ination sent by registered or
certified m ail to the person.
(7) If the Board determ ines not to
sustain the objection, p u rsuant to
paragraph (d)(6) of this section, the
confidential portion shall be m ade
available to the public:
(i) 15 days after notice of the Board’s
determ ination not to sustain the
objection has been given, as required by
paragraph (d)(6) of this section,
provided that the person filing the
objection has not previously filed w ith
the Board a w ritten statem ent that he
intends, in good faith, to seek judicial
review of the finding and determ ination;
or
(ii) 60 days after notice of the B oard’s
determ ination not to sustain the
objection has been given as required by
paragraph (d)(6) of this section and the
person filing th e objection has filed w ith
the Board a w ritten statem ent of intent
to seek judicial review of the finding
and determ ination, but has failed to file
a petition for judicial review of the
B oard’s determ ination; or
(iii) U pon final judicial
determ ination, if adverse to the party
filing the objection.
(8) If the confidential portion is m ade
available to the public, a copy thereof
shall be attached to each copy of the
statem ent, report, or docum ent filed
w ith the Board.
§ 208.37 Government securities sales
practices.
(a) Scope. This subpart is applicable
to state mem ber banks that have filed
notice as, or are required to file notice
as, governm ent securities brokers or
dealers pursuan t to section 15C of the
Securities Exchange Act (15 U.S.C. 78o5) and D epartm ent of the Treasury rules
un d er section 15C (17 CFR 400.1(d) and
part 401).
(b) D efinitions. For purposes of this
section:
(1) B an k that is a governm ent
securities broker or dealer m eans a state
m em ber bank that has filed notice, or is
required to file notice, as a governm ent
securities broker or dealer pursuant to
section 15C of the Securities Exchange
Act (15 U.S.C. 78o-5) and D epartm ent of
the Treasury rules un d er section 15C (17
CFR 400.1(d) and Part 401).
(2) C ustom er does not include a
broker or dealer or a governm ent
securities broker or dealer.
(3) G overnm ent security has the same
meaning as this term has in section
3(a)(42) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(42)).
(4) N on-institutional custom er means
any custom er other than:
(i) A bank, savings association,
insurance com pany, or registered
investm ent company;
(ii) An investm ent adviser registered
u n d er section 203 of th e Investm ent
Advisers Act of 1940 (15 U.S.C. 80b-3);
or
(iii) Any entity (w hether a natural
person, corporation, partnership, trust,
or otherwise) w ith total assets of at least
$50 million.
(c) Business conduct. A bank that is
a governm ent securities broker or dealer
shall observe high standards of
com mercial honor and just and
equitable principles of trade in the
conduct of its business as a government
securities broker or dealer.
(d) R ecom m endations to customers.
In recom m ending to a custom er the
purchase, sale or exchange of a
governm ent security, a bank that is a
governm ent securities broker or dealer
shall have reasonable grounds for
believing th at the recom m endation is
suitable for the custom er upon the basis
of the facts, if any, disclosed by the
custom er as to the custom er’s other
security holdings and as to the
custom er’s financial situation and
needs.
(e) C ustom er inform ation. Prior to the
execution of a transaction recom m ended
to a non-institutional customer, a bank
that is a governm ent securities broker or
dealer shall make reasonable efforts to
obtain inform ation concerning:
(1) The custom er’s financial status;
(2) The custom er’s tax status;
(3) The custom er’s investm ent
objectives; and
(4) Such other inform ation used or
considered to be reasonable by the bank
in making recom m endations to the
customer.
Subpart D— Prompt Corrective Action
§208.40 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
(a) A uthority. Subpart D of Regulation
H (12 CFR part 208, Subpart D) is issued
by the Board of Governors of the Federal
Reserve System (Board) un d er section
38 (section 38) of th e FDI Act as added
by section 131 of the Federal Deposit
Insurance Corporation Im provem ent Act
of 1991 (Pub. L. 102-242, 105 Stat. 2236
(1991)) (12 U.S.C. 1831o).
(b) Purpose and scope. This subpart D
defines the capital m easures and capital
levels that are used for determ ining the
supervisory actions authorized under
section 38 of the FDI Act. (Section 38 of
the FDI Act establishes a framework of
supervisory actions for insured
depository institutions that are not
adequately capitalized.) This subpart
also establishes procedures for
subm ission and review of capital
restoration plans and for issuance and
review of directives and orders pursuant
to section 38. Certain of the provisions
of this subpart apply to officers,
directors, and em ployees of state
m em ber banks. O ther provisions apply
to any com pany that controls a mem ber
bank and to the affiliates of the mem ber
bank.
(c) O ther supervisory authority.
N either section 38 nor this subpart in
any w ay lim its th e authority of the
Board u n d er any other provision of law
to take supervisory actions to address
unsafe or u n so u n d practices or
conditions, deficient capital levels,
violations of law, or other practices.
A ction u n d er section 38 of the FDI Act
and this subpart may be taken
independently of, in conjunction with,
or in addition to any other enforcement
action available to the Board, including
issuance of cease and desist orders,
capital directives, approval or denial of
applications or notices, assessm ent of
civil m oney penalties, or any other
actions authorized by law.
(d) D isclosure o f capital categories.
The assignm ent of a bank u n d er this
subpart w ithin a particular capital
category is for purposes of
im plem enting a n d applying the
provisions of section 38. Unless
perm itted by the Board or otherwise
required by law, no bank may state in
any advertisem ent or prom otional
material its capital category un der this
subpart or that the Board or any other
Federal banking agency has assigned the
bank to a particular capital category.
§ 208.41
subpart.
Definitions for purposes of this
For purposes of this subpart, except as
m odified in this section or unless the
context otherw ise requires, the terms
used have the same meanings as set
forth in section 38 and section 3 of the
FDI Act.
(a) Control—(1) Control has the same
m eaning assigned to it in section 2 of
the Bank H olding Company Act (12
U.S.C. 1841), and the term controlled
shall be construed consistently w ith the
term control.
(2) E xclusion fo r fid u cia ry ownership.
No insured depository institution or
com pany controls another insured
depository institution or com pany by
virtue of its ow nership or control of
shares in a fiduciary capacity. Shares
shall not be deem ed to have been
acquired in a fiduciary capacity if the
acquiring insured depository institution
or com pany has sole discretionary
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
authority to exercise voting rights w ith
respect to the shares.
(3) E xclusion fo r debts previously
contracted. No insured depository
institution or com pany controls another
insured depository institution or
com pany by virtue of its ow nership or
control of shares acquired in securing or
collecting a debt previously contracted
in good faith, u n til two years after the
date of acquisition. The two-year period
may be extended at the discretion of the
appropriate Federal banking agency for
up to three one-year periods.
(b) Controlling person m eans any
person having control of an insured
depository institution and any com pany
controlled by th at person.
(c) Leverage ratio m eans the ratio of
Tier 1 capital to average total
consolidated assets, as calculated in
accordance w ith the Board’s Capital
A dequacy G uidelines for State Member
Banks: Tier 1 Leverage Measure
(A ppendix B to this part).
(d) M anagem ent fe e m eans any
paym ent of m oney or provision of any
other thing of value to a com pany or
individual for the provision of
m anagem ent services or advice to the
bank, or related overhead expenses,
including paym ents related to
supervisory, executive, managerial, or
policy making functions, other than
com pensation to an individual in the
in d iv id u al’s capacity as an officer or
em ployee of the bank.
(e) R isk-w eighted assets m eans total
w eighted risk assets, as calculated in
accordance w ith the B oard’s Capital
A dequacy G uidelines for State Member
Banks: Risk-Based Measure (A ppendix
A to this part).
(f) Tangible eq uity m eans the am ount
of core capital elem ents in the Board’s
Capital A dequacy G uidelines for State
M ember Banks: Risk-Based Measure
(A ppendix A to this part), plus the
am ount of outstanding cum ulative
perpetual preferred stock (including
related surplus), m inus all intangible
assets except mortgage servicing rights
to the extent that the Board determ ines
that mortgage servicing rights may be
inclu ded in calculating the bank’s Tier
1 capital.
(g) Tier 1 capital m eans the am ount of
Tier 1 capital as defined in the B oard’s
Capital A dequacy G uidelines for State
Member Banks: Risk-Based Measure
(A ppendix A to this part).
(h) Tier 1 risk-based capital ratio
m eans the ratio of Tier 1 capital to
w eighted risk assets, as calculated in
accordance w ith the B oard’s Capital
Adequacy G uidelines for State Member
Banks: Risk-Based M easure (A ppendix
A to this part).
(i)
Total assets means quarterly
average total assets as reported in a
bank ’s Report of Condition and Income
(Call Report), m inus intangible assets as
provided in the definition of tangible
equity. At its discretion the Federal
Reserve m ay calculate total assets using
a b an k ’s period-end assets rather than
quarterly average assets.
(j) Total risk-based capital ratio
m eans the ratio of qualifying total
capital to w eighted risk assets, as
calculated in accordance w ith the
Board’s Capital A dequacy G uidelines
for State M em ber Banks: Risk-Based
M easure (A ppendix A to this part).
37653
§ 208.43 Capital measures and capital
category definitions.
(a) Capital measures. For purposes of
section 38 and this subpart, the relevant
capital m easures are:
(1) The total risk-based capital ratio;
(2) The Tier 1 risk-based capital ratio;
and
(3) The leverage ratio.
(b) Capital categories. For purposes of
section 38 and this subpart, a mem ber
bank is deem ed to be:
(1) “Well capitalized” if the bank:
(1) Has a total risk-based capital ratio
of 10.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 6.0 percent or greater; and
(iii) Has a leverage ratio of 5.0 percent
§ 208.42 Notice of capital category.
or greater; and
(iv) Is not subject to any w ritten
(a) Effective date o f determ ination o f
agreement, order, capital directive, or
capital category. A m em ber bank shall
prom pt corrective action directive
be deem ed to be w ithin a given capital
issued by the Board p ursuant to section
category for purposes of section 38 of
8 of th e FDI Act, the International
the FDI A ct and this subpart as of the
Lending Supervision Act of 1983 (12
date the bank is notified of, or is
U.S.C. 3907), or section 38 of the FDI
deem ed to have notice of, its capital
Act, or any regulation thereunder, to
category, pu rsuant to paragraph (b) of
m eet and m aintain a specific capital
this section.
level for any capital measure.
(b) N otice o f capital category. A
(2) “A dequately capitalized” if the
m em ber bank shall be deem ed to have
bank:
been notified of its capital levels and its
(i) Has a total risk-based capital ratio
capital category as of the m ost recent
of 8.0 percent or greater; and
date:
(ii) Has a Tier 1 risk-based capital
(1) A R eport of Condition and Income ratio of 4.0 percent or greater; and
(Call Report) is required to be filed w ith
(iii) Has:
(A) A leverage ratio of 4.0 percent or
the Board;
greater; or
(2) A final report of exam ination is
(B) A leverage ratio of 3.0 percent or
delivered to the bank; or
greater if the bank is rated com posite 1
(3) W ritten notice is provided by the
un d er the CAMELS rating system in the
Board to th e bank of its capital category
most recent exam ination of the bank
for purposes of section 38 of th e FDI Act and is not experiencing or anticipating
and this subpart or that the b ank’s
significant growth; and
capital category has changed as
(iv) Does n o t m eet the definition of a
provided in paragraph (c) of this section “well capitalized” bank.
or § 208.43(c).
(3) “U ndercapitalized” if the bank
has:
(c) A d ju stm e n ts to reported capital
(i) A total risk-based capital ratio that
levels an d capital category—(1) Notice
is less than 8.0 percent; or
o f a djustm ent by bank. A m em ber bank
(ii) A Tier 1 risk-based capital ratio
shall provide the Board w ith w ritten
that is less th a n 4.0 percent; or
notice th at an adjustm ent to the bank ’s
(iii) Except as provided in paragraph
capital category m ay have occurred no
(b)(2)(iii)(B) of this section, has a
later than 15 calendar days following
leverage ratio th at is less th a n 4.0
the date that any m aterial event
percent; or
occurred th at w ould cause the bank to
(iv) A leverage ratio that is less th a n
be placed in a low er capital category
3.0 percent, if the bank is rated
from the category assigned to th e bank
com posite 1 u n d er the CAMELS rating
for purposes of section 38 and this
system in the most recent exam ination
subpart on the basis of the b ank ’s m ost
of the bank and is not experiencing or
recent Call Report or report of
anticipating significant growth.
exam ination.
(4) “ Significantly und ercap italized” if
(2) D eterm ination b y Board to change the bank has:
capital category. After receiving notice
(i) A total risk-based capital ratio that
pursu an t to paragraph (c)(1) of this
is less than 6.0 percent; or
section, the Board shall determ ine
(ii) A Tier 1 risk-based capital ratio
w heth er to change the capital category
that is less than 3.0 percent; or
of the bank and shall notify the bank of
(iii) A leverage ratio that is less than
the Board’s determ ination.
3.0 percent.
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Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
(5) “Critically undercapitalized” if the notified that it m ust subm it a new or
bank has a ratio of tangible equity to
revised capital restoration plan shall file
total assets th at is equal to or less than
the plan in w riting w ith the appropriate
2.0 percent.
Reserve Bank w ithin 45 days of
(c) Reclassification based on
receiving such notice, unless the Board
supervisory criteria other than capital.
notifies the bank in writing that the plan
The Board m ay reclassify a well
is to be filed w ith in a different period.
capitalized mem ber bank as adequately
(b) Contents o f plan. All financial data
capitalized and may require an
subm itted in connection w ith a capital
adequately-capitalized or an
restoration p lan shall be prepared in
undercapitalized m em ber bank to
accordance w ith the instructions
com ply w ith certain m andatory or
provided on the Call Report, unless the
discretionary supervisory actions as if
Board instructs otherwise. The capital
the bank w ere in the next low er capital
restoration plan shall include all of the
category (except that th e Board may not
inform ation required to be filed u nder
reclassify a significantly
section 38(e)(2) of the FDI Act. A bank
undercapitalized bank as critically
th at is required to subm it a capital
undercapitalized) (each of these actions
restoration plan as the result of a
are hereinafter referred to generally as
reclassification of the bank pursuant to
“reclassifications”) in the following
§ 208.43(c) shall include a description of
circumstances:
the steps the bank w ill take to correct
(1) Unsafe or u n sou nd condition. The
the unsafe or u n so u n d condition or
Board has determ ined, after notice and
practice. No plan shall be accepted
opportunity for hearing pursuan t to 12
unless it includes any perform ance
CFR 263.203, that th e bank is in unsafe
guarantee described in section
or u n sound condition; or
38(e)(2)(C) of that Act by each com pany
(2) Unsafe or u n soun d practice. The
that controls the bank.
Board has determ ined, after notice and
(c) R eview o f capital restoration plans.
opportunity for hearing p ursu an t to 12
W ithin 60 days after receiving a capital
CFR 263.203, that, in th e m ost recent
restoration plan u n d er this subpart, the
exam ination of the bank, the bank
Board shall provide w ritten notice to the
received and has not corrected, a lessbank of w hether the plan has been
than-satisfactory rating for any of the
approved. The Board m ay extend the
categories of asset quality, management,
tim e w ithin w hich notice regarding
earnings, liquidity, or sensitivity to
approval of a plan shall be provided.
m arket risk.
(d) D isapproval o f capital plan. If the
§ 208.44 Capital restoration plans.
Board does not approve a capital
restoration plan, the bank shall subm it
(a)
Schedule fo r filin g plan. (1) In
a revised capital restoration plan w ithin
general. A m em ber bank shall file a
w ritten capital restoration plan w ith the the tim e specified by the Board. U pon
receiving notice that its capital
appropriate Reserve Bank w ithin 45
restoration plan has not been approved,
days of the date that the bank receives
any undercapitalized m em ber bank (as
notice or is deem ed to have notice that
defined in § 208.43(b)(3)) shall be
the bank is undercapitalized,
subject to all of the provisions of section
significantly undercapitalized, or
38 and this subpart applicable to
critically undercapitalized, unless the
significantly undercapitalized
Board notifies the bank in w riting that
institutions. These provisions shall be
the p lan is to be filed w ithin a different
applicable until such tim e as the Board
period. A n adequately capitalized bank
approves a new or revised capital
that has been required, pursuant to
restoration plan subm itted by the bank.
§ 208.43(c), to com ply w ith supervisory
(e) Failure to su bm it capital
actions as if th e bank were
restoration plan. A m em ber bank th at is
undercapitalized is not required to
undercapitalized (as defined in
subm it a capital restoration plan solely
§ 208.43(b)(3)) and that fails to subm it a
by virtue of th e reclassification.
w ritten capital restoration plan w ithin
(2) A d d itio n a l capital restoration
plans. N otw ithstanding paragraph (a)(1) the period provided in this section
shall, u pon the expiration of that period,
of this section, a bank that has already
be subject to all of the provisions of
subm itted and is operating u n d er a
section 38 and this subpart applicable to
capital restoration p lan approved under
significantly undercapitalized
section 38 and this subpart is not
institutions.
required to subm it an additional capital
restoration plan based on a revised
(f) Failure to im p le m en t capital
calculation of its capital m easures or a
restoration plan. Any undercapitalized
reclassification of th e institution under
mem ber bank that fails in any material
§ 208.43(c), unless the Board notifies the respect to im plem ent a capital
bank that it m ust subm it a new or
restoration plan shall be subject to all of
revised capital plan. A bank that is
the provisions of section 38 and this
subpart applicable to significantly
undercapitalized institutions.
(g) A m e n d m e n t o f capital plan. A
bank th at has filed an approved capital
restoration p lan may, after prior w ritten
notice to and approval by the Board,
am end the plan to reflect a change in
circum stance. U ntil such time as a
proposed am endm ent has been
approved, th e bank shall im plem ent the
capital restoration p lan as approved
prior to the proposed am endm ent.
(h) N otice to FDIC. W ithin 45 days of
the effective date of Board approval of
a capital restoration plan, or any
am endm ent to a capital restoration plan,
the Board shall provide a copy of the
plan or am endm ent to the Federal
Deposit Insurance Corporation.
(i) Performance guarantee by
com panies that control a bank. (1)
Lim itation on Liability, (i) A m o u n t
lim itation. The aggregate liability u nder
the guarantee provided un d er section 38
and this subpart for all com panies that
control a specific m em ber bank that is
required to subm it a capital restoration
plan u n d er this subpart shall be lim ited
to the lesser of:
(A) An am ount equal to 5.0 percent of
the bank’s total assets at the tim e the
bank w as notified or deem ed to have
notice that the bank was
undercapitalized; or
(B) The am ount necessary to restore
the relevant capital m easures of the
bank to the levels required for the bank
to be classified as adequately
capitalized, as those capital measures
and levels are defined at the tim e that
the bank initially fails to com ply w ith
a capital restoration plan under this
subpart.
(ii) Lim it on duration. The guarantee
and lim it of liability u n d er section 38
and this subpart shall expire after the
Board notifies the bank that it has
rem ained adequately capitalized for
each of four consecutive calendar
quarters. The expiration or fulfillm ent
by a com pany of a guarantee of a capital
restoration plan shall not lim it the
liability of the com pany under any
guarantee required or provided in
connection w ith any capital restoration
plan filed by the sam e bank after
expiration of the first guarantee.
(iii) Collection on guarantee. Each
com pany that controls a bank shall be
jointly and severally liable for the
guarantee for such bank as required
u n d er section 38 and this subpart, and
the Board m ay require and collect
paym ent of the full am ount of that
guarantee from any or all of the
com panies issuing the guarantee.
(2) Failure to provide guarantee. In
the event that a bank that is controlled
by a com pany subm its a capital
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
failed to subm it or im plem ent in any
m aterial respect an acceptable capital
restoration plan, the bank shall become
subject to the provisions of section 38 of
the FDI Act that restrict com pensation
paid to senior executive officers of the
institution (section 38(f)(4)).
(4) A d d itio nal provisions applicable
to critically undercapitalized banks. In
addition to the provisions of section 38
of the FDI Act described in paragraphs
(a)(2) and (a)(3) of this section,
im m ediately upo n receiving notice or
being deem ed to have notice, as
provided in § 208.32, that the bank is
critically undercapitalized, the bank
shall become subject to the provisions of
section 38 of the FDI Act:
(i) Restricting the activities of the
bank (section 38(h)(1)); and
(ii) Restricting paym ents on
§208.45 Mandatory and discretionary
subordinated debt of the bank (section
supervisory actions under section 38.
38(h)(2)).
(a)
M andatory supervisory actions. (1) (b) Discretionary supervisory actions.
Provisions applicable to all banks. All
In taking any action u n d er section 38
m em ber banks are subject to the
that is w ithin the Board’s discretion to
restrictions contained in section 38(d) of take in connection with: A member
the FDI Act on paym ent of capital
bank that is deem ed to be
distributions and m anagem ent fees.
undercapitalized, significantly
(2) Provisions applicable to
undercapitalized, or critically
undercapitalized, significantly
undercapitalized, or has been
undercapitalized, an d critically
reclassified as undercapitalized, or
undercapitalized banks. Immediately
significantly undercapitalized; an officer
upo n receiving notice or being deem ed
or director of such bank; or a com pany
to have notice, as provided in § 208.42
that controls such bank, the Board shall
or § 208.44, that the bank is
follow the procedures for issuing
undercapitalized, significantly
directives un d er 12 CFR 263.202 and
undercapitalized, or critically
263.204, unless otherw ise provided in
undercapitalized, the bank shall becom e section 38 or this subpart.
subject to the provisions of section 38 of
the FDI Act:
Subpart E— Real Estate Lending and
(i) Restricting paym ent of capital
Appraisal Standards
distributions and management fees
§208.50 Authority, purpose, and scope.
(section 38(d));
(ii) Requiring that the Board m onitor
(a) A uthority. Subpart E of Regulation
the condition of the bank (section
H (12 CFR part 208, subpart E) is issued
38(e)(1));
by the Board of Governors of the Federal
(iii) Requiring subm ission of a capital
Reserve System u n d er section 304 of the
restoration plan w ithin the schedule
Federal Deposit Insurance Corporation
established in this subpart (section
Im provem ent Act of 1991, 12 U.S.C.
38(e)(2));
1828(o) and Title 11 of the Financial
(iv) Restricting the growth of the
Institutions Reform, Recovery, and
bank’s assets (section 38(e)(3)); and
Enforcem ent Act (12 U.S.C. 3331-3351).
(v) Requiring prior approval of certain
(b) Purpose and scope. This subpart E
expansion proposals (section 3(e)(4)).
prescribes standards for real estate
(3) A d d itiona l provisions applicable
lending to be used by m em ber banks in
to significantly undercapitalized, and
adopting internal real estate lending
critically undercapitalized banks. In
policies. The standards applicable to
addition to the provisions of section 38
appraisals rendered in connection w ith
of the FDI Act described in paragraph
federally related transactions entered
(a)(2) of this section, im m ediately upon
into by m em ber banks are set forth in 12
receiving notice or being deem ed to
CFR part 225, subpart G (Regulation Y).
have notice, as provided in § 208.42 or
§208.51 Real estate lending standards.
§ 208.44, th at the bank is significantly
undercapitalized, or critically
(a) A d option o f written policies. Each
undercapitalized, or that the bank is
state bank that is a m em ber of the
subject to the provisions applicable to
Federal Reserve System shall adopt and
institutions that are significantly
m aintain w ritten policies th at establish
undercapitalized because the bank
appropriate limits and standards for
restoration p lan that does not contain
the guarantee required un der section
38(e)(2) of the FDI Act, the bank shall,
u p on subm ission of the plan, be subject
to the provisions of section 38 and this
subpart that are applicable to banks that
have not subm itted an acceptable
capital restoration plan.
(3) Failure to perform guarantee.
Failure by any com pany that controls a
bank to perform fully its guarantee of
any capital plan shall constitute a
m aterial failure to im plem ent the plan
for purposes of section 38(f) of the FDI
Act. U pon such failure, the bank shall
be subject to the provisions of section 38
and this subpart that are applicable to
banks that have failed in a material
respect to im plem ent a capital
restoration plan.
37655
extensions of credit that are secured by
liens on or interests in real estate, or
that are m ade for the purpose of
financing perm anent im provem ents to
real estate.
(b) R equirem ents o f lending policies.
(1) Real estate lending policies adopted
pursu an t to this section shall be:
(1) Consistent w ith safe and sound
banking practices;
(ii) A ppropriate to the size of th e
institution and the nature and scope of
its operations; and
(iii) Review ed and approved by the
bank’s board of directors at least
annually.
(2) The lending policies shall
establish:
(i) Loan portfolio diversification
standards;
(ii) P rudent underw riting standards,
including loan-to-value limits, that are
clear and measurable;
(iii) Loan adm inistration procedures
for the b ank ’s real estate portfolio; and
(iv) Documentation, approval, and
reporting requirem ents to m onitor
com pliance w ith the bank’s real estate
lending policies.
(c) M onitoring conditions. Each
mem ber bank shall m onitor conditions
in the real estate m arket in its lending
area to ensure that its real estate lending
policies continue to be appropriate for
current m arket conditions.
(d) Interagency guidelines. The real
estate lending policies adopted p u rsu an t
to this section should reflect
consideration of the Interagency
G uidelines for Real Estate Lending
Policies (contained in appendix C of
this part) established by the Federal
bank and thrift supervisory agencies.
Subpart F— Miscellaneous
Requirements
§208.60
Authority, purpose, and scope.
(a) A uthority. Subpart F of Regulation
H (12 CFR part 208, subpart F) is issued
by the Board of Governors of the Federal
Reserve System u n d er sections 9, 11, 21,
25 and 25A of the Federal Reserve Act
(12 U.S.C. 321—
338a, 248(a), 248(c),
481-486, 601 and 611), section 7 of the
International Banking Act (12 U.S.C.
3105), section 3 of the Bank Protection
Act of 1968 (12 U.S.C. 1882), sections
1814, 1816, 1818, 18310, 1 8 3 1 p -l and
1831r— of the FDI Act (12 U.S.C. 1814,
1
1816, 1818, 18310, 1831p— and 1831r1
1), and the Bank Secrecy Act (31 U.S.C.
5318).
(b) Purpose a n d scope. This subpart F
describes a m em ber bank’s obligation to
im plem ent security procedures to
discourage certain crimes, to file
suspicious activity reports, and to
com ply w ith the Bank Secrecy A ct’s
3 76 5 6
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998 /Rules and Regulations
requirem ents for reporting and
recordkeeping of currency and foreign
transactions. It also describes the
exam ination schedule for certain sm all
insured m em ber banks.
§208.61
Bank security procedures.
(a) A uthority, purpose, a n d scope.
Pursuant to section 3 of the Bank
Protection Act of 1968 (12 U.S.C. 1882),
m em ber banks are required to adopt
appropriate security procedures to
discourage robberies, burglaries, and
larcenies, and to assist in the
identification and prosecution of
persons w ho com m it such acts. It is the
responsibility of the m em ber b ank’s
board of directors to com ply w ith the
provisions of this section and ensure
that a w ritten security program for the
bank’s m ain office and branches is
developed and im plem ented.
(b) D esignation o f security officer.
U pon becom ing a m em ber of the Federal
Reserve System, a m em ber b ank’s board
of directors shall designate a security
officer w ho shall have the authority,
subject to the approval of th e board of
directors, to develop, w ithin a
reasonable time, b u t no later than 180
days, and to adm inister a w ritten
security program for each banking
office.
(c) Security program. (1) The security
program shall:
(1) Establish procedures for opening
and closing for business and for the
safekeeping of all currency, negotiable
securities, and sim ilar valuables at all
times;
(ii) Establish procedures that w ill
assist in identifying persons com m itting
crimes against the institution and that
w ill preserve evidence that m ay aid in
their identification and prosecution.
Such procedures may include, b u t are
n ot lim ited to: m aintaining a cam era
that records activity in the banking
office; using identification devices, such
as prerecorded serial-num bered bills, or
chem ical and electronic devices; and
retaining a record of any robbery,
burglary, or larceny com m itted against
the bank;
(iii) Provide for initial and periodic
training of officers and em ployees in
their responsibilities u n d er the security
program and in proper em ployee
conduct during and after a burglary,
robbery, or larceny; and
(iv) Provide for selecting, testing,
operating, and m aintaining appropriate
security devices, as specified in
paragraph (c)(2) of this section.
(2) Security devices. Each m em ber
b ank shall have, at a m inim um , the
following security devices:
(i) A m eans of protecting cash and
other liquid assets, such as a vault, safe,
or other secure space;
(ii) A lighting system for illum inating,
during the hours of darkness, the area
around the vault, if the vault is visible
from outside the banking office;
(iii) Tam per-resistant locks on exterior
doors and exterior w indow s that m ay be
opened;
(iv) An alarm system or other
appropriate device for prom ptly
notifying the nearest responsible law
enforcem ent officers of an attem pted or
perpetrated robbery or burglary; and
(v) Such other devices as the security
officer determ ines to be appropriate,
taking into consideration: the incidence
of crimes against financial institutions
in the area; the am ount of currency and
other valuables exposed to robbery,
burglary, or larceny; the distance of the
banking office from the nearest
responsible law enforcem ent officers;
the cost of the security devices; other
security m easures in effect at the
banking office; and the physical
characteristics of the structure of the
banking office and its surroundings.
(d) A n n u a l reports. The security
officer for each m em ber bank shall
report at least annually to the bank’s
board of directors on the
im plem entation, adm inistration, and
effectiveness of the security program.
(e) Reserve Banks. Each Reserve Bank
shall develop and m aintain a w ritten
security program for its m ain office and
branches subject to review and approval
of the Board.
§ 208.62
Suspicious activity reports.
(a) Purpose. This section ensures that
a member bank files a Suspicious
A ctivity Report w hen it detects a know n
or suspected violation of Federal law, or
a suspicious transaction related to a
money laundering activity or a violation
of the Bank Secrecy Act. This section
applies to all mem ber banks.
(b) D efinitions. For the purposes of
this section:
(1) Fin CEN m eans the Financial
Crimes Enforcement Network of the
Departm ent of the Treasury.
(2) Institution-affiliated party means
any institution-affiliated party as that
term is defined in 12 U.S.C. 1786(r), or
1813(u) and 1818(b) (3), (4) or (5).
(3) SA R m eans a Suspicious Activity
Report on the form prescribed by the
Board.
(c) SA R s required. A m em ber bank
shall file a SAR w ith the appropriate
Federal law enforcem ent agencies and
the D epartm ent of the Treasury in
accordance w ith th e form’s instructions
by sending a com pleted SAR to FinCEN
in the following circumstances:
(1) Insider abuse involving a n y
am ount. W henever the m em ber bank
detects any know n or suspected Federal
crim inal violation, or pattern of crim inal
violations, com m itted or attem pted
against the bank or involving a
transaction or transactions conducted
through the bank, w here the bank
believes that it was either an actual or
potential victim of a crim inal violation,
or series of crim inal violations, or that
the bank was used to facilitate a
crim inal transaction, and the bank has
a substantial basis for identifying one of
its directors, officers, em ployees, agents
or other institution-affiliated parties as
having com m itted or aided in the
com m ission of a crim inal act regardless
of the am ount involved in the violation.
(2) Violations aggregating $5,000 or
m ore where a su sp ect can be identified.
W henever the m em ber bank detects any
know n or suspected Federal crim inal
violation, or pattern of crim inal
violations, com m itted or attem pted
against the bank or involving a
transaction or transactions conducted
through the bank and involving or
aggregating $5,000 or m ore in funds or
other assets, w here the bank believes
th at it w as either an actual or potential
victim of a crim inal violation, or series
of crim inal violations, or that the bank
was used to facilitate a crim inal
transaction, an d the bank has a
substantial basis for identifying a
possible suspect or group of suspects. If
it is determ ined prior to filing this
report that the identified suspect or
group of suspects has u sed an “alias,”
then inform ation regarding the true
identity of the suspect or group of
suspects, as w ell as alias identifiers,
such as drivers’ licenses or social
security num bers, addresses and
telephone num bers, m ust be reported.
(3) Violations aggregating $25,000 or
m ore regardless o f a p o tentia l suspect.
W henever the m em ber bank detects any
know n or suspected Federal crim inal
violation, or pattern of crim inal
violations, com m itted or attem pted
against the bank or involving a
transaction or transactions conducted
through the bank and involving or
aggregating $25,000 or m ore in funds or
other assets, w here the bank believes
that it was either an actual or potential
victim of a crim inal violation, or series
of crim inal violations, or that the bank
was used to facilitate a crim inal
transaction, even though there is no
substantial basis for identifying a
possible suspect or group of suspects.
(4) Transactions aggregating $5,000 or
m ore that involve po tential m o n ey
laundering or violations o f the B ank
Secrecy A ct. A ny transaction (w hich for
purposes of this paragraph (c)(4) m eans
Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
a deposit, w ithdraw al, transfer betw een
accounts, exchange of currency, loan,
extension of credit, purchase or sale of
any stock, bond, certificate of deposit, or
other m onetary instrum ent or
investm ent security, or any other
paym ent, transfer, or delivery by,
through,, or to a financial institution, by
w hatever m eans effected) conducted or
attem pted by, at or through the member
bank and involving or aggregating
$5,000 or more in funds or other assets,
if th e bank knows, suspects, or has
reason to suspect that:
(1) The transaction involves funds
derived from illegal activities or is
inten ded or conducted in order to hide
or disguise funds or assets derived from
illegal activities (including, w ithout
lim itation, the ow nership, nature,
source, location, or control of such
funds or assets) as part of a plan to
violate or evade any law or regulation or
to avoid any transaction reporting
requirem ent under federal law;
(ii) The transaction is designed to
evade any regulations prom ulgated
u n d er the Bank Secrecy Act; or
(iii) The transaction has no business
or apparent lawful purpose or is not the
sort in w hich the particular custom er
w ould norm ally be expected to engage,
and th e bank know s of no reasonable
explanation for the transaction after
exam ining the available facts, including
the background and possible purpose of
the transaction.
(d) Tim e fo r reporting. A mem ber
bank is required to file a SAR no later
th a n 30 calendar days after the date of
initial detection of facts that m ay
constitute a basis for filing a SAR. If no
suspect was identified on the date of
detection of the incident requiring the
filing, a m em ber bank may delay filing
a SAR for an additional 30 calendar
days to identify a suspect. In no case
shall reporting be delayed more th an 60
calendar days after the date of initial
detection of a reportable transaction. In
situations involving violations requiring
im m ediate attention, such as w hen a
reportable violation is on-going, the
financial institution shall im m ediately
notify, by telephone, an appropriate law
enforcem ent authority and the Board in
addition to filing a tim ely SAR.
(e) Reports to state and local
authorities. Member banks are
encouraged to file a copy of the SAR
w ith state and local law enforcement
agencies w here appropriate.
(f) E xceptions. (1) A mem ber bank
need not file a SAR for a robbery or
burglary com m itted or attem pted that is
reported to appropriate law enforcem ent
authorities.
(2) A m em ber bank need not file a
SAR for lost, missing, counterfeit, or
stolen securities if it files a report
pu rsuant to the reporting requirem ents
of 17 CFR 240.17f—
1.
(g) R etention o f records. A mem ber
bank shall m aintain a copy of any SAR
filed and the original or business record
equivalent of any supporting
docum entation for a period of five years
from the date of the filing of the SAR.
Supporting docum entation shall be
identified and m aintained by the bank
as such, and shall be deem ed to have
been filed w ith the SAR. A mem ber
bank m ust make all supporting
docum entation available to appropriate
law enforcem ent agencies upon request.
(h) N otification to board o f directors.
The m anagem ent of a m em ber bank
shall prom ptly notify its board of
directors, or a com m ittee thereof, of any
report filed pu rsuant to this section.
(i) Compliance. Failure to file a SAR
in accordance w ith this section and the
instructions m ay subject the member
bank, its directors, officers, employees,
agents, or other institution affiliated
parties to supervisory action.
(j) C onfidentiality o f SARs. SARs are
confidential. A ny m em ber bank
subpoenaed or otherw ise requested to
disclose a SAR or the inform ation
contained in a SAR shall decline to
produce the SAR or to provide any
inform ation th at w ould disclose that a
SAR has been prepared or filed citing
this section, applicable law (e.g., 31
U.S.C. 5318(g)), or both, and notify the
Board.
(k) Safe harbor. The safe harbor
provisions of 31 U.S.C. 5318(g), w hich
exem pts any m em ber bank that m akes a
disclosure of any possible violation of
law or regulation from liability under
any law or regulation of the U nited
States, or any constitution, law or
regulation of any state or political
subdivision, covers all reports of
suspected or know n crim inal violations
and suspicious activities to law
enforcem ent an d financial institution
supervisory authorities, including
supporting docum entation, regardless of
w hether such reports are filed pursuant
to this section or are filed on a voluntary
basis.
37657
recordkeeping and reporting of currency
transactions.
(b) E stablishm ent o f com pliance
program. O n or before April 27, 1987,
each bank shall develop and provide for
the continued adm inistration of a
program reasonably designed to assure
and m onitor com pliance w ith the
recordkeeping and reporting
requirem ents set forth in the Bank
Secrecy Act (31 U.S.C. 5311, et seq.) and
the im plem enting regulations
prom ulgated thereunder by the
D epartm ent of Treasury at 31 CFR part
103. The com pliance program shall be
reduced to writing, approved by the
board of directors, and noted in the
m inutes.
(c) C ontents o f com pliance program.
The com pliance program shall, at a
m inim um :
(1) Provide for a system of internal
controls to assure ongoing com pliance;
(2) Provide for ind epen den t testing for
com pliance to be conducted by bank
personnel or by an outside party;
(3) Designate an individual or
individuals responsible for coordinating
and m onitoring day-to-day com pliance;
and
(4) Provide training for appropriate
personnel.
§ 208.64
Frequency of examination.
(a) General. The Federal Reserve
exam ines in sured m em ber banks
pursu an t to authority conferred by 12
U.S.C. 325 and the requirem ents of 12
U.S.C. 1820(d). The Federal Reserve is
required to conduct a full-scope, on-site
exam ination of every insured m em ber
bank at least once during each 12-m onth
period.
(b) 18-m onth rule fo r certain sm all
institutions. The Federal Reserve may
conduct a full-scope, on-site
exam ination of an insured m em ber bank
at least once during each 18-m onth
period, rather than each 12-m onth
period as provided in paragraph (a) of
this section, if the following conditions
are satisfied:
(1) The bank has total assets of $250
m illion or less;
(2) The b an k is w ell capitalized as
defined in subpart D of this part
(§208.43);
§208.63 Procedures for monitoring Bank
(3) At th e m ost recent exam ination
Secrecy Act compliance.
conducted by either the Federal Reserve
(a) Purpose. This section is issued to or applicable State banking agency, the
assure that all state mem ber banks
Federal Reserve found the bank to be
establish and m aintain procedures
w ell managed;
reasonably designed to assure and
(4) At th e m ost recent exam ination
m onitor their com pliance w ith the
conducted by either the Federal Reserve
provisions of the Bank Secrecy Act (31
or applicable State banking agency, the
U.S.C. 5311, et seq.) and the
Federal Reserve assigned the bank a
im plem enting regulations prom ulgated
CAMELS rating of 1 or 2;
thereunder by the D epartm ent of
(5) The bank currently is not subject
Treasury at 31 CFR part 103, requiring
to a formal enforcem ent proceeding or
37658
Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
order by the FDIC, OCC, or Federal
Reserve System; and
(6) No person acquired control of the
bank during the preceding 12-month
period in w h ich a full-scope, on-site
exam ination w ou ld have been required
b u t for this section.
(c) A u th o rity to conduct more
freq u en t exam inations. This section
does not lim it the authority of the
Federal Reserve to exam ine any m em ber
bank as frequently as the agency deems
necessary.
(b) The B oard’s Suitability Rule,
§ 208.37(d), is fundam ental to fair
dealing and is inten ded to prom ote
ethical sales practices and high
standards of professional conduct.
B anks’ responsibilities include having a
reasonable basis for recom m ending a
particular security or strategy, as well as
having reasonable grounds for believing
the recom m endation is suitable for the
custom er to w hom it is m ade. Banks are
expected to m eet the same high
standards of competence,
professionalism, and good faith
Subpart G— Interpretations
regardless of the financial circum stances
of the customer.
§ 208.100 Sale of bank’s money orders off
(c) In recom m ending to a custom er
premises as establishment of branch office.
the purchase, sale, or exchange of any
(a) The Board of Governors has been
governm ent security, the bank shall
asked to consider w hether the
have reasonable grounds for believing
appointm ent by a m em ber bank of an
agent to sell the b ank’s m oney orders, at that the recom m endation is suitable for
a location other than the prem ises of the the custom er u pon the basis of the facts,
if any, disclosed by the custom er as to
bank, constitutes the establishm ent of a
the custom er’s other security holdings
branch office.
and financial situation and needs.
(b) Section 5155 of the Revised
(d) The interpretation in this section
Statutes (12 U.S.C. 36), w hich is also
applicable to m em ber banks, defines the concerns only the m anner in w hich a
bank determ ines that a recom m endation
term branch as including “any branch
is suitable for a particular institutional
bank, branch office, branch agency,
additional office, or any branch place of customer. The m anner in w hich a bank
fulfills this suitability obligation w ill
business * * * at w hich deposits are
vary, depending on the nature of the
received, or checks paid, or money
custom er and the specific transaction.
lent.” The basic question is w hether the
A ccordingly, the interpretation in this
sale of a b an k ’s m oney orders by an
section deals only w ith guidance
agent am ounts to the receipt of deposits
regarding how a bank may fulfill
at a branch place of business w ithin the
customer-specific suitability obligations
m eaning of this statute.
(c) M oney orders are classified as
un d er § 208.37(d).7
(e) W hile it is difficult to define in
deposits for certain purposes. However,
advance the scope of a bank’s suitability
they bear a strong resem blance to
traveler’s checks that are issued by
obligation w ith respect to a specific
institutional custom er transaction
banks and sold off premises. In both
cases, the purchaser does not intend to
recom m ended by a bank, the Board has
establish a deposit account in the bank,
identified certain factors that may be
although a liability on th e bank ’s part is
relevant w hen considering com pliance
created. Even though they result in a
w ith § 208.37(d). These factors are not
deposit liability, th e Board is of the
intended to be requirem ents or the only
opinion that the issuance of a b an k’s
factors to be considered but are offered
m oney orders by an authorized agent
m erely as guidance in determ ining the
does not involve the receipt of deposits
scope of a b ank ’s suitability obligations.
at a “branch place of business” and
(f) The two most im portant
accordingly does not require the Board’s considerations in determ ining the scope
perm ission to establish a branch.
of a b an k’s suitability obligations in
m aking recom m endations to an
§208.101 Obligations concerning
institutional custom er are the
institutional customers.
custom er’s capability to evaluate
(a) As a result of broadened authority
investm ent risk independently an d the
provided by the G overnment Securities
extent to w hich the custom er is
Act A m endm ents of 1993 (15 U.S.C.
exercising in dependent judgem ent in
78o-3 and 78o-5), the Board is adopting
evaluating a b an k’s recom m endation. A
sales practice rules for the governm ent
bank m ust determine, based on the
securities market, a market w ith a
particularly broad institutional
7 The interpretation in this section does not
com ponent. Accordingly, the Board
address the obligation related to suitability that
requires that a bank have” * * * a ‘reasonable basis’
believes it is appropriate to provide
to believe that the recommendation could be
further guidance to banks on their
suitable for at least some customers.” In the Matter
suitability obligations w hen making
of the Application of F.J. Kaufman and Company of
recom m endations to institutional
Virginia and Frederick J. Kaufman, Jr., 50 SEC 164
(1989).
customers.
inform ation available to it, the
custom er’s capability to evaluate
investm ent risk. In some cases, the bank
may conclude that the custom er is not
capable of making independent
investm ent decisions in general. In
other cases, the institutional custom er
may have general capability, but may
not be able to understand a particular
type of instrum ent or its risk. This is
m ore likely to arise w ith relatively new
types of instrum ents, or those w ith
significantly different risk or volatility
characteristics than other investm ents
generally m ade by the institution. If a
custom er is either generally not capable
of evaluating investm ent risk or lacks
sufficient capability to evaluate the
particular product, the scope of a bank ’s
customer-specific obligations under
§ 208.37(d) w ould not be dim inished by
the fact th at the bank was dealing w ith
an institutional customer. On the other
hand, the fact that a custom er initially
n eed ed h elp understanding a potential
investm ent need not necessarily im ply
that the custom er did not ultim ately
develop an understanding and make an
ind ependent investm ent decision.
(g) A bank may conclude th at a
custom er is exercising independent
judgem ent if the custom er’s investm ent
decision w ill be based on its own
ind ependent assessm ent of the
opportunities and risks presented by a
potential investm ent, m arket factors and
other investm ent considerations. Where
the bank has reasonable grounds for
concluding that the institutional
custom er is making in dependent
investm ent decisions and is capable of
in depen den tly evaluating investm ent
risk, th e n a bank’s obligations und er
§ 208.25(d) for a particular custom er are
fulfilled.8 Where a custom er has
delegated decision-making authority to
an agent, such as an investm ent advisor
or a bank trust departm ent, the
interpretation in this section shall be
applied to the agent.
(h) A determ ination of capability to
evaluate investm ent risk independently
w ill depend on an exam ination of the
custom er’s capability to make its ow n
investm ent decisions, including the
resources available to the custom er to
m ake inform ed decisions. Relevant
considerations could include:
(1) The use of one or more
consultants, investm ent advisers, or
bank trust departments;
(2) The general level of experience of
the institutional custom er in financial
markets an d specific experience w ith
the type of instrum ents under
consideration;
8 See footnote 7 in paragraph (dj of this section.
Federal Register/Vol. 63, No. 133/Monday, July 13, 1998/Rules and Regulations
(3) The custom er’s ability to
understand the economic features of the
security involved;
(4) The custom er’s ability to
independently evaluate how market
developm ents w ould affect the security;
and
(5) The com plexity of the security or
securities involved.
(1) A determ ination that a custom er is
making ind epen den t investm ent
decisions w ill depend on the nature of
the relationship that exists betw een the
bank and the customer. Relevant
considerations could include:
(lj A ny w ritten or oral understanding
that exists betw een the bank and the
custom er regarding the nature of the
relationship betw een the bank and the
custom er and the services to be
rendered by the bank;
(2) The presence or absence of a
pattern of acceptance of the b an k’s
recom m endations;
(3) The use by the custom er of ideas,
suggestions, market views and
inform ation obtained from other
governm ent securities brokers or dealers
or m arket professionals, particularly
those relating to the sam e type of
securities; and
(4) The extent to w hich the bank has
received from the custom er current
com prehensive portfolio inform ation in
connection w ith discussing
recom m ended transactions or has not
been provided im portant inform ation
regarding its portfolio or investm ent
objectives.
(j) Banks are rem inded that these
factors are m erely guidelines th at w ill
be utilized to determ ine w hether a bank
has fulfilled its suitability obligation
w ith respect to a specific institutional
custom er transaction and that the
inclusion or absence of any of these
factors is not dispositive of the
determ ination of suitability. Such a
determ ination can only be m ade on a
case-by-case basis taking into
consideration all the facts and
circum stances of a particular bank/
custom er relationship, assessed in the
context of a particular transaction.
(k) For purposes of the interpretation
in this section, an institutional custom er
shall be any entity other than a natural
person. In determ ining the applicability
of the interpretation in this section to an
institutional customer, the Board w ill
consider the dollar value of the
securities that the institutional custom er
has in its portfolio and/or under
management. W hile the interpretation
in this section is potentially applicable
to any institutional customer, the
guidance contained in this section is
more appropriately applied to an
institutional custom er w ith at least $10
m illion invested in securities in the
aggregate in its portfolio and/or u nder
management.
PART 250— MISCELLANEOUS
INTERPRETATIONS
1. The authority citation for part 250
continues to read as follows:
Authority: 12 U.S.C. 78, 248(i) and 371c(e).
§§250.120 through 250.123, 250.140,
250.161, 250.162 [Removed]
2. Sections 250.120, 250.121, 250.122,
250.123, 250.140, 250.161, 250.162 are
removed.
§§ 250.300 through 250.302
[Removed]
3. The undesignated center heading
preceding § 250.300 and §§ 250.300
through 250.302 are removed.
By order of the Board of Governors of the
Federal Reserve System, July 6, 1998
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-18274 Filed 7-10-98; 8:45 am]
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Federal Register/Vol. 63, No. 133/M onday, July 13, 1998/Rules and Regulations
FEDERAL RESERVE SYSTEM
12 CFR Part 216
[Regulation P; Docket No. R-0965]
Security Procedures
Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:
SUMMARY: The Board is rescinding
Regulation P, w hich is no longer
necessary since its provisions have been
incorporated into Regulation H
(Membership of State Banking
Institutions in the Federal Reserve
System), as issued by the Board
elsewhere in to day’s Federal Register.
Regulation P requires each bank to
adopt appropriate security procedures.
EFFECTIVE DATE: October 1, 1998.
FOR FURTHER INFORMATION CONTACT: Jean
Anderson, Staff Attorney, Legal D ivision
(202/452-3707). For the hearing
im paired only, T elecom m unications
Device for the Deaf (TDD), Diane Jenkins
(202/452-3544).
SUPPLEMEN TARY INFORMATION: Section
303(a) of the Riegle Com m unity
Developm ent and Regulatory
Im provem ent A ct of 1994 (12 U.S.C.
4803(a)) requires the Board, as w ell as
the other federal banking agencies, to
review its regulations and w ritten
policies in order to stream line and
modify these regulations and policies to
im prove efficiency, reduce unnecessary
costs, and elim inate unw arranted
constraints on credit availability. The
Board review ed its Regulation P w ith
this purpose in m in d and has adopted
its proposal to rescind Regulation P in
order to meet the goals of section 303(a).
Regulation P im plem ents the
requirem ents of the Bank Protection Act
of 1968 (BPA). The BPA requires the
federal financial institution supervisory
agencies to establish m inim um
standards for bank security devices and
procedures to discourage bank crime
and to assist in the identification of
persons w ho com m it such crimes. 12
U.S.C. 1882. To im plem ent this statute
a uniform regulation (Regulation P) was
adopted in 1969 by each of the
supervisory agencies—Comptroller of
the Currency, Federal Deposit Insurance
Corporation, Federal Home Loan Bank
Board (now know n as the Office of
Thrift Supervision), and the Board. As
originally proposed, Regulation P
included a list of security devices that
banks were required to adopt. On March
1, 1991, (55 FR 13069) (1991
Am endm ents), the supervisory agencies
am ended their rules to incorporate
am endm ents m ade to the BPA by the
Financial Institutions Reform Recovery
and Enforcement Act of 1989 (FIRREA)
and to address the fact that m any of the
required security devices had been
rendered obsolete by virtue of
technological advances.
Discussion
The B oard’s action to rescind
Regulation P and incorporate its
provisions into Regulation H (12 CFR
part 208—M em bership of State Banking
Institutions in the Federal Reserve
System) as pu blished elsewhere in
today’s Federal Register, w ould not
substantively change the requirem ents
of Regulation P. The B oard’s action to
incorporate Regulation P into
Regulation H is designed to simplify
com pliance for State m em ber banks by
consolidating regulatory requirem ents
applying to State mem ber banks into
one regulation.
The Board published its proposal to
rescind Regulation P for com m ent in the
Federal Register on March 31, 1997 (61
FR 15299). The Board received 4
com m ents on the proposal from the
following types of institutions:
Trade associations—2
Federal Reserve Banks—2
Three of the 4 com ments received
generally supported, or did n ot object
to, rescinding Regulation P. However,
one com m enter opposed incorporating
Regulation P into Regulation H on the
basis that Regulation H relates solely to
37665
state mem ber banks and R egulation P
addresses security procedures for bo th
state m em ber banks and Federal Reserve
Banks. Despite this concern the Board is
rescinding Regulation P and
incorporating it into Regulation H as
proposed because it believes that the
Federal Reserve Banks are well aw are of
the requirem ents of Regulation P.
Regulatory Flexibility Act Analysis
P ursuant to section 605(b) of the
Regulatory Flexibility Act (Pub. L. 9 5 354, 5 U.S.C. 601 et seq.), the Board of
Governors of the Federal Reserve
System certifies that adoption of this
proposal w ill not have a significant
econom ic im pact on a substantial
num ber of sm all entities that w o uld be
subject to the regulation.
This am endm ent w ill rem ove a
regulation and an interpretation that the
Board believes are no longer necessary.
The am endm ent does not im pose more
burdensom e requirem ents on bank
holding com panies than are currently
applicable.
Paperwork Reduction Act
In accordance w ith the Paperw ork
R eduction A ct of 1995 (44 U.S.C. 3506;
5 CFR 1320 A ppendix A .l), th e Board
review ed the rule u n d er the authority
delegated to the Board by the Office of
M anagem ent and Budget. No collections
of inform ation pu rsuant to the
Paperw ork R eduction Act are contained
in th e final rule.
List of Subjects in 12 CFR Part 216
Federal Reserve System, Reporting
and recordkeeping requirem ents,
Security measures.
For the reasons set forth in the
pream ble and un d er the authority of 12
U.S.C. 1882, the Board is am ending 12
CFR chapter II, as set forth below:
PART 216— [REMOVED]
1. Part 216 is removed.
By order of the Board of Governors of the
Federal Reserve System, Inly 6,1998.
J e n n i f e r J. J o h n s o n ,
Secretary of the Board.
[FR Doc. 98-18276 Filed 7-10-98; 8:45 am]
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@FedFRASER